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).
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
