The nation’s red hot rental market may be finally cooling off.
These stats may the harbinger of an easing in the rental market, according to Brett Ryan and Aditya Bhave at Deutsche Bank.
“After a rapid period of home price appreciation in 2013, the growth rate of this series has begun to stabilise,” wrote the analysts in a note Sunday.
“In turn, we expect rental inflation to moderate over the next several quarters. Indeed, there was tentative evidence of this in the March CPI report as the year-over-year growth rate of the rent of shelter component ticked down a tenth to 3.2%.”
This isn’t to say rental prices are suddenly going to drop off, but certainly the scorching pace of increases may temper a bit.
Ryan and Bhave’s basic argument is that home prices usually lead rental prices, and as home prices have slowed their appreciation so too will rents. Here’s the thinking:
While house prices should continue to climb higher, they will likely do so at a slower pace going forward. For one, home prices are fairly close to their previous-cycle peaks. Case in point, the aforementioned CoreLogic home price index was only about 8% below its prior cycle peak as of Q4 2015. At its current growth rate, this series would surpass its 2006 apex sometime in the first half of next year. In addition, as more housing supply comes to market, and vacancy rates begin to stabilise, house prices, and therefore rental inflation, should slow.
The biggest issue driving up prices, as we’ve noted previously, is the constricted supply of homes. But as Ryan and Bhave suggest, multi-family housing starts are growing at their fastest pace since August 1989 which should ease the increases.
“As more supply has come on line, effective rent growth, shown in the second chart, has recently begun to decline,” said the note. “Hence, the additional supply of housing stock is beginning to alleviate some of the upward pressure on rents.”
The slowing may not be a cure-all, but any easing should be good news for renters.