| Summary: | Inflation is one of today’s biggest short-term global economic challenges, and housing costs, a persistent component of inflation whose price increases have had a strong influence in the loss of purchasing power of American households, and which is irreplaceable, have more than doubled in the past 20 years. Housing cost rises have outpaced inflation for the rest of the products typically consumed by individuals, and low-income earners have been highly burdened by the situation. However, this has not always been the tendency, and this paper will explain how the recent rise in rents can be mainly attributed to a higher demand for housing, as opposed to higher construction and operating costs due to inflation spillovers into real estate related products. This will be demonstrated through both qualitative and quantitative analyses of the housing market and its price dynamics in the United States. The first section of this document — The Upheaval of Housing Costs — will explain how rising house prices have trespassed into rising residential rents, and how this has been highly influenced by long periods of expansionary monetary policy and the implementation of Quantitative Easing, along with rising income inequality and the failure of the market to swiftly adapt its residential products to the changing dynamics in demand. This chapter offers a well-rounded explanation of the demand determinants of housing, as well as historical context to better understand why rents have outpaced inflation for other products since the 1980’s. The second section — Rents, House Prices, and Inflation —exhibits a quantitative analysis of how house prices and inflation for non-rent products impact residential rents. This analysis was carried out with an Error Correction Model to capture both the short-term and long dynamics of these variables, given that changes in house prices and inflation do not fully impact rents immediately. This model was run for the United States and replicated for Boston, Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, New York, Philadelphia, and San Francisco. Results for this analysis show that since 1978, demand-pull inflation has dominated rent growth in the United States and in most of the studied cities. This analysis is followed by an Appendix showcasing the detailed outputs for every model, as well as graphs to visually support our quantitative analysis and provide comprehensive evidence of the dynamics of these variables in those cities.
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