In California, Governor Gavin Newsom has proposed a moratorium that would effectively delay rental payments until the tenant can pay for it after May 31st given that their income has been detrimentally affected by the coronavirus. This poses the question, what long term economic impacts will this have on homeowners, investors, tenants, and buyers? At first it may seem sensible just to push back the rental payment, but there are some negative externalities. Not only this, it is hard to say whether the moratorium will change things in the short run, because people will not be making more than they were making before the devastating coronavirus, possibly even less.
With this moratorium, investors and landlords are effectively reaping no profit from low interest which discourages allocation of funding into investment. Not to mention the aggregate demand and supply is continuing to fall, spelling further declines in interest rates which should deter investors until the end of the health crisis when aggregate demand bounces back. One thing I would like to point out is that when aggregate demand does bounce back in the long run and we reach the same output as we had before the crisis, the prices will actually be lower than they were before. Here is a graph depicting aggregate demand and supply of the economy in the midst of the health crisis.
While the Real GDP and output is the same, the lower price equilibrium affects homeowner and investor outlooks on prospective property. In theory, with lower price and low interest rates investors would once again be encouraged to put their money into homes as opposed to a period of moratorium where rental properties and interest are essentially showing no growth nor yield. With regards to tenants, this drop in price only comes in the long run, and with just a 2 month moratorium delay the write off payments would be just as high or even higher than the price before the health prices started. Sadly many people will not be employed by the end of the 2 month delay, so it seems like a disaster in the short run. However during the moratorium, landlords are actually hit hard too because they are effectively forced to bear the brunt of the pandemic’s blow, being liable for all expenses in regards to their property and workers they hire. This would result in them laying off workers, forfeiting property, and missing obligations, risking foreclosure.
Author: Jerry Liu