Pressuring the Rental Market – Inflation Fueled by Interest Rate Rising

Author Charlie Cutler Read bio
Tags: rental market
Date: December 16, 2021

The cost of living and tenants’ ability to keep up with rental payments are under increased pressure. Economic policymakers say that current inflation ragings will prove temporary, but a look at the rising rents may challenge that view.

There are also work stoppages, supply shortages, and labor constraints, all due to the pandemic keeping developers from ramping up and building to meet the demand.

I’ve spent a lot of time thinking about rental markets and interest rates. I know that the Federal Reserve targets 2 percent annual price increases on average, so it was a shock when I learned that rents would increase a whopping 10 percent this year.

And, guess what else? Next year, housing prices are expected to climb 5.7% and inflation will rise by 4% – both increases less than in 2021.

Inflation Impacting Cost of Living

Rents are shooting higher after a pandemic slump, burdening households and fueling overall inflation

This is bad news for the Federal Reserve because it could make current, uncomfortably rapid, price gains last longer

The inflation is expected to persist on having a significant impact on the economy, at least for the foreseeable future, potentially hitting 5% by the end of 2021 according to some economists.

Increased Energy Costs

The cost of energy has already seen a steep increase. About 15 million households are facing a 12% rise in energy bills, and there are warnings of further “significant rises”. 

Whether or not paying utility bills is the responsibility of the tenant or owner, the rising costs add greater pressure on the ability to keep up with rent or mortgage payments.

Impact of Expected Interest Rate Rises

In response to inflationary pressures, the banks are expected to increase their base rates, currently at 0.1%, in the upcoming months. 

If so, this can quickly have a knock-on effect of increasing mortgage rates, putting some landlords in a position where they may need to increase rent to cover the additional cost.

Tall orange building

Shielding Landlords – Tenant Referencing and Rent Insurance

Carrying out robust and thorough tenant referencing is essential in order to protect yourself from risk. Our comprehensive landlord advisory services allow you to be confident about who you’re renting to, by verifying identity and income and providing a clear affordability risk assessment.

By taking out rent guarantee insurance, you can cover a serious amount of money in rental income per month, even for up to a year, while also getting legal expenses covered to help with eviction costs.

Knowing that the costs of missed rental payments and legal expenses can quickly add up to thousands of dollars, and still some uncertainty about the pandemic, having a rent guarantee policy reduces a landlord’s risk of any lost income.

Ensuring Standing Order is Set Up on New Tenancies

Standing orders for rent payments can be set up easily by the tenant, with a confirmation provided to the agent. Standing orders help reduce the risk of tenant bankruptcies, by automating the rental payment process.

Pursuing Markets Hidden Gems With IPG

The housing sector performed spectacularly in 2021 in many markets, with huge gains achieved in demands for warehousing.

The rental market did reasonably well in 2021, but not as strong as the underlying fundamentals suggest. Therefore, in 2022, these ‘hidden gem’ markets have more room for growth.

IPG considers a rental market a hidden gem based on two categories. First, if the market’s ratio of median home price to median family income is in the lower half of the surrounding metro areas. 

Secondly, there are several indicators that reflect the strength of housing demand for that metro areas: wage growth, job growth, the ratio of the change in population to the sum of housing permits, population growth, net domestic migration, percentage of the population ages 25 to 44, and the percentage of households with broadband service.

Even if inflation is high, an oversupply of housing will bring home prices down. Interest rates and rental costs tend to go up with inflation, but if mortgage rates go up too high, people won’t take out home loans. Demand will decrease; home prices will fall. It is only possible to wait, and watch…