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bennymac

A Sustained Jump In Us Cpi Due To Rising Rents

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Hey guys, thought id make a post here because no doubt most of you are much more cluey than me when it comes to macro effects.

Im trying to get my head around the consequences of a sustained rise in the U.S CPI.

My personal belief is that the analysts have not given enough thought to rising rents in the states. the fed CPI weighs rent increases quite heavily, and like in Australia (which has just seem a massive boost in residential and commercial rents post boom due to a strong demographic situation but unaffordable house ownership) now that housing starts are appearing to fall and supply is dropping, i think rents might burst out of their seams.

Obviously your all aware of last nights unexpected jump in CPI (due largely to a rise in rents) which has shaken the markets abit, but aside from the obvious what are the possible effects? Will a severe correction/collapse in the building market have any considerable impact on demand for commodities? Builders sentiment in the US is at a 10 year low.

Rents increase ---> CPI increases ---> Bernanke gets jittery and U.S rates keep increasing ----> correction in the U.S market due to over-leveraging ---> an armchair economist like me gets abit lost here, aside from the obvious implications for U.S discretionary, building and banking stocks, will it have massive implications for the overseas financiers? And how will the U.S dollar fare in all of this, my basic teaching tells me that the U.S dollar rises with inflation but its already over-valued so really the only way its going is down?

Any thoughts would be helpful guys

Cheers, Ben

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bennymac

I'm not sure what you're actually saying/ asking.

Maybe these thoughts will be useful:

Unaffordable housing does not mean that rents must rise - every BTL that pushes house prices higher is leaving/ releasing that property into the rental market.

Rental prices and to a lesser extent property prices are fundamentally grounded by average wages. In other words, the average wage is the primary determinant of the average rental price.

The fact that the UK is an island/ has difficult planning laws/ a growing population of "households" does restrict supply. But that restriction in supply has not cause house prices to rise. Why? Because rents have not risen anywhere near as much.

The US dollar falls with inflation. If I'm a holder of a foreign currency and the Fed are printing lots of dollars and causing inflation, then next year, I'm going to want more dollars for every one of my foreign currency because each dollar buys less in real terms.

Basically every day that passes puts the Fed further into that crack between the rock and the proverbial hard place. (Except that they don't really care that much.) They can raise interest rates to protect the value of the dollar and cause recession or they can lower interest rates, print money and cause hyper inflation. Look at it from the Fed's point of view and it is a little simpler. The fact that the dollar is the primary global currency gives them a huge benefit since they can export inflation (by printing extra dollars and instead of devaluing the worth of just the US population, they devalue the worth of all the dollar assets that the rest of the world hold). Therefore their KEY focus is protect the primacy of the dollar. Hyperinflation is therefore off the table. This means they have to let the dollar slide a little to stop the deficits increasing but after that they will protect it to the hilt and not give two hoots about the recessionary pain the US feels. Bottom line - US rates are going up. And if they go up, the UK simply cannot maintain its 4.50%.

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thanks for the feedback, its been helpful.

'Unaffordable housing does not mean that rents must rise'

Ok. But what happens when building starts collapse and supply of housing drops?

In regards to the rent rises: what we have seen here in Australia is a massive increase in rents, but slight slips in actual house prices. Wage growth obviously hasnt been the prime driver of rental growth given its been running at about 5% and rental increases 25% p.a + for the last 24 months. Strong natural increase and migration have been the factors. People still need a roof over there heads.

In regards to inflation, im obviously way off. But why is it though that when a countries CPI rises the dollar of that country tends to rise? i.e like the USD's bounce when the higher than expected CPI came out last week? Is it the market pricing into the USD future interest rate rises as a result of the CPI jump? But then going by what you said the USD's ******ed anyway, so who/whys it being bought.

Cheers

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Ok, I'm probably most qualified to answer the first and I'll take a flyer on the other two.

'Unaffordable housing does not mean that rents must rise'

Ok. But what happens when building starts collapse and supply of housing drops?

New builds are only part of the picture in terms of housing supply in the market. Developers will continue to develop sites because building projects takes years to come to fuition, they have land banked and what else are they going to do? But completely overpowering all of this will be the property that comes onto the market due to house prices falling in real terms, house prices falling in nominal terms and even house prices failing to appreciate as quickly as they have done in the recent past.

In regards to the rent rises: what we have seen here in Australia is a massive increase in rents, but slight slips in actual house prices. Wage growth obviously hasnt been the prime driver of rental growth given its been running at about 5% and rental increases 25% p.a + for the last 24 months. Strong natural increase and migration have been the factors. People still need a roof over there heads.

I don't know the specifics in Australia but what I can tell you is that 25% is one thing but there is no way that rental prices will increase 300% like house prices can and have done in some places, because that would mean that they were greater than wages. I'm guessing you're quoting the 5% as an annual figure so we ought to be comparing 10% to the 25% over 24 months. In my opinion the excess 15% might come from the pull exerted by the ballooning asset prices as people are mortaging themselves further and further into the future. I have no doubt that demographics can help explain too but people normally give them too much credence as they are "easy" explanations.

In regards to inflation, im obviously way off. But why is it though that when a countries CPI rises the dollar of that country tends to rise? i.e like the USD's bounce when the higher than expected CPI came out last week? Is it the market pricing into the USD future interest rate rises as a result of the CPI jump? But then going by what you said the USD's ******ed anyway, so who/whys it being bought.

Again, this isn't something I've looked into particularly but be very careful when looking at the response of something like the dollar to news such as CPI and consider all the factors. Even then it might not make much sense. I'd be interested to know where the evidence is for currencies appreciating when inflation rises in that country. It's an interesting question about the market expectations of future interest rate rises on the back of higher CPI and I think you might be onto something here. All other things being equal, higher expected inflation should mean a weaker currency but if the Fed is credible in its fight against inflation then in fact higher inflation is not expected, rather higher interest rates are, which should mean the dollar appreciates. Let's see what happens!

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thanks for the help infektd, i get the jist of what your saying and what i was missing.

in regards to the inflation, yeah i think that may be it- the USD bounced because the market has faith in bernanke to raise rates to keep inflation down (as a result of the CPI jump)... but who knows, i read somewhere that hes more worried about asset devaluation then he is inflation?

scary times, but anyway thanks again

ben

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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