Rent increases may seriously affect proptech’s future

The Council of Economic Advisers reported that skyrocketing rents were responsible for 40% of the Consumer Price Index increase in May. At least 35% of people in the U.S. live in rented housing.

Why should we care?
“For many renters, especially those in large, urban areas with public transit that happen to be dominated by Democrats, increases in housing costs are likely to be far more expensive and pressing than the price at the pump,” writes Alexander Sammon in The American Prospect. “Yet there remains little willingness to address this component of inflation head-on.” And things are likely to get worse: With leases generally renewed on a 12-month basis, it may take a year for all tenants to feel the squeeze and for figures to fully reflect that severe spike in rental costs. Beyond the potential repercussions for Democrats’ midterm re-election prospects—and the possibility skyrocketing rents will make people lose access to housing—this driver of inflation may also have a negative effect on the proptech sector. According to Paul Williams, a fellow at the Jain Family Institute, the Democrats could lower the effects of rent inflation by making rental vouchers an entitlement, passing rent regulations (e.g. capping rent increases), or building more housing, yet Democrats are doing none of the above. Coupled with rising mortgage rates, which reduce the incentive to build new construction, renters’ depleted savings through inflation will further drive down demand for new construction projects (thus shrinking proptechs’ client lists), potentially spawning a positive feedback loop of housing shortages and rising prices. To avoid going out of business, construction proptechs could take the initiative to build affordable housig on their own by opting for an “if you build it, they will come”-type approach, but few incentives currently exist for them to do so. In the meantime, we veer closer to a rates-induced recession.