While it is fair to say that Donald Trump’s tenure as president of the USA has been “eventful,” from an economic and investment point of view, he has delivered on many of his promises. As all eyes move towards the next presidential election, add Tuesday, 3 November 2020 to your diary, what are the latest trends in the US housing market?
Focused employment markets
A recent report cast a fascinating light on the US employment market and trend expectations for 2020. It is common knowledge that the vast majority of new jobs related to services/office jobs. What is less well known is that expanding businesses are now focusing on existing markets where IT support, personal support, office space and healthcare services are already in place (a change from the historical trend where companies and services followed the likes of Google). Indeed, just 30 markets in the US accounted for 60% of new jobs over the last five years (taking in only 40% of the population).
As a consequence, we will continue to see significant investment in real estate within these large developing markets. The influx of new employees will boost local rental markets and help push real estate prices higher.
Homeownership under pressure
Over the last few years, we have seen a significant increase in real estate prices across large areas of the USA. As a consequence, many first-time buyers are being priced out of the major markets such as New York City and San Francisco. Interestingly, this trend has now been repeated in other areas, taking in Miami, Boston, Denver, Columbus, Portland and Seattle. This means that more people have been forced towards the rental market creating opportunities for real estate investors.
As you might expect in markets where demand is high and supply is relatively low, we are starting to see many single-family homes split into several rental units. This makes the rental charge for individual units more palatable (opening the property up to a broader market) and helps to create a significant rental income stream. The ability to lock in rental yields which are attractive relative to savings rates (with the added potential for capital appreciation), seems to have caught the eye of many investors.
As we touched on above, many properties are now out of the reach of first-time buyers, and even private tenants are struggling to meet sky-high rents in some areas. This has led to the likes of New York and California announcing plans to follow Oregon’s lead in introducing rent controls which cap rises at 7% annually. This is something of a double-edged sword. There is already a shortfall in newbuild supply and the introduction of rental controls will see some investors retreating to the sidelines – taking much-needed capital investment with them.
The short term impact might be positive for first-time buyers in some areas, with reduced demand initially dragging prices down, and private tenants will have more clarity on short to medium term rent rises. However, a reduction in long term investment in areas that introduce rent controls will lead to fewer newbuilds, reduced supply, and even more significant long-term upward pressure on property prices. In simple terms, there will be fewer properties available relative to naturally growing demand.
The US rental market is following the same trend as other leading markets such as the UK, where increased property prices have forced more people into private rental. This scenario is attracting real estate investors able to lock in attractive rental yields compared to savings rates. In what can very quickly become a vicious circle, further investment from landlords will push prices upwards, forcing more and more people to rent, and the vicious circle begins.
The introduction of rent controls is controversial, but in areas where rents, as well as properties, are moving out of the reach of the general public, something needs to be done. Restricting potential rent increases; this limits the underlying yield of a property making it less attractive to investors. Indeed, we may see some investors cashing in their property chips to take advantage of the steady trend of recent years.
Balancing supply and demand, as well as homeownership and private rental, will not be accessible but like many countries around the world, radical changes may be required.