Photo Credit: Sean Pavone / Shutterstock
As the pandemic’s effects on the economy continue to play out, one major concern on the minds of economic observers is inflation. Aggressive government stimulus over the last two years, supply chain breakdowns, and continued uncertainty around the spread of COVID-19 and its effects on certain industries are all potentially contributing to rising prices in the economy.
One positive development along these lines has been wage growth. Job growth has slowed down in recent months, and labor force participation rates are still significantly below pre-pandemic levels. Because the labor supply is limited, employers are raising wages to entice workers to take jobs, which has led to some of the sharpest wage increases in years.
But a more concerning trend has taken hold in the cost of housing. The market for residential real estate purchases has been highly competitive during the pandemic, with an influx of new buyers boosted by low interest rates and strong savings and investment returns. However, the market has seen relatively low supply, with fewer existing homes coming up for sale and new construction failing to keep up due to labor and supply shortages. The supply constraints have driven up housing prices—often a leading indicator for rents—and renters are now feeling the effects.
The result of these conditions has been a fairly gradual increase in the rate of wage growth accompanied by a much sharper increase in rental prices. The rate of rental price growth dipped at the start of the pandemic, falling from 3.3% year-over-year at the end of 2019 to a low of 1.3% in September 2020, and has since rebounded sharply to 5.4% in June of this year. In contrast, wage growth was around 3% before the pandemic, held fairly steady between 2.5% and 3% throughout 2020, and recently ticked up to 3.5%.