“VULTURES OUT“Read one of the many posters young protesters waved at a recent rally in Dublin. Their anger was driven by rising rents in the Irish capital, which have been driven up as the fastest rise in house prices in years has made renting more attractive. The mood spreads. Private equity firms, insurance companies, pension funds and other institutional investors who bought their own home during the pandemic are becoming resentment in rich countries. As their share of the residential real estate market has grown, so has the backlash. Some blame large landlords for the rising rents. Others accuse them of exploiting crises for profit.
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Politicians reacted quickly. The White House wants to restrict the types of real estate that large investors can buy. New Zealand has removed tax breaks for property investors and Ireland has imposed a 10% tax on bulk house purchases. Canada’s central bank says the role big investors play in housing needs further investigation. In Germany, Berliners voted in September to force their city’s largest landlords to sell more than 200,000 apartments to the country, even though the referendum was non-binding and the Constitutional Court is expected to overturn the result when it becomes law. Spain’s left government is the latest to take action to deal with large landowners. According to new proposals, they are faced with rent controls, higher taxes on vacant properties and a ban on buying public housing.
With this Brouhaha you could think that professional landlords are devouring the market. In fact, their share remains modest. In America, investors own only 2% of rental homes. Across Europe, listed funds own less than 5%. In Spain, criticism has focused on Blackstone, the country’s largest rental company. After entering the market eight years ago, the private equity giant now owns 30,000 apartments. However, this corresponds to only 1% of the total stock.
There is no doubt that big investors have big ambitions. Single-family houses and rental apartments have developed into a lucrative line of business. Other Wall Street firms like KKR and Goldman Sachs are also entering the market – and they build as much as they buy. By some estimates, they make up more than 6% of new homes in America each year. Across the UK, institutional investors are expected to provide a tenth of the government’s housing target over the next few years. As of 2018, they have built almost a quarter of the new homes in Liverpool and more than 15% in Nottingham, Leicester and Sheffield.
This injection of capital is to be welcomed, not despised. Investors want to make money, of course, but they see a niche in the market that needs to be filled and are doing something about it. The demand for rental apartments has never been so high. In the UK, fewer than one in ten homes were rented in the mid-1990s. Today the proportion is closer to one in five. A third of households in America are rented out. Falling home ownership rates in the rich world mean that apartments of decent quality are more in demand than ever in the private rental market. But tenancies are uncertain and the supply of rental apartments is not keeping pace with demand. There is a chronic shortage in a number of countries. Canada’s national vacancy rate was 3% in 2020. In parts of Australia it is below 1%.
The flood of institutional funds into the rental market comes at a crucial time. The city centers are full of empty buildings due to the pandemic. This created the opportunity to expand the living space there through renovation. However, this not only requires a revision of the planning rules, but also a lot of money to pay for the construction work. Cities like New York show what is possible. Large investors have been converting offices into apartments there for years. Today around 60,000 people live in Lower Manhattan, compared to 14,000 in the mid-1990s. The City of London estimates that there will be space for 1,500 additional apartments by 2030.
At the heart of the problem is a lack of supply in the places where economic opportunities are greatest. Some say the answer is higher interest rates or macroprudential instruments such as limits on the amount of credit banks can lend. These policies would dampen demand and price growth, but would not bring the economic benefits of growing successful cities. Some prefer first-time home loan programs, but these only drive house prices up – and fail both homebuyers and taxpayers. Simple solutions like relaxing planning laws can be politically toxic. Britain appears to have put a proposed planning reform that would have encouraged more housing on hold.
Instead of relying on gimmicks, countries must find their way out of the crisis. Instead of caricaturing large sums of money as barbarians at the garden gate, politicians should therefore lay out the welcome mat. ■
This article appeared in the Leaders section of the print edition under the heading “Barbarians at the Garden Gate”