A number of politicians have pointed to institutional investors as key drivers of the housing crisis and have proposed banning them from certain housing markets. We’ll walk you through (i) who these “shadowy” investors are, (ii) what the data shows about how they impact markets and (iii) why you should be skeptical of the ban proposals.
What’s an Institutional Investor?
The term institutional investor is fuzzy, but it generally means a professional investment entity, usually with “LLC” or “Inc.” at the end of its name. The biggest of these entities, and the ones that dominate the ban discussions, are the big pools of pensions. A typical scenario involves retirees coming together to pool their pensions so they can make investments that would be too difficult or expensive to make alone. The pension pool hires managers, who go out and invest the pool’s money on behalf of its retirees or, more commonly, pay a third-party manager to do so (what we call private equity or asset management).
Besides future pensioners, other major institutional investors that hire third-party managers include insurance pools, government-owned savings funds and university endowments. The 10 biggest US-based pools are teachers’ and other federal and state employees’ pension funds. Alongside these private pools are investment pools open to more of the general public, such as real estate investment pools (link) that you can buy into on Robinhood. Rounding out the cast are smaller, specialist real estate investment companies, generally owned by a small number of rich owners.
Because they perpetually have members retiring, pension pools are always looking for stable, predictable cash flows from long-lived assets. Managed pools historically got this yield by investing in multifamily (typically big buildings), office, retail and industrial real estate, among other assets. In the wake of the 2008 housing crash, they saw an opportunity to acquire cheap units in bulk in the single-family housing market (often from Fannie and Freddie) and never looked back (link). Before 2010, no single pool owned more than 1,000 single-family homes. By 2022, they owned 450,000 and the 5 largest owned nearly 300,000 of that total—concentrated heavily in the fast-growing Sunbelt, with a preference for cities with housing supply constraints (link).
Concurrent with institutional investors’ entry into the single-family market, the housing market began to come back from the lows of the crash. As the overall economy recovered, a substantial percentage of that recovery turned into increased demand for places to live, work, play and post. By 2020, that pendulum had fully swung. A decade after the housing crash, demand for housing has outstripped supply so severely that we’re in the midst of a massive housing shortage! Concerned politicians (from both political parties) noticed that institutional investors’ entry into the single-family market coincided with the growth of real estate prices and began to see institutional investors’ participation as one of the principal causes of that growth. While it’s certainly an intuitively appealing analysis, that simple story isn’t supported by the data.
How do Institutional Investors Impact Affordability?
First, the obvious. A supplier can only increase prices three ways: (i) increasing demand by providing a better product/service (“Amenity Provision”), (ii) removing supply from the market (“Supply Contraction”) and (iii) using its market power to extract value from its suppliers (including labor) or customers (“Market Power Extraction”).
The Rotterdam Experiment
The biggest investor ban that we’re aware of and that has been studied (link) is Rotterdam’s 2022 ban on all buy-to-rent investors. The motivation for the ban was a fear that the participation of investor-landlords was driving up the cost of housing. The results were not what the policy’s proponents hoped. From the study authors: “[T]he ban has “successfully increased middle-income households’ access to homeownership, at the expense of buy-to-let investors. However, the policy also drove up rents in affected neighborhoods, thereby damaging housing affordability for individuals reliant on private rental housing, undermining some of the intentions of the law.”
In essence, before the ban, investor-landlords were taking homes from the home ownership market and moving them to the rental market. Perhaps predictably, the ban’s shift of supply moved prices in the home ownership market down but prices in the rental market up.
Indirect Evidence
Other studies look at what happens when institutional investors enter a single-family housing market. We bucket them into two categories: (i) market power analyses and (ii) landlord behavior analyses. The conclusion from the substantial majority of market power analyses that we have seen is that when institutional investors enter a market, the impact of supply expansion in the rental market overwhelms other pressures (including attempts at Market Power Extraction) and rent falls (link).
In markets where institutional investors have enough scale to impact prices, rent can rise, but the authors of these studies (link) attribute these price impacts primarily to Amenity Provision (link). This of course isn’t to say that these landlords’ participation was unambiguously positive. We should care that these investors compete with the goal of broad homeownership. Moreover, there is evidence from landlord behavior studies that these landlords can be quicker to evict and can accelerate demographic shifts (link). In the final section, we’ll talk about how to start to address these concerns.
So Should We Ban Institutional Investors?
No. At least not without much more evidence that they’re harmful to renters in the areas that a ban would apply. Instead of bans like Bill A5441 (link) in New Jersey, we should lean into policies that directly address the concerns of Market Power Extraction but without contracting rent supply. In a time of worrying rent increases, we should not let the rental market shrink back to its pre-housing crash size.
A policy response first needs to test whether a particular investor or group of investors has market power. One helpful fact here is that homes are expensive. They comprise the biggest part of the cost of living for the average household. Consequently, a lot of pension money has to come together to acquire a substantial portion of the homes in a big market.
The largest owner of single-family homes owns fewer than 100,000 homes (link) across its entire portfolio. While that total is impressive, it would only represent about 20% of the single-family homes in NYC, so we should expect that in the NYC MSA and in other of the largest markets, it is difficult for even a big savings pool to exert meaningful market power. It’s thus particularly surprising to see investor bans proposed in the NYC MSA (link)!
State governments can require landlords to collect and annually report beneficial ownership and control information, rent payments and landlord investment in renovations and repairs. The ownership and control information could serve as an early warning sign for market concentration, while the payment and repair information should give us insight into whether there is Market Power Extraction. Moreover, landlords already collect and report (in aggregated form) much of this information on their state tax returns. It would be an incremental cost to require them to provide this information to state competition regulators.
To help expand homeownership opportunities, minimize displacement and support a healthy enough vacancy rate to strengthen tenant bargaining positions, we should remove obstacles to building new housing. We could also make sure our tenant protections are strong but sensible enough to benefit a broad base of existing and new renters.