Low-Interest Rate Environment Also Contributing To Rising Cost of Housing
December 30, 2021–With near-zero interest rates by central banks in the United States and Europe, companies raised $12 trillion in 2021 sales of stocks, bonds, and new loans. That’s up 17 percent from 2020, according to reporting by the Financial Times.
Low-interest rates make borrowing easier and increase the money supply. The downside is they encourage riskier investments, benefit those who already own assets, and can skew the societal risk toward inflation. In effect, investors benefit while consumers pay more.
Cash to Keep Flowing in 2022
The trend is likely to continue in 2022. Research by J.P. Morgan suggests the U.S. Federal Reserve will continue a “broadly accommodative” policy despite its tapering of bond purchases. The investment firm estimates that U.S. and European equities are up 21 percent for 2021 and are likely to continue rising.
The U.S. Federal Reserve indicated in December it might begin raising interest rates up to three times in 2022 after it completes its tapering–by March at the earliest. But J.P. Morgan analysts see only a .25 increase in September 2022.
According to the meeting minutes (released Jan. 5, 2022), participants projected they will move up the timing for the first fed funds rate increase from the first quarter of 2023 to June 2022. The Fed Funds Rate stands at 0.08 percent. Meanwhile, the rates set by the European Central Bank hover between negative territory and zero.
Era of Easy Money
“The ferocious pace of fundraising underscores just how easy financial conditions are in many parts of the world, most notably the US, where more than $5tn was raised,” George Russell and Emily Goldberg write for the FT.
The downside is inflation is running high globally. In Europe, it fluctuates greatly by country in the Eurozone. In the United States, it stands at 6.8 percent at the end of 2021 and is expected to rise.
Housing Prices Rise
Price rises are most notable in the housing sector, where prices of single-family homes rose 14.9 percent from 2020, the National Association of Realtors reported. (By some estimates the housing sector rose 18 percent in 2021.) Rents are increasing too. According to the Zillow Observed Rent Index (ZORI), the average rent of U.S. housing rose to $1879 a month in November 2021 from $1668 a year earlier.
It’s been a boon to investors. But other homebuyers and renters are feeling the squeeze.
Many analysts see a strong correlation between the Fed’s policies and the rising housing prices, as well as equities and autos.
For example, Peter Boockvar, an investment adviser with the Bleakley Advisory Group, sees the rising prices as a direct result of monetary policy.
“Now we have a portion of the population who can’t afford to own a home due to the Fed policy,” Bookvar told the GER. He estimates that 25 percent of home buyers are now investors. Individual home buyers now have to compete against institutional investors, many of whom are willing to pay cash. “The beneficiaries of the Fed policies are the ones who own assets,” he said.
Unfortunately, policymakers are behind the curve in making the connection between low-interest rates and the imbalanced market forces.
