The cost of renting in American cities has been skyrocketing over the past few years, but that may finally be changing, according to Dave Liang at UBS.
The dramatic increase in multi-family building — such as apartment buildings — has finally caught up with surging demand and will cool off rent growth according to the UBS economist.
Liang said during the recovery, more and more Americans have opted to rent rather than own. This large shift led to a constrained supply and rapidly increasing rent. However, according to Liang, builders have corrected for the increased demand. Here’s Liang’s breakdown (emphasis added):
“Expectedly, multi-family permits have also risen steadily post-crisis, up to a 483,000 pace in 2015. The 2016-to-date level of 413,000 would suggest fewer total starts this year, assuming a 1.5-2.0 month lead time. Given a slowing rate of construction and an approximate building time of 12 months, we expect completions to soften in 2017. The additional units coming to market this year could in theory provide an upper bound to effective rent growth.”
For the past two years, according to Liang, rent growth has been running well above its long-term average and the rate of inflation.
“In fact, we have already seen signs of slowing rent growth. Post-crisis annual effective rent growth peaked at 7.2% in Q3 2015 at the national level- it has since slowed to 3.6% in Q2 2016,” wrote Liang. “This trend is expected to carry over into 2017.”
Liang said that the stabilisation of the vacancy rate, which has been falling for the last six years, shows that supply has increased to the point that rent growth can slow.
While rents are still increasing in Liang’s projection, the return to a level closer to wage growth and broader inflation is most likely welcome news for American renters.