Home prices are rising at their fastest pace since 2013 but shelter inflation is low and falling (see Exhibit 1). Should we expect higher home prices, significant fiscal support, and a quick economic recovery to also produce above-trend rent growth? Or has the coronacrisis led to a more persistent divergence as households abandon crowded apartments in favor of single-family homes? In addition to the higher unemployment and rental payment delinquencies typical of recessions, the coronacrisis has catalyzed urban flight—the relocation of households away from densely populated areas to the suburbs and low-density residential neighborhoods. Some estimates pin the scale of departures at 15-20% in high-income urban areas like Manhattan and San Francisco. The decomposition of Census vacancy rates is also consistent with urban flight, with vacancy rates rising in central cities(+0.3pp on average) but falling in suburbia, smaller towns, and rural areas (both – 0.3pp). These figures probably understate urban flight, because not all urban move-outs have resulted in lease termination. Historical relationships suggest the 5.2pp acceleration in home prices since the start of the coronacrisis would boost shelter inflation in 2020 and 2021, with a peak impact of around +0.5pp.
Demand for single-family housing has been a clear beneficiary, particularly in the suburbs. As our credit strategists note, for-sale inventory has fallen to multi-decade lows, and the supply-demand mismatch has boosted house price appreciation to levels last seen a decade ago. Home viewings are also growing faster in suburban and rural locations. For those remaining in the cities, the recession and its disproportionate impact on lower-income wage earners in the leisure, hospitality, and retail sectors have diminished the ability to afford existing housing for some of the hardest hit households. The resulting rise in rent non-payment, coupled with eviction moratoriums enforced in most cities, has convinced some landlords to forgive rent entirely for some tenants. As discussed in more detail here, we estimate the direct effect of rent forgiveness on year-on-year shelter inflation at -0.35pp in January 2021 (the sum of the estimated monthly effects in Exhibit 2). While a contributing factor, this would only explain aquarter of the drop in shelter inflation (and around a sixth of the disconnect relative tothe current pace of home price growth).
…Perhaps unsurprisingly, we find that rent inflation is currently much weaker in more populated and denser zip codes. Using Zillow rent data at the zip code level, we decompose rent growth across different population densities. As shown in Exhibit 4,rent growth is significantly underperforming in downtown and center city zip codes:+0.8% year-on-year on a household-weighted basis, compared to +5.2% for suburban and residential areas. Rent growth is even weaker in the highest-density zip codes: those with densities above 10,000 people per square mile (8% of the US population)show rent declines of 4.2% in the Zillow data…To estimate the impact of this intramarket demand shift on measured shelter inflation, we first adjust the volatility of the Zillow data to match that of the CPI shelter measures. We then multiply the underperformance in center-city zip codes in the Zillow data by the excess weight of the CPI sample in center-city neighborhoods (50% vs. 33% for the US housing stock). On this basis, we estimate a -0.3pp impact on year-on-year shelter inflation. This -0.3pp estimate reflects only the interaction between urban flight and the CPI sample, and does not include run-of-the-mill recession effects, or the disconnect between homeowner costs and tenant rent payments.
We expect a waning drag from urban flight on shelter inflation by next year. However, we don’t expect upward pressure from this channel (relative to the pre-crisis period), because we believe it is the level of rental vacancies that is the primary determinant of shelter inflation. We also expect at least some of the suburban relocation to prove permanent. The advent of work from home and the fact that second homes represents less than a third of 2020 home sales growth suggest it could take several years of rurban vacancy rates to normalize—even with the relatively quick return to full employment that we forecast.
That could be applied word for word to Australia.