Why have rent and mortgage prices doubled(or more) in the past 2 years?
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I don’t know about doubling, could be some local effect, but globally countries have raised interest rates to fight inflation so rent and mortgages have gone up.
Where? My mortgage has gone down
Everyone has to live somewhere. Shelter is one of the most basic human needs. You really can’t opt out of it and have any kind of reasonable quality of life. So demand is always high.
Supply, however, is constricted. Many towns and cities will have strict regulations on where and how new housing can be built, and people in general tend to vote against expanding this, especially when it comes to cheaper housing, out of the perception that it will overtax their town’s resources or encourage “undesireables” to move in, as well as the reality that as long as supply remains low, the value of property they own goes up, which benefits existing homeowners. Exacerbating this is a recent increase in property investors, who profit off of owning homes they rent out, list on AirBnB (or similar), or “flip” (buy a rundown house, do cheap renovations and then resell at a profit). These all take homes off the market or increase the price of homes on the market, raising new mortgages. Also, interest rates have gone up significantly in the past year in an attempt to curb inflation, which increases the cost of new mortgages.
Rent is exacerbated by some of these same issues as well as others. Taking rental properties off the market for AirBnB decreases supply. New rental construction tends to be “luxury” apartments that rent for more, because the cost of building them over budget/low-income apartments isn’t significantly higher but the end profit is. And there has been a rise in shifting rental costing decisions to software algorithms, which has resulted in higher prices as removing the human element removes compassion and there’s a polyopoly – when everyone is using the same algorithms to set prices (and those algorithms can frequently share data), prices can go up across the board with little recourse for renters.
It basically comes down to the old adage: buy land, they aren’t making any more of it. Supply is limited and often dwindling, and demand is steadily high and increasing in popular areas.
This depends on your location
Rent and mortgage prices are affected by demand and inflation like everything else. Inflation has been high since the pandemic which has been increasing the cost of living.
The pandemic also increased the demand for housing.
People with the ability to work from home started moving away from bigger cities to smaller towns and suburbs causing a housing crisis in towns that weren’t building enough new homes to meet demand.
Since big city folks are willing to pay more for houses, this causes a surge in market value in those towns.
People also wanted to move out of apartments and crowded buildings to avoid getting sick.
Combine this with a reduced rate of building homes because of the pandemic and you get a surge in prices.
Real-estate is also one of the few solid investments you can make right now. Increasing housing costs causes people to buy homes as an investment. When landlords own 2-3 homes or more to rent them out, this reduces the availability of homes for families and increases costs further.
The rise of AirBnB and similar businesses has also increased the demand for housing.
But with interest rates on the rise, the demand for housing is going to come down as people will have a harder time borrowing money. The concern now is that it may lead to another housing crash.
Some of the other factors to consider is the cost of building right now. Initially it was a supply chain issue with lumber and other materials driving those costs up. Then add in labor shortages due to people who are no longer in the trades because they got out during the pandemic or businesses that folded decreasing overall competition. Add in longer and longer times to get materials as well as to get permits and to deal with plans and other administrative issues and there is ongoing consistent pressure on the cost of building.
All of these increase the cost of new construction and of repairs and remodeling. When new construction costs go up, so does the value of existing stock. When those costs go up, the costs go to the consumer as either higher sales or higher rent.
Hopefully, the combination of higher interest rates driving demand down and a backlog of construction projects finally coming to market will help to stabilize and even bring the base sales costs down. Unfortunately, the higher interest rates make the cost of money go up so the home value is less but the mortgage is up so you’re not likely to see actual savings to the end consumer for awhile.
Central banks have raised interest rates in an attempt to control consumer spending and reduce inflation. If mortgages become more expensive then so do rents on properties bought on buy-to-let.
Unfortunately, this is the only tool they have for controlling inflation and it only works if inflation is being driven by consumer spending.
Currently inflation is not being driven by consumer spending but by energy prices. This means that raising interest rates has had so far zero effect on reducing inflation. However, reducing consumer spending power drives increasing demands for higher wages – which do drive inflation.
Governments need to do two things to break the cycle and actually control inflation. Firstly reign in central banks attempting to wield the blunt instrument of interest rates and actually look at the true inflationary pressures. It’s bitter medicine but it needs to be administered to those who can best afford it instead of those who can afford it least. Secondly take a hard line on energy companies and investors leveraging the difference between wholesale prices and retail prices to ensure excess profits for both.
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