Economics
Landlords Shouldn’t Get Away Without a Hit This Time
Real estate is as good an investment as stocks and with way less risk. That argues against a taxpayer bailout.
The question of who takes the hit from coronavirus is implicit in many of the policy decisions that governments will make during the next few months. There are basically two criteria leaders should use to decide who loses the most from coronavirus. The first is human welfare -- making sure that everyone still has food, shelter and the other necessities of life, not just during the pandemic but after it. The second is productivity; the government needs to preserve the ability of companies and workers to create real economic value. Both considerations suggest that landlords should take a hit.
With many businesses shuttered and workers out of work, the country is experiencing a deluge of missed rent payments. On the residential side, fewer than 70% of renters made payments by April 5; normally more than 80% of payments are on time. Even one month of missed rents can result in large losses to landlords:
Estimated Impact of a Month of Missed Rent
By share of payments missed in each category
Data: CoStar Portfolio Strategy
In Europe, where lockdowns have been more severe, the crisis may be even more acute.
Governments ultimately must decide how much of these rent payments will be collectable after the crisis ends and how much will have to be written off by the landlords. In the U.S., various states and cities have suspended evictions. Landlords report that many governments are refusing to enforce rent collection during the crisis. There will undoubtedly be a long legal tussle over unpaid rent for years to come. Meanwhile, there is a patchwork of government policies aimed at making landlords whole. Fannie Mae and Freddie Mac have granted mortgage relief to landlords who suspend evictions. The Paycheck Protection Program will bail out some landlords and increased unemployment insurance will allow many tenants to keep paying rent.
The question of who is ultimately responsible for missed rent is therefore still very much up in the air. The worst option would be to force tenants to spend the next few years paying back months of rent that they were unable they missed through no fault of their own. This would be unfair, and it would punish those who can least afford to take the hit. It might be a recipe for social unrest. Large-scale rent relief is necessary, whether through enforced forbearance or government handouts to renters.
The next question is how big a loss landlords should take and how much should be borne by taxpayer. If property companies fail, banks that lend to these companies will have to write off billions of dollars in loans. That could weaken the financial system, worsening and prolonging the depression. But the government could avert this by bailing out the banks and letting property companies simply fold. This would mean that land, as an asset class, would take the hit.
One argument for doing this is simply that it rarely happens. Researchers have found that since the mid-19th century, housing has yielded similar returns to equities in most developed nations while incurring much less risk.
Land Is a Good Bet Without as Much Risk
Estimated average asset return, 1870-2015
Source: "The Rate of Return on Everything, 1870–2015," Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor, June 2017, National Bureau of Economic Research
In an efficient financial market, this shouldn’t happen; risk and reward should be proportional. One possibility is that government policy consistently intercedes on behalf of landowners -- rebuilding after disasters and wars or setting zoning policies so that land usually or always appreciates. In other words, government backing can turn land into a lucrative one-way bet.
Not only is that unfair, it could be a big contributor to inequality. In a 2016 paper, macroeconomist Matthew Rognlie found that most of the increase in capital’s share of national income documented by economists such as Thomas Piketty was because of rising land prices, not to the increasing value of corporations.
This could also be bad for national productivity. As 19th century economist Henry George pointed out -- and as subsequent generations of economists have reaffirmed -- landlords naturally receive more value than they produce. Only an ideologue would believe that landlords are parasitic; they obviously produce value by building, upgrading and maintaining properties. But because the value of the land they own is determined by the productivity of the city around that land, much of the rent that landlords capture is not generated through their own efforts. That makes it inefficiently expensive to live in urban areas even in good times; in a crisis, it can deal a lasting blow to the livability of highly productive cities.
Letting landlords take a hit from coronavirus, as long as it doesn’t hurt banks, could therefore be the optimal policy. (Small unincorporated landlords might be exempted from these losses, perhaps with a targeted bailout.) It would represent a rare loss for a class of wealthy people who are used to not taking losses. The alternative -- bailing out landlords at taxpayer expense -- might seem easier, especially in a time when bailouts in plentiful supply. But it’s probably not the fairest or most productive approach.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Technology & Ideas
It’s Possible You’re Not Worried Enough About Coronavirus
Many are banking on a quick bounce-back that probably won’t happen.
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Today’s Agenda
We're all subject to forces beyond our control.
Photographer: Cindy Ord/Getty Images North America
Don’t Read This Before Bed
These days one of the worst things you can do is check the news right before bed, because you’re going to see some stuff that makes you not want to close your eyes again for several days. So let’s just state this up front: Don’t read today’s newsletter right before bed.
Because we’re about to take a long ride through the dark side, as a necessary counterpoint to the misplaced optimism gripping financial markets and many policy makers lately. The on-again/off-again cheerleader for this is President Donald Trump, who is as eager to get everybody back to work as we are to comply. The trouble is, in order for this to happen safely, the country still needs far more coronavirus testing, protective equipment and contact-tracing capability than it currently has, Bloomberg’s editorial board writes. Typically you’d expect the federal government to take the lead on this, but Trump has punted responsibility to the underfunded states, so we’re going nowhere fast.
Some of those states are already starting to end lockdowns long before even Trump’s guidelines suggest is wise. New outbreaks are almost a certainty, warns Max Nisen (not that the first one even really ended; its pace of growth has just slowed down). How bad they get depends on both suppression measures and several uncontrollable factors, such as the weather and the ability of science to find treatments.
Many of us may expect a peak in cases to be followed by a decline that was just as rapid as the rise. Instead, what we see in both scientific models and real-world data from other countries is a rush to a high plateau and then a slow grind downward, writes Mark Buchanan. This suggests it could be months before the pandemic is truly under control — by which time we may be due for the fall season to bring a second wave. This pattern could repeat for years.
A vaccine could finally end it, but there’s no guarantee we’ll get one, despite Operation Warp Speed, the Trump administration’s vaccine moonshot program. In fact, we must prepare for the possibility this disease will never truly be defeated, warns Narayana Kocherlakota. For economic policy makers, that means their heroic short-term support for the economy won’t be nearly enough.
Trump has apparently not realized the potential downsides, or else he’d be pushing Congress for far more help, writes Jonathan Bernstein.
Giddy stock investors may soon realize they’re just in the middle of the sort of dead-cat bounce we saw in the Depression, writes Gary Shilling.
Maybe this is all too pessimistic; Bill Gates says we could have a vaccine in just nine months. But it’s better to prepare for the worst and hope for the best. Now here’s a picture of some animals, in case you foolishly read this right before bed:
Further Reopening Reading:
About Those Small-Company Bailouts
On the campaign trail in 2016, Trump was always reading a song called “The Snake,” which says you can’t blame a snake for biting you; it’s in its nature. Trump used it to stoke fear of immigrants, but you could also apply it to companies. For instance, we’re all justifiably angry at big companies for taking relief money meant for small ones. But the Paycheck Protection Program was built to funnel money to some big businesses, writes Neil Barofsky. It’s in a company’s nature to try to get money the law says belongs to it.
But nobody bothered to change the incentives when the second pot of cash was distributed. If we don’t fix them soon, and also make sure they’re properly aligned in the Fed’s huge Main Street lending program, then the political backlash will be fiercer than what followed the financial crisis, Neil warns.
The fury inspired by the first round of bailout money going to undeserving recipients did shame some into returning it. But plenty of companies are still hanging onto this cash instead of doing the right thing, writes Joe Nocera.
Further Bailout Reading: Sorry, landlords, but you should eat some of the costs of people not paying rent for a while. — Noah Smith
Where’s the Beef?
As if we didn’t have enough to worry about, the nation’s strategic meat reserve may be threatened by coronavirus outbreaks at processing plants. The fact that problems at just a few facilities can affect your personal bacon supply is mainly the result of massive industry consolidation, writes David Fickling. And pandemic-proofing the industry will only further concentrate it, as the big producers can handle the necessary costs the best.
In any event, forcing workers into infected plants could well backfire, warns Amanda Little, leading to more widespread shutdowns and longer food shortages. For better or worse, Trump’s apparent “order” keeping these plants open is as vague as everything else he’s done in this crisis, writes Noah Feldman.
Telltale Charts
The shutdown of air travel will hurry many old gas-guzzling airplanes off to that old-airplane farm upstate, greatly reducing the world’s demand for jet fuel, write Liam Denning and Brooke Sutherland. Unfortunately for the oil industry, jet fuel was its one big hope for growth in oil demand.
Movie theaters are steamed Universal released “Trolls World Tour” straight to video, but the industries will need each other after lockdowns end, writes Tara Lachapelle.
Further Reading
Tesla bulls ignore such niceties as “coronavirus” and “numbers.” — Liam Denning
Kudos to Royal Dutch Shell for cutting its dividend, an all-too-rare example of bowing to reality. — Chris Hughes
Some real-time indicators suggest the job market is in even worse shape than the ugly official numbers say. — Michael R. Strain
Europe will collapse without a leader, but Germany, the best candidate, doesn’t want the job. — Andreas Kluth
This may be the death knell for Davos Man. — Mark Gilbert
Americans are swamping thrift stores with too much stuff. — Adam Minter
ICYMI
Children may be as infectious as adults, even with mild symptoms.
West Point grads will be in a “safety bubble” before Trump’s speech.
Kickers
What recipe is your state searching for the most in quarantine? (h/t Scott Kominers)
Why carbon emissions aren’t falling more during lockdowns.
You need to order your Mother’s Day gifts now. Here are some ideas.
Note: Please send recipes and complaints to Mark Gongloff at mgongloff1@bloomberg.net.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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