As a Beacon Hill Realtor for 20 years plus, I thought I would never see this: Beacon Hill apartment landlords are facing a problem they didn’t think was possible a few months ago – falling Beacon Hill apartment rent prices and vacancies. The most recent MLS data shows over 160 Beacon Hill apartments are for rent for September 1st and growing. The deflationary move in rent prices is the first I’ve seen in my 20 plus years in the Beacon Hill real estate business. A month isn’t a trend, but if it continues, the impact could be good news for Beacon Hill apartment renters and a disaster for landlords.
Deflation is when consumer prices fall. Sounds great, right? Who doesn’t want to pay less for things? Declines at certain times, especially during the coronavirus outbreak is welcoming news. Consumers have more money they can spend or invest in. However, it becomes a problem if it spreads across more segments and the general economy. It becomes a huge tailwind during an economic slowdown.
Widespread economic deflation can lead to something called a “deflationary spiral.” Since prices are dropping, consumers wait to see if they can get a better deal. If businesses can’t sell inventory, they slow orders for new inventory and investment. This leads to lower employment… which leads to less demand… leading to further price drops… which leads to… you get the point. It becomes even more of an issue if interest rates are kept low for a long period before. Keynes himself once warned that lowering rates after a period of extended low rates, will fail to stimulate demand.
Deflation is not sounding so great now, right? There’s an even bigger problem for heavily indebted first-time Boston condo owners – regarding Boston real estate mortgage debt. It’s common knowledge the value of debt in Boston real estate can be inflated away, but it’s less commonly known that the opposite can happen. The value of debt can increase in real terms in a deflationary environment. This makes existing mortgage debts harder to pay, since debt loads and payments are the same, but they exist in the same universe as higher unemployment and lower wages. It also generally means lenders need to raise interest payments because the value of debt decreases.