It may come as no surprise that in the aftermath of an epic single-family housing boom and subsequent bust, millions of more people have been renting — without much new multifamily housing supply until recently.
This situation has let to strong gains for apartment REITs and an astonishing ability for property owners to raise rents.
Now a research paper by Rob Arnott and Lillian Wu of Research Affiliates in Newport Beach, Calif. asks why the CPI doesn’t reflect the inflation that is apparent in places where people spend their money.
Arnott and Wu argue that the four biggest expenditures for most people — rent, food, energy, and health care — have been rising. Since 1995, rents have been rising at 2.7% clip, energy at a 3.9%, food at 2.6%, and health care at 3.6%. Notably, these four expenses account for 60% of the aggregate of people’s budgets, 80% of middle-class budgets, and 90% of the budgets of the working poor.
Furthermore, there is a downside to bull markets in that as asset prices soar, future returns diminish. Indeed, looking at the asset return forecasts of Research Affiliates and also of one of the firm’s like-minded competitors, Grantham, Mayo, van Oterloo, it’s tough to find asset classes that are priced to deliver inflation-beating returns over the next seven-to-10 years.
Not only do anemic future returns bode poorly for the wealthy who, Arnott and Wu argue, typically dissipate their wealth among just a few generations. They also harm young workers and the middle class in general who require stronger returns on investments to fund their retirements. The middle class has little incentive to save and invest with prospective returns so poor.
Moreover, new business start-ups are delayed because, with interest rates held artificially low, entrepreneurs don’t know the cost of capital. Near zero borrowing rates aren’t available to them, and the future cost of capital may be still higher.
Likewise, larger corporations shy away from risky projects now in favor of borrowing money at shockingly low rates in order to finance stock buybacks — even if the shares are purchased at ever higher prices.
If monetary policy is artificially propping up asset prices, the good news is that sooner or later prices will revert to levels that more fairly reflect earnings and cash flows. While this will inflict pain on investors, it will also re-set financial assets to deliver more robust returns.