There's another possible factor here, but I'm honestly not sure how it would play into your analysis, or even if its relevent. That factor is property taxes.
I only have my personal informal experience to go on, in three markets, FL, GA, and MI over the last 25 or so years. However, my observation is that property taxes for landlords have gone up much faster than inflation over that period, to the point where it is no longer profitable to be a landlord renting to long-term tenants, at least where I live currently in MI.
In most jurisdictions, property taxes are levied essentially as a % of the property value. So, if property values are going up faster than inflation then you'd expect taxes to go with them. However, many jurisdications also then offer "homesteading" to resident-owners which caps their taxes, but then accelerates the taxes on other properties: second home owners and landlords.
I had one property in FL in the 2010s that for a while was homesteaded (while my mother-in-law lived in it), the became unhomesteaded after she passed. Our taxes went from (about) 3% a year rises, to about 20% a year rises, over several years. This is simply unsustainable.
I've done the math on my current town in MI, and much as I'd like to be able to offer accomodation to long term renters (because we have a huge shortage of such accomodation and as a result a shortage of workers), its simply not economically viable for me. (Or, informally, other landlords I've spoken to).
As I said, I'm not sure how this plays into your analysis, but surely high taxation has long term impacts on housing supply. Its difficult enough to build new housing due to regulation, but taxation may be disincentivizing some home builders over the long term.
High property taxes also add fuel to the short-term (AirBnB) vs long-term rental argument, which is a factor in many towns that have seasonal tourist industries. For a landlord, Airbnb can be more profitable, but is also a lot more work and potential hassle compared to a long-term tenant. However, if taxes get high enough I might be forced to choose the high-hassle-high-profit route of AirBnB vs the lower-hassle-lower-profit year round rental, even if I would have a preference for the latter.
My observation is it became very fashionable in the past decade for the upper class to own multiple homes. My closest neighbor owns a beach cottage, a house in Florida and now two houses in Maryland. They are trying to sell one of the Maryland houses but put it for sale post the current cycle peak and now it languishes.
I have many friends and family in Utah and they speak of it being quite normal for people to own a second home, typically in the warmer climate of Southern Utah.
The QE / ZIRP policies of the past decade made owning real estate a very attractive investment. One got to own an asset that not only was appreciating in value but also provided cash flow as a VRBO / AirBNB rental and a promise of a large return if the house was ever sold.
What happens as home are purchased for personal use, personal investment and short term rental? The supply of homes available to live in decreases. But demand for housing grows as people (a) need a place to live and (b) there is always the desire to join the investment trend.
If we see a crash in housing prices over the next several years, will the "experts" recognize that bubbles exists? Will they acknowledge the damage caused by QE and ZIRP?
I'm having trouble following figure 5 and the explanation. Is it information that there are labels on the left side of the line for some and the right side for others? Where can I see in the chart that "Prices everywhere declined, but rents didn’t" in 2007-2012?
If house prices (and wages) didn't increase beyond inflation pressures, would housing become generic and what would be the incentive to work hard and/or innovate? Wouldn't that be a big improvement over the current state of affairs?
If rent as a % of income had remained constant, what % of housing inflation would go away? As in, what % of the increase is just that there is more money about versus "supply".
It looks like you have 2015 to 2021 available. 2019 to 2022 would be nice to see for pandemic effect.
The problem I always have with zoning arguments is that every expensive metro I go to has lots of cheap housing, but its trapped in bad neighborhoods. Isn't price just an indirect for of neighbor quality control. How do people keep out bad neighbors if they can't price them out.
<blockquote>As Professor Shiller points out, home price inflation shouldn’t rise faster than general inflation over the long run (and it didn’t until recent decades).</blockquote>
From the demand side, why would this be true?
We've seen medical costs rise, arguably from demand for better treatments. The cost of food now splits along organic/expensive/fresh versus cheap/shippable/survival.
Homes are much more than mere shelter now, and because of cars they don't need to be super close to work. Isn't there ample room for home prices to rise simply because (some) people have excess income and want to spend it on a big/nice house?
Kevin, thanks for your interesting article
A quick comment : I don't see why you assume the causality is rents->prices rather than prices->rents
The scatterplots clearly show correlation but the causality is debatable it seems to me.
Regards
Douglas,
London
There's another possible factor here, but I'm honestly not sure how it would play into your analysis, or even if its relevent. That factor is property taxes.
I only have my personal informal experience to go on, in three markets, FL, GA, and MI over the last 25 or so years. However, my observation is that property taxes for landlords have gone up much faster than inflation over that period, to the point where it is no longer profitable to be a landlord renting to long-term tenants, at least where I live currently in MI.
In most jurisdictions, property taxes are levied essentially as a % of the property value. So, if property values are going up faster than inflation then you'd expect taxes to go with them. However, many jurisdications also then offer "homesteading" to resident-owners which caps their taxes, but then accelerates the taxes on other properties: second home owners and landlords.
I had one property in FL in the 2010s that for a while was homesteaded (while my mother-in-law lived in it), the became unhomesteaded after she passed. Our taxes went from (about) 3% a year rises, to about 20% a year rises, over several years. This is simply unsustainable.
I've done the math on my current town in MI, and much as I'd like to be able to offer accomodation to long term renters (because we have a huge shortage of such accomodation and as a result a shortage of workers), its simply not economically viable for me. (Or, informally, other landlords I've spoken to).
As I said, I'm not sure how this plays into your analysis, but surely high taxation has long term impacts on housing supply. Its difficult enough to build new housing due to regulation, but taxation may be disincentivizing some home builders over the long term.
High property taxes also add fuel to the short-term (AirBnB) vs long-term rental argument, which is a factor in many towns that have seasonal tourist industries. For a landlord, Airbnb can be more profitable, but is also a lot more work and potential hassle compared to a long-term tenant. However, if taxes get high enough I might be forced to choose the high-hassle-high-profit route of AirBnB vs the lower-hassle-lower-profit year round rental, even if I would have a preference for the latter.
My observation is it became very fashionable in the past decade for the upper class to own multiple homes. My closest neighbor owns a beach cottage, a house in Florida and now two houses in Maryland. They are trying to sell one of the Maryland houses but put it for sale post the current cycle peak and now it languishes.
I have many friends and family in Utah and they speak of it being quite normal for people to own a second home, typically in the warmer climate of Southern Utah.
The QE / ZIRP policies of the past decade made owning real estate a very attractive investment. One got to own an asset that not only was appreciating in value but also provided cash flow as a VRBO / AirBNB rental and a promise of a large return if the house was ever sold.
What happens as home are purchased for personal use, personal investment and short term rental? The supply of homes available to live in decreases. But demand for housing grows as people (a) need a place to live and (b) there is always the desire to join the investment trend.
If we see a crash in housing prices over the next several years, will the "experts" recognize that bubbles exists? Will they acknowledge the damage caused by QE and ZIRP?
I'm having trouble following figure 5 and the explanation. Is it information that there are labels on the left side of the line for some and the right side for others? Where can I see in the chart that "Prices everywhere declined, but rents didn’t" in 2007-2012?
If house prices (and wages) didn't increase beyond inflation pressures, would housing become generic and what would be the incentive to work hard and/or innovate? Wouldn't that be a big improvement over the current state of affairs?
If rent as a % of income had remained constant, what % of housing inflation would go away? As in, what % of the increase is just that there is more money about versus "supply".
It looks like you have 2015 to 2021 available. 2019 to 2022 would be nice to see for pandemic effect.
The problem I always have with zoning arguments is that every expensive metro I go to has lots of cheap housing, but its trapped in bad neighborhoods. Isn't price just an indirect for of neighbor quality control. How do people keep out bad neighbors if they can't price them out.
<blockquote>As Professor Shiller points out, home price inflation shouldn’t rise faster than general inflation over the long run (and it didn’t until recent decades).</blockquote>
From the demand side, why would this be true?
We've seen medical costs rise, arguably from demand for better treatments. The cost of food now splits along organic/expensive/fresh versus cheap/shippable/survival.
Homes are much more than mere shelter now, and because of cars they don't need to be super close to work. Isn't there ample room for home prices to rise simply because (some) people have excess income and want to spend it on a big/nice house?