Zoning and the economy aren't the only factors in neighborhood change—financial regulations and policies, sometimes seemingly unrelated, also have an effect.
Michael Reher writes to reveal an underappreciated factor in the rental housing affordability crisis in the United States: changing financing practices.
According to the findings of Reher's new working paper, "much of the growth in apartment improvements, the rise in rents, and the loss of low-income units were the result of a change in bank regulations and the interplay between low-interest rates and the rules that govern underfunded public pension funds."
With renovations, for instance, Reher traces the increase in residential improvements with multiple changes that funneled funding for renovations away from other kinds of residential investments.
The first is High Volatility Commercial Real Estate (HVCRE) bank capital requirements introduced in 2015 in accordance with the requirements of the 2010 Dodd-Frank Wall Street Improvement and Consumer Protection Act. These regulations, which were supposed to make the financial system more stable by requiring banks to have greater reserves for riskier loans, categorized loans secured by improvements on rental properties as significantly less risky than loans for the construction of new rental units.
Reher provides this summary of the paper's findings to conclude a more detailed article:
Collectively, my findings indicate that the regulatory changes and the changes made by public pension fund managers together accounted for around one-third of real improvement activity over 2010-2016. During this period, quality improvements accounted for 65 percent of rent growth (though this number includes improvements not necessarily created by the previous two shifts).
FULL STORY: HAVE CHANGES IN FINANCING CONTRIBUTED TO THE LOSS OF LOW-COST RENTAL UNITS AND RENT INCREASES?
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