Thanks, Malcolm, for your comment! I think is the change that makes the problem more acute. Imagine you are a landlord with a mortgage, you will be more willing to pass on the cost of higher interest rates in that case than when the increase in interest rates is spread over time. In the latter, you will do that too, but the pass-through might be smaller for the same increase. (i.e., I am implicitly suggesting that pass-through is non-linear). Regarding your second point, you might want to take into account that affordability in buying properties might be affected by higher interest rates too, so limiting that option, unless you buy with cash. This channel might actually increase the demand for rental properties by crowding out buyers, indeed.
RE the rents channel - I agree on this generally, 2 points/questions
1) would it make sense to just look through rental inflation in policy setting, as they often do in Switzerland given rent indexation to the policy rate (ie a cpi ex rents or a services cpi ex rents)?
2) it would be interesting to see what's going on here in the scandi's given the majority of debt is floating
Fascinating piece, strongly agree with your premise and argument. I have two questions adjacent to the topic.
First, is your thinking that the rent component moves more to the level or the difference in the policy rate over time? Simply put, if the BoE's monetary tightening had been as large but spread over a longer period, would this problem be as acute?
Second, how much of this is reflective of transitory stress in the rental market? In this view, there will be a "discovery process" where higher rates destroy demand for rental properties - the share of which in the housing stock is too high for effective monetary policy. That takes time as landlords either exit or discover if they can charge their tenants more (unpleasant for both) but in the end you get a higher share of owner-occupiers than before the rate shock. To cut rates pre-emptively in that environment would be to truncate that process no?
Terrific! Central banks are stuck in linear models while the world functions in Complexity.
Thanks, Malcolm, for your comment! I think is the change that makes the problem more acute. Imagine you are a landlord with a mortgage, you will be more willing to pass on the cost of higher interest rates in that case than when the increase in interest rates is spread over time. In the latter, you will do that too, but the pass-through might be smaller for the same increase. (i.e., I am implicitly suggesting that pass-through is non-linear). Regarding your second point, you might want to take into account that affordability in buying properties might be affected by higher interest rates too, so limiting that option, unless you buy with cash. This channel might actually increase the demand for rental properties by crowding out buyers, indeed.
hey Gianluca, Great post
RE the rents channel - I agree on this generally, 2 points/questions
1) would it make sense to just look through rental inflation in policy setting, as they often do in Switzerland given rent indexation to the policy rate (ie a cpi ex rents or a services cpi ex rents)?
2) it would be interesting to see what's going on here in the scandi's given the majority of debt is floating
Fascinating piece, strongly agree with your premise and argument. I have two questions adjacent to the topic.
First, is your thinking that the rent component moves more to the level or the difference in the policy rate over time? Simply put, if the BoE's monetary tightening had been as large but spread over a longer period, would this problem be as acute?
Second, how much of this is reflective of transitory stress in the rental market? In this view, there will be a "discovery process" where higher rates destroy demand for rental properties - the share of which in the housing stock is too high for effective monetary policy. That takes time as landlords either exit or discover if they can charge their tenants more (unpleasant for both) but in the end you get a higher share of owner-occupiers than before the rate shock. To cut rates pre-emptively in that environment would be to truncate that process no?