Eric Rosengren is the Boston Fed President, and a man who has publicly fretted at the construction cranes populating his home city. True, property values have been soaring in the Boston market—witness nearby Newton, Mass., where an average home sells near a cool million. Boston is a city and region infamous for stipulations on property development, from minimum lot sizes to excruciating permitting for commercial development.
Rosengren may wish to ponder whether a noose on supply is what drives Boston property values higher, and not national prosperity.
When he had a vote on monetary policy (as a rotating member of the Federal Open Market Committee) Rosengren resolutely voted for rate hikes last year, warning of an overheating economy. Nary a week goes by now that Rosengren does not reiterate his sentiments.
We have this doozy from Rosengren in March, as reported by Reuters: “Eric Rosengren…said the ‘sharp’ rise in apartment prices in particular may signal financial instabilities that interest rates, which are only gradually rising, may not be able to contain.”
Of course, presently national core CPI sans shelter is actually deflating, and up 0.8% YOY.
The latest core PCE (the Fed’s preferred measure of inflation) also deflating presently, but YOY is up 1.6%.
And Boston? Core CPI there is up 2.1%, pulled by “with higher shelter costs being the main driver of the increase….” reports the BLS.
“Property sales volume may have peaked, but prices continue to rise due to limited inventory.”—That is how commercial real estate brokerage Colliers International sized up the Boston property market in Q1 2017.
The Colliers review of the Boston market is one any other city would die for, with tech employment growing, law firms hunting space, the local schools highly rated and a mass-transit system that hustles 1.3 million riders around every day.
The problem is Boston does not have the housing and commercial property to handle the demand, and that is spiking prices. An economist might suggest the solution is to build more.
And Rosengren’s solution? One can Google “Eric Rosengren” and “property zoning” and come up with nothing. His solution is to cut demand.
Property Values, Zoning And Trade Deficits
So we have a central bank, in this case the U.S. Federal Reserve, contemplating monetary policy in a world of artificially inflated property values.
The problem is complicated by the fact that the U.S. runs large and chronic trade deficits, and that also tends to spiral property prices north—a finding of the Fed itself, but one which no Fed official has ever mentioned. In short, foreign capital pours into U.S. real estate. The same thing is happening in Australia, Canada, Great Britain. Yes, a house in Sydney will set you back $1 million, and the middle-class can no longer afford to buy a house in Great Britain.
The Fed is fighting chimeras, and myopically at that. True, the Fed does not control property zoning in Boston or anywhere else, nor can it shrink the trade deficit.
But rather than define solutions for policymakers—for example, suggest methods by which federal inducements could cut property zoning, or create “free development zones” in cities, or suggesting a raise in trade tariffs (yes, heresy)—instead the Fed continues to operate as if kneecapping labor markets is the only policy course. It is certainly the Fed’s favorite policy.
As if on cue, on May 9 Reuters reported that, “Rosengren, in a speech that reiterated concerns about high U.S. real estate prices, said the current jobless rate at 4.4% has already fallen below his 4.7% estimate of ‘natural employment.’”
For investors, 2017 thus remains a tricky year. The Fed appears ready to eviscerate labor and suffocate the economy to throttle real estate prices. With a yawning trade deficit and ubiquitous property zoning, that will take some throttling. Overkill is possible, perhaps likely eventually.