Why Is Your Rent So High?

has risen even faster in the past few years. And not just in cities like New York where it's always been crazy. Rent increases are far outpacing wages for many people in the U US and around the world. Slowed down there for a bit during the thick of the pandemic, but then it came roaring back. Why is this happening and is there any relief insight? My Bloomberg colleague Preshanko pol reports on real estate and he joins me now from Boston, Prishan, thanks for being here. Great to be here, Prishan.

I think the quickest way to lose an hour of your time is to go up to somebody and say, so, how do you feel about your rent? Everyone seems to be complaining that their rent is so much higher than it used to be. We used to think about New York and San Francisco, other big cities here the amazing stories about how much people were paying. But now medium sized cities, small town's rent is just crazy high. Exactly

why is that and how did this happen? Yeah, well, you know, part of it is that the for sale market got so hot, especially during the past few years during the pandemic, so a lot of people couldn't buy, and so that meant that relatively wealthy people, people who were wealthy enough to purchase, were sort of shoved back into the rental market, which became a really crowded place. So you ended up with like the kind of rent

growth that we've never seen in this country before. I mean, typically rents go up maybe a few percentage points a year or something like that, but we were like seeing double digit growth and all over the country, not just in the land of Wall Street and Silkin Valley. This was happening in the heartland. One of our colleagues, Alex Hanzi, recently wrote a story that said that more than half of renters reported that their rent had gone up by

a twelve hundred dollars or more in the last year alone. Yeah, that's nuts. I mean, I I've done stories throughout this, and I remember just talking to people during the worst of it. It wasn't so long ago, maybe a year year ago or so. They were struggling, you know, in Florida, for example, people were just struggling to even to find a place to live. In Florida was a place where you could usually find a place for a reasonable amount

of money outside of saying like Miami and Fort Lauderdale. Yeah, it was one of the appeals of you know, living down in Florida, right. I mean, so these people were getting on waiting lists like one after the other, and they would have to pay kind of application fee each time, and they were racking up, you know, maybe a thousand dollars or more sometimes an application fees just to have

an opportunity to potentially have an apartment. They mean, you know, I guess the landlords in those cases were pocketing that money, but it was a huge mess for shot. While we were talking through this episode, our producer's end up said that a friend of hers living in Brooklyn was going through this very thing. So she gave him a ring, and here's what he had to say. My name is not Long tens In and I am from Queen. I

currently live in Bushwick. Since I moved into this apartment during the pandemic, I like got the pandemic discount that a lot of people were also getting. And it was one of those situations where it was like the rent is initially it was twenty six, but we're going to give you one month off, so it sort of came down to like twenty four or something. So that's what

we signed on twenty four initially. After you're living here, Um, we got the new like lease with updated rent, and then the landlord basically hyped it up all the way up to twenty nine. Yeah, so we were just like, that is a lot of money. I like grew up in like a very like horror immigrant family where we still sort of like it's like it's hard to pay rent,

you know. And yeah, I mean there's just a lot of people that are coming in that can't afford to stay here, and then it's ultimately the people that just have to move. So you talked about how people who would have bought a house but couldn't because of the financial squeeze during COVID, uh stuck with rentals and that kind of lowered the supply. What are some of the other reasons that have caused is because the increase in rent oversay the last ten years has so far outpaced

wages and even outpaste inflation. Yeah, I mean, like part of this is the fact that we've had a lot of construction more recently, but we've had a lack of home construction in America for a long time, you know, of all kinds, so it just hasn't kept up with what's needed. The other thing is that a lot of the construction we did have was sort of focused on the wealthier people, and there really hasn't been very much

built for the people really need it. There's that there's also this idea that you know, people were leaving their parents basements and roommate situations and striking out on their own. And you also had this kind of demographic boom right of young people all seeking you know, to begin their lives. There's just a lot of demand. And and then let's throw one more thing on top of it, which is COVID, Right,

and COVID kind of lit a fire under people. It wasn't just that people were rushing to buy homes in the suburbs. People were just rushing to make changes of all kinds. And that could be just you know, finding a job elsewhere, somewhere cheaper, you know, in Phoenix or Tampa or you know, Austin is not very cheap anymore, but it's cheap, you know, if you were living in New York. So a lot of these moves really added

to that demand. There's a perception I heard a lot from people that landlords are taking advantage of what you're describing here, that there is a shortage supply and there's an increase in demand to raise rents much higher than they you know, ordinarily could have. And there's a certain amount of gouging going on, just people opportunistically raising rents because what are people gonna do. Is that something that you actually see bearing in data or is that just

something people kind of suspect. Oh yeah, absolutely. I mean these kinds of rent increases are just astronomical. I mean some of them they look like mistakes, you know, like increases and this is like Austin and just these are crazy and and these are sort of the bulk of these increases are going to be actually for new leases, not for existing leases, but people who even had renewals. We're seeing crazy jumps and it was shocking to them, right, But they didn't have much of a choice because where

are they going to go. Another thing that seems to be contributing to this is real estate companies, sometimes financial institutions, buying up a lot of rental property simply to make money on it in a way that hasn't been done before. Yeah, I mean, it's sort of the institutionalization of the American

housing market. Right. This really was a byproduct of the Great Financial Crisis and the massive housing crash and foreclosure wave that we experienced starting in two thousands seven or so, and you ended up with just a whole lot of

distressed properties. And you know, like White Knights, private equity firms showed up starting around and they kind of hoovered up all these for closed properties that we're sitting vacant and disrepair, often bank owned, and they kind of got the housing market moving again because they bought those properties up and turned them into rentals, which was a new thing. You had a sort of a whole new class here. You had mom and pop landlords in the past that

it owned single family homes. We never had sort of institutional players that were doing this. They were they bought apartment buildings, not sort of scattered site single family rentals. So by doing this they actually allowed home prices to start rising. But what happened is they did this so aggressively in some places that they ended up kind of getting rid of a lot of the homes that might have been affordable to first time buyers, and you ended

up with this severe shortage of housing. So it's the opposite problem in prices just kept growing building off of the shortage, and it got worse and worse and worse and worse over ten years. I see here in Washington, d C. Seeing New York, Chicago, a lot of other cities, a lot of construction of rental apartments to meet this demand, and yet they seem to be really expensive apartments. The

rents are really really high in these places. Who do they think it's going to afford them, because people are already struggling to pay existing rents. Is their demand for these really expensive places. The issue now is that there's a ton of high end construction of multi family homes.

It might be the highest in at least ten years that rental homes that will deliver this year, right, And these were homes that were built before inflation took off and when there was a lot of demand, and now things kind of changed once they were already committed, kind of like a giant like cruise turning around a giant cruise ship, you know, they have to make decisions like so far in advance, so they can't pivot very easily.

People believed that there would be no end to this kind of boom and rental demand because people have to live somewhere, right, So even if the first sale market weaken that that would only be good news for rentals because yeah, more people will be renting. But I think a lot of people are just kind of not leaving their apartments. They're staying in place, you know. And one reason that's happened is because where they're going to move.

So if they move somewhere else, there's now such a What they were charging for these new leases for you know, empty apartments is so much higher than what you'd pay if you just stayed put. So a lot of people just stayed put. The other thing is that a lot of people are nervous about the economy. So when you're nervous, you don't really want to make big moves, right, So there's that. There's also the fact that the cost of everything has gone up, you know, from groceries to commuting

to everything else. So for renters, their budgets are squeezed, and again that's another reason to kind of not make a big move. Preshian, please stay with me. We'll talk about what renters can expect in the year ahead after the break. Prishan, We're talking about the U S rental market, but rents are high all over the world. Our producer in London went out to hear what people there had to say. So our rent was up in October, so we're running for a year, and then they were like

trying to increase it. We're like, come on, we've been here for a while, you know us, please half it, and then we did so like it's out not too bad, I guess. So I'm from Greece and I rent here in London, but I mean, like I'm a landlord as well. I mean I would raise my rents. I mean, of course, absolutely, the students I'm living with their on like k Yeah, so if it increased, there's no way we could collectively afford it at all. Like we're on the brink right now.

So yeah, subsistence living. Rather than saying I think they're all doing well, it seems like they're all doing the bare minimum. I get that kind of vibe from all the landlords I've lived, So they just do the least they can because they know that there's high demand property here. For sure. You've spelled out this, you know, pretty challenging situation renders. I think in real life people are really

feeling what you're describing. Is there any relief in sight? Yes, great news for renters this three Maybe they're a year. Landlords have a problem all of a sudden, which is that there's a ton of multi family construction underway and a lot of these units will deliver this year. And these tend to be middle or high end units in places like Seattle and Austin and Atlanta, but also in

the suburbs and in the middle of nowhere. There's just a ton of construction of all kinds, you know, maybe a larger amount than we've seen in many, many years. And then on top of that, you have landlords who are gonna have to start dropping their rents in general because their tenants are gonna start bolting and looking for other opportunities. So as rents go down elsewhere and the market starts to become a little more competitive, it's going to be the landlords who have to be more competitive

as opposed to buyers being exactly. Yes, so it's a real turnaround. Some cities have required that new construction set aside a certain amount of housing for people who have lower incomes. Has that helped it all? What do we see happening there? This is sort of the market solution to the problem, which is that you require, like, if you're going to build something, you have to include a

percentage that would be affordable. The trouble there is, you know, it just sort of gives an incentive for the landlord to actually boost the rents for every other unit to sort of make up for it. So I'd say the jury is out, but that is sort of a major way that they've been trying to do it. There's also like various kinds of subsidies, right the low income housing tax credits and things like that, So you end up with a lot of not enough let's say, not enough

affordable housing. So I think it's really hard for people on the lower end of the spectrum right now to find a place to live, and that leads to instability people you know, living in a illegal apartment and a basement, or or crowding in way too many people, or living in their car, or you know, in a tent or in a homeless shelter. This is sort of the result. And we're already seeing the data show that rank collections, whereas you're not seeing this for moderate or hire income rentals.

People are paying their rent, but on the lower end of the spectrum, the rent collections have have dropped in the last couple of years, meaning that people just aren't able to afford to pay their rent exactly. And do you think that the relief you describe happening at the high in the middle part of the market in the coming year will also bring some relief at the lower

end of the market. It takes time, because you know, the way this works is like you build the high end unit and then ten years later it's not such a great unit anymore, and then that moves to the moderate and then eventually, you know, thirty years down, and that's subsidized housing or whatever, you know, and making up the time frame there. But it doesn't happen instantly. So there may be some help, right, but it's not enough.

I mean, we were just talking earlier about how people saying that rents went up twelve hundred bucks last year. Do you think a year from now we're going to see the story that says people say their rents went down meaningfully? I think so. Yeah. I really hate predicting the future because you know, as we've learned during these past few years, that we always tend to be wrong.

With all this construction happening, it does seem like there has to be a change, right, And if the economy turned south, that would only make that more true because if people start losing jobs, you know, people can't afford these sky high rents. They just went up way too fast. So in a way, the landlords are to blame for allowing the rents to get as high as they did, right, because it means that they have further to fall. Shanko, Paul, thanks so much for talking with me today. All right,

thank you, after the break. What's happening in the rest of the world, My colleague Neil Callinan joins me now from London. He's going to give us a broader look at turmoil and all kinds of real estate all over the world. Neil, thanks so much for being here. Thanks, it's good to charge you. So now we've been talking about rents and hearts difficult for people to afford housing

a lot of parts of the world. You have written a story that takes a big step back and looks across real estate markets, in particular commercial real estate markets. Can you first just start by telling us when we're talking about the commercial real estate market, what are we talking about. We're talking about everything that's not a house that you own effectively. So you can actually include multi

family in some jurisdictions and not so. If you live in an apartment block that can be actually classified as a commercial building. But for most people, it's the office they go to, it's the shops that they go to, it's the strip mall that they stop off and on the way home, and it's those assets that combine with how they make actually propertly the biggest asset in the world.

And you know, you've been talking about rental housing and the cost of rents and people struggling with Part of that comes out of the global financial crisis, when the credit crunch meant that people build fewer houses and a lot of home builders and multifamily developers went bust. So there was a kind of shortage of house building during the bad times that didn't apply everywhere, and in fact, in some countries like China, obviously there was a huge

amount of house building, mainly aimed at buyers. And now we're going to start to see the outfall of that because a lot of the valuations and a lot of the house prices that people have paid, and this also goes for the office blocks and the shopping malls and so forth, are based off low interest rates, and so once the cost of paying that loan goes up, then the values start to fall because nobody else is willing

to pay what you paid for. And this is the pain that we're starting to see come true now, and in many cases it won't come true in data until the second half of the year, particularly for the bank lending books. But already, for example, you're seeing commercial property values in the UK down about sevent in the US there not about fifteen percent. They may go another ten percent this year so we're seeing big, big value declines

starting to come true in the property market. And you've taken a look at the property market around the world, and it seems that there really is this global trend that there are very few bright spots when you look around at what's happening with property. It's about out there. You know, malls have had a really really tough time for a few years. That's going to continue. Just seemed like they were starting to get back on their feet last year, and then obviously interest rates wrote so much

that in many cases they've made them on investable. And then i'll it's blocked to work from home trend that's really really really hitting off its values in the tech cities in particular, so from Dublin to San Francisco and in London as well to an extent. But then mainly it's a kind of like secondary offices, by which we mean like lower quality ones in not the best locations where maybe they were struggling to find a tenant in the first place, and maybe they don't the company hasn't

been growing very quickly. Those are the buildings that values where really you're going to see the stress, not just pain, but actually distress starting to come true, and is all of this happening now just as a result of the

general global downturn and kind of the end of cheap money. Yeah, I mean for real estate is a real double whammy, right, because you know, typically when you're going into a recession, central banks react by cutting interest rates, which kind of like allows you kick the can down the road a bit it because you don't really have to act. Now you have massive inflation meets economic downturn meets central banks who want to push rights forward to bring inflation down.

So their priority is no longer the borrowers and the holders of capital. Their priority is inflation. And it's as simple as that. And the cost of living has to come down, and that means real estate is going to suffer. And so this is a pretty unique set of circumstances. The other thing you're going to see is actually a slump in transactions, so we have to wait for what's

called seller capitulation. The sellers still think their buildings weren't let's say a hundred million, because it was worth a hundred million last year. The buyer, because there's far less of them and they can't borrow as much as in there, well, I actually think your buildings worth seventy eight and so we have to wait for the seller to almost give up. And that's going to be the next trend that comes true.

And that's how you start getting what we call price discovery, which is when you start to see what something's really worked as a host to what it's theoretically worth. And that's when some of the banks will start to suffer. Now it's worth saying the banks have been much more responsible this time than in the build up to the global financial crisis. Their loan to values and most of the commercial real estates in the fifties, so you'd have to see a pretty big value decline in order to

hit that. So a lot of the cases, it's actually the equity holders, which are many cases are are pension funds. They're going to be feeling the impact of this coming up in the next year. In the UK, for example, I think you write that housing prices are as much as twenty percent overvalued. Yeah, and what we're starting to

see is price falls as a result of that. So it's starting to finally come true into the data that house prices have been overvalued, that they have been void by low interest rates, particularly to try and say the economy during the pandemic. Actually saw something yesterday that said house prices in London and the southeast of England, which is the areas around London, effectively are over valued. Now.

I don't think anybody is saying that there's going to be a forty percent to climb, but certainly that area looks very vulnerable going forward. And I think one of the global trends you're going to see is the countries that were the winners of the last downturn, that came out of it in the best shape, are going to be the losers this time around because maybe they didn't need interest rates to be as low as they were. So you know, in China we've already seen mortgage holders

boycotting paymaking payments while apartment blocks halted instruction. House prices in Sydney are falling at the fastest rate and record in Canada. Toronto has just had his worst run ever Sweden. I mean, the house price declined there is unbelievable and early eighteen percent, about eighteen percent in just a few months. When you look down the road, how do you see all this playing out? Right? Now? There's a lot of people who are upside down or in distress. Where does

it go from here? Yeah, I think the market will go to a downturn until such time as basically prices reset at a level that makes sense for the borrowing environment that we're in. So it's got to go to a level where you can afford to pay your mortgage.

Basically if you're a homeowner, and that might sound simplistic, but if your interest rates have gone up and the Fed raised interest rates at the fastest pace on record, and you can afford to pay let's say, of your post tax income, it's basically got to go to a level that reflects that, and in some cases that means

price falls in order that people can afford these. Otherwise you have to wait, hold on to it, maybe rented out what we call accidental landlords, so you actually don't want to be a litler, but you can't afford to get rid of your place, so you kind of hold onto the rent until the market comes back. And you know, I'm irish, and we we basically had people to do

this for fifteen years. It took fifteen years for the market to rec over, and we may end up in a situation like that, where lots of lots of people are holding onto property they can't afford to get rid of. And I do think the banks are in better shape. I do think there will be a shake out there, but it won't be anywhere near as bad as a

financial crisis. What's interesting is for the banks is that a lot of what are called stage two loans, which is kind of a very boring jargony termed that basically means the loans starting to get a bit in trouble, but it's not in proper trouble yet. The level of increase of that in Europe in the last year has been the fastest on record, So that suggests that the banks see some trouble coming down the tracks and they're getting ready and preparing for that. Neil Calenan, thanks so

much for talking with me today. Thank you. You can read more from Prashanko Pol and Neil Calenan on Bloomberg dot com. Thanks for listening to us here at the Big Take, the Daily podcast from Bloomberg and I Heart Radio. For more shows from my heart Radio, visit the heart Radio app, Apple Podcasts, or wherever you listen. Read today's story and subscribe to our daily newsletter at bloomberg dot com slash Big Take, and we'd love to hear from you. Email us with questions or comments to Big Take at

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