There has been quite a bit of buzz lately about rent increases being passed through to the Core CPI through something called OER (Owners’ Equivalent Rent). The CPI doesn’t take into account housing prices directly, so the stagging increase over the past 5-6 years hasn’t been captured as inflation. The CPI uses the equivalent rental price as the basis for judging changes in house price movements. In a normal environment, home prices and rental prices move in tandem. However in our bubble market, rents have been stagnant for the past few years, while home prices have shot up dramatically. Recently, rents have begun to rise. This jump in rents is starting to push the core CPI higher. You can think of the CPI as having understated housing inflation, simply due to the way housing inflation is measured. Should rents continue to increase, the Core CPI figure is going to remain elevated.
So what are the macroeconomic effects of the rental rates of 1,000,000 apartments increasing 7.25% in the next two years?
From the NY Times:
Rents for New York City’s one million rent-stabilized apartments can increase by as much as 7.25 percent over the next two years, the city’s Rent Guidelines Board voted last night in a raucous meeting that was disrupted for hours by jeering tenants protesting the state’s control of the city’s rent laws.
The board voted, 5 to 4, to allow increases of 7.25 percent on two-year leases and 4.25 percent on one-year leases. For tenants who pay for their own heat, the allowable increases are 6.75 percent and 3.75 percent. The increases, the highest since 2003, apply to leases renewed between Oct. 1, 2006, and Sept. 30, 2007.
Increases such as these may keep the Fed tightening, long after the housing bubble bursts.