There’s been a lot of fuss in the news lately about how companies such as Blackrock are buying up houses left, right and center, often paying over the odds (as much as 15-25% above market) to get them. Many warn that this means the chances of new buyers actually finding a house they can afford are getting smaller by the day – and they’re right. However, there’s another side to the picture, and that is the inevitable result of the Federal Reserve’s policies and the inflation they’re generating.
Put yourself in the position of the average investor (or of Blackrock, which is an investment company, and its peers). Interest rates offer no real return at all on capital – in fact, in a high-inflation but low-interest environment, they offer a negative return. Your dollars are losing value every day they sit in a bank account, or in your wallet. The stock market is in a bubble of enormous dimensions, with share values vastly overinflated, and the bond market supported by all sorts of artificial measures that distort its structure. What’s an investor to do with his money to make a return on it?
The answer appears to be, at present, the property market. Property prices have been rocketing upward, buoyed by easy credit, stimulus money, and low interest rates. That’s what makes it meaningful for a company to offer a 15-25% higher price for a house than its market value. Not only does it guarantee that the company will get the house, even in the face of competition from other buyers; it’s also realistic, in that the company knows rising prices will raise the market value of the property to match what it paid within two to three years. That’s not a long time to wait, when there are no other worthwhile investment outlets for that money.
What’s more, the rise in property values is, right now, the only thing that’s keeping pace with – if not exceeding – the actual, real rate of inflation (which, as we’ve seen, is far higher than the official figure). Companies know this – they’re not blind. If their dollars are worth less with every day that passes, why not buy something that will appreciate in market value to offset inflation? Right now, that’s housing.
There’s also the element of market domination. If more and more people can’t find houses to buy at an affordable price, and are therefore forced to rent instead, they’ll be forced to pay whatever the landlord demands (within reason, of course). Companies are betting that if they control a big slice of the housing pie, they can increase their rent demands and get away with it, because consumers will have no choice but to pay them. That gives them an even bigger return on their investment in property.
So, when you see reports of companies paying over the odds for worthwhile properties, understand that their behavior makes commercial sense. They’re doing what they can to preserve the value of their investment funds, and make a decent return on them. The fact that it’s driving the property market to insane levels is a side-effect.
There’s a downside, too, of course. Many of the big rental companies are skimping on maintenance and services, to reduce their expenses – at the expense of their renters. Good for their bottom line, bad for us.