Hostility to the real estate private equity push is wrong
“VOUTSIDE ULTURESRead one of the many placards held up by young demonstrators at a recent rally in Dublin. The cause of their anger was skyrocketing rents in the Irish capital, pushed up as the fastest growing house prices in years made renting more attractive. The feeling is spreading. Private equity firms, insurance companies, pension funds and other institutional investors who grabbed residential real estate during the pandemic are becoming the target of resentment in wealthy countries. As their share of the residential real estate market has grown, so has the backlash. Some blame the big landlords for soaring rents. Others accuse them of exploiting the crisis for profit.
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Policymakers were quick to respond. The White House wants to restrict the types of properties that large investors are allowed to buy. New Zealand removed tax breaks for real estate investors and Ireland imposed a 10% wholesale home purchase tax. Canada’s central bank says the role big investors play in housing needs further examination. In Germany, Berliners voted in September to force their city’s biggest landlords to sell more than 200,000 apartments to the state, though the referendum was not binding and the Constitutional Court is expected to overturn the result if it becomes law. Spain’s left-wing government is the latest to take action to deal with the big landowners. Under new proposals, they will face rent controls, higher taxes on empty properties and a ban on buying social housing.
From this hubbub, you might think that professional owners are gobbling up the market. In fact, their share remains modest. In America, investors only own 2% of rental housing. Across Europe, listed funds hold less than 5%. In Spain, reviews have focused on Blackstone, the country’s largest residential landlord. After entering the market eight years ago, the private equity giant now owns 30,000 homes. Yet this is only 1% of the total stock.
There is no doubt that big investors have big ambitions. Single-family homes and apartments built for rental have become a lucrative business. Other Wall Street companies such as KKR and Goldman Sachs are also piling up in the market, and they build as well as they buy. By some estimates, they account for over 6% of new homes in America each year. Across Britain, institutional investors are expected to provide one-tenth of the government’s housing target over the next few years. Since 2018, they have built almost a quarter of new homes in Liverpool and over 15% in Nottingham, Leicester and Sheffield.
This injection of capital should be welcomed and not despised. Investors want to make money, of course, but they see a void in the market that needs to be filled and they are doing something about it. The demand for rental housing has never been higher. In Great Britain, less than one in ten dwellings was rented in the mid-1990s. The share is now closer to one in five. One third of households in America are rented. Falling homeownership rates in the rich world mean that decent quality housing in the private rental market is more in demand than ever. However, rentals are precarious and the supply of rental housing has failed to meet demand. A number of countries face chronic shortages. The national rental vacancy rate in Canada in 2020 was 3%. In parts of Australia it is less than 1%.
The influx of institutional money into the rental market comes at a critical time. The city centers are full of empty buildings, because of the pandemic. This created the possibility of expanding the dwellings by converting them. However, this will require not only an overhaul of the town planning rules, but also a lot of money to pay for the construction works. Cities like New York show what is possible. The big investors out there have been turning their offices into homes for years. As a result, some 60,000 people live in Lower Manhattan today, up from just 14,000 in the mid-1990s. The City of London estimates that it will have room for an additional 1,500 homes by 2030.
The crux of the matter is the lack of supplies in places where economic opportunities are greatest. Some say the answer lies in higher interest rates or macroprudential tools, such as restrictions on how much banks can lend. These policies would temper the growth in demand and prices, but would not bring the economic benefits of the growth of prosperous cities. Some favor loan programs for first-time buyers, but these only inflate house prices, failing both buyers and taxpayers. Simple solutions such as relaxing planning laws can be politically poisonous. Britain appears to have put aside a town-planning reform proposal that would have encouraged housing construction.
Rather than relying on gadgets, countries need to get out of the crisis. That’s why, instead of caricaturing the big money like barbarians at the garden gate, decision-makers should prepare the welcome mat. â
This article appeared in the Leaders section of the print edition under the title “Barbarians at the Garden Gate”