How have rental costs been affected by the recent decreasing in housing values? At first glance, it seems like it will always cost more money to have the exclusive use of a limited resource when purchasing that resource outright becomes more expensive. However, it also seems to me that during the housing bubble, housing stocks became an investment vehicle divorced from the actual market need for housing and this investment bubble in some ways seemed to subsidize housing. This is, investment financed an over-building of housing supplies relative to the actual demand for housing under the presumption that the bubble would never actually pop.
To use an analogy, if you buy shares in GE with the hope that they’ll rise in value, but I would like to have some stock certificates hanging on my wall just because I like the way they look, certainly we could make a cheap arrangement for me to frame and hang your GE stock certificate just so that I can have it to look at on my wall while you retain the actual ownership of the stock and your primary interest is in seeing the value of the stock continue to rise.
So, what is the professional economic consensus on the way the decline of the housing bubble has affected or will affect rents?
Your first point is a good one. In fact, one index to quantify how “divorced from the market need for housing” the real estate market got is to compare the price ratio of buying versus renting. This article in a recent NY Times demonstrates the logic:
As for the real question in the OP: rents will fall if there are more places for rent than people looking to rent. The effect of the current housing market is likely to be an increase in people looking to rent, though, due to people not wanting to buy in a down market and also it now being harder to get a loan than in recent years. This will be offset to some degree by developers with unsold units, or people who bought investment properties to flip for a profit now being stuck renting them out for income to offset their payments, but I suspect it won’t be enough. A lot of the houses stuck on the for-sale market are primary residences, not investment vehicles or new construction.
That’s my guess, though. I haven’t done the research to see what proportion of the real estate market are primary residences vs. new construction/secondary properties.
In my area, most of the apartment rentals are in older buildings that are presumably paid off and only have upkeep, utilities, and taxes to pay; anything else is profit. Most new apartment construction is condos. It seems to me that if there’s a competition for renters, these landlords have a lot more wiggle room to lower (or not raise) prices to attract tenants.
(I read recently that 55% of new-home sales in Toronto are now condominium apartments.)
Houses may be different, but there aren’t that many new single-family detached houses in Toronto. Plenty of townhouses and older detached houses, though.
Anecdotally, here in Massachusetts, the increase in distressed properties has strengthened the rental market, because there are lots of properties sitting vacant, meaning a somewhat artificial constriction to supply. But Massachusetts is something of a special case, because the amount of new construction is limited. It’s not like Los Vegas or Phoenix, where speculative building has miles of desert to swallow up.
Yeah, I’d heard that rents are going up in my area, even though house prices are going down, as less people have the option to buy, due to the credit crisis.
Hopefully this means at some point it might actually become economically viable to buy a house (personally I thought it was crazy buying somewhere where the interest alone on the mortage was far more than you’d be paying to rent a similar property).
I don’t have a cite, but I do have an anecdote. I was behind a guy in the business line at my bank last week, who said he owned six rental properties. He said the rent he could get form them had just sharply increased, and the time the apartment was available sharply decreased. It makes sense, because during the bubble houses were not unoccupied very long, while today there are a lot more vacant. The combination of those kicked out of their houses and those who do not wish to purchase yet because they don’t think the bottom has been reached might put pressure on rentals, and thus drive up prices.
For some real data, see this chart. The rents went up, even if the occupancy rates didn’t in some counties. Chart here.
For purposes of comparison, here are median single family home sale prices.
I think that it may be more of an offset than you think. Although the houses that won’t sell weren’t intended to be rental investment vehicles, there’s no reason why they wouldn’t be put to such use if there’s no other use. One of the consequences of the housing bubble was that many places were considerably overbuilt. I don’t recall the cite, but I read that most of the major bubble cities have the highest housing units per capita that they’ve had for decades. With an oversupply of housing, the costs of both buying and renting should drop.
I also think, though, that the housing and rental markets are going to be more dependent on location than ever before (Maybe we should add a forth “Location” to the list of important real estate criteria). With gas unlikely to drop below $3/gal in the foreseable future, all those overbuilt suburbs are going to crash even harder, while rentals in cities, both closer to work and closer to mass transit are going to go up.
Rents seem to behave strangely. A quick check of Google News shows a lot of rent rising in the UK, Canada, Qatar, among other places. I think it’s more tied to general inflation panic among landlords than based on firm market principles of supply and demand- that is I think it will correct itself and rents will drop when the panic is over. The rental market is like the stock market in that all the movement is at the foamy top of the kettle, where a few trades or a few high rentals seem to signify a great trend, but that ignores the underlying inertia of all the stocks not traded and tenants not changing locations.