> do you think that housing prices running away like this might instigate some policy shifts?
Probably, yes. It was easy to see this coming, so I think policymakers should have shifted policy earlier, but it will be hard not to do so at this point, because now you don't need to look ahead anymore to see it.
The last time shelter inflation rose in this fashion was around 2010 to 2013 -- but that was shelter bouncing back from -0.6% to 2.3% after the GFC, rather than running ahead of the inflation target. The time before that was 2005-2007, when shelter inflation ramped up to 4.3% before the GFC. And the time before that was the '80s Volcker shock.
That's not just pattern-matching; that's a causal relationship. When interest rates gradually rise or fall, housing prices fall or rise in tandem such that shelter inflation -- rent and mortage payments -- is fairly constant at around 2%. But when interest rates step-change suddenly, shelter reacts violently. When that change is a rate cut, shelter initially falls (as mortgages get cheaper) and then climbs back (as housing prices adjust for the lower rates). When that is a rate hike, shelter initially spikes (as mortgages get expensive) and then falls (after the real estate market corrects).
But real estate market corrections are more broadly devastating than stock market corrections (although they often go in pairs). Housing is a highly-leveraged asset, is most peoples' largest (or only) investment, is used as collateral for other loans, and so on.
Shelter is a good approximator for overall long-term inflation expectations, labor prices, and wage inflation. So the Fed doesn't have much choice but to either address it or allow an inflationary wage-price spiral.
Probably, yes. It was easy to see this coming, so I think policymakers should have shifted policy earlier, but it will be hard not to do so at this point, because now you don't need to look ahead anymore to see it.
The last time shelter inflation rose in this fashion was around 2010 to 2013 -- but that was shelter bouncing back from -0.6% to 2.3% after the GFC, rather than running ahead of the inflation target. The time before that was 2005-2007, when shelter inflation ramped up to 4.3% before the GFC. And the time before that was the '80s Volcker shock.
That's not just pattern-matching; that's a causal relationship. When interest rates gradually rise or fall, housing prices fall or rise in tandem such that shelter inflation -- rent and mortage payments -- is fairly constant at around 2%. But when interest rates step-change suddenly, shelter reacts violently. When that change is a rate cut, shelter initially falls (as mortgages get cheaper) and then climbs back (as housing prices adjust for the lower rates). When that is a rate hike, shelter initially spikes (as mortgages get expensive) and then falls (after the real estate market corrects).
But real estate market corrections are more broadly devastating than stock market corrections (although they often go in pairs). Housing is a highly-leveraged asset, is most peoples' largest (or only) investment, is used as collateral for other loans, and so on.
Shelter is a good approximator for overall long-term inflation expectations, labor prices, and wage inflation. So the Fed doesn't have much choice but to either address it or allow an inflationary wage-price spiral.