By Michael O’Connor

There are multiple theories as to why house prices continue to reach unfathomable heights.

One that gets a lot of airtime is the role of private equity firms in the market. The generally accepted narrative is that these funds come in, buy up all the available property supply and leave nothing for the rest of us. In reality, this effect is somewhat exaggerated.

It's always a crowd-pleaser when you blame surging housing prices on the big bad investment banks. After all, who doesn’t love to rally behind a ‘Vultures Out’ campaign. As much as I would love to burden them with most of the blame, the stats simply don’t back it up.

The share of total home sales that come from investor purchases has actually been in decline. In 2020, estimates showed that investors make up about 20 percent of housing sales.

Bear in mind that number is not just the share of institutional investors but anyone who isn’t just buying a house as their primary residence.

This 20% includes people purchasing second homes, vacation rentals, individual investment properties, and small investors flipping homes for profit.

In the US since 2011, the cumulative acquisitions from institutional investors has approached 400,000 single-family homes. This may seem like a lot, but with 83 million homes in the US, this represents less than half a percent of the market.

If we narrow our focus solely to the 16 million homes on the rental market, institutionally backed firms only own 2.5% of the market.

In reality, large investors make up just one to two percent of all single-family purchases, while other investors make up 18 to 19 percent.

The numbers show that most rentals are owned by small investors; your neighbours and friends.

To be clear, I agree that levies should be in place to prohibit bulk buying of properties, but simply using private equity firms as the scapegoat ignores the crux of the problem.

As masters of the dark arts of deflection, politicians are quick to point the finger. In reality, money supply, over-regulation, a distinct lack of planning, inadequate funding, and extended periods of undersupply post the Global Financial Crisis are the driving forces behind the current housing crisis but I guess it’s easier to fix the blame than fix the problem.

Where do prices go from here?

I expect home prices to grow more moderately in the coming years as more supply reaches the market, but this will take time. Those waiting for a considerable pullback could be left wanting.

Don’t expect housing to become affordable any time soon.

"If I had to guess, it’s going to be years until we see anything approaching a “normal” housing market. We simply didn’t build enough homes following the last housing crash to meet the demand coming from millennials reaching their household formation years" - Ben Carlson 'A Wealth of Common Sense'

Looking ahead, rising rates could slow things a bit if mortgage rates get high enough. With that said, the central banks are relatively boxed in. Interest rates are unlikely to skyrocket given the effect this would have on the service level of Government debt, but that’s for another day.

Remember, just because you think house prices should fall, doesn’t mean they will. The distinction is vital.

The waiting game hasn’t always paid off.