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Home Publications Blogs Beat the Press If Rents Are Pricing People Out of the Market, It's Because New Rental Units Are More Expensive

If Rents Are Pricing People Out of the Market, It's Because New Rental Units Are More Expensive

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Monday, 14 April 2014 14:11

The NYT had an interesting piece on how a rapidly growing number of people are finding rents unaffordable (defined as more than 30 percent of gross income. There are two reasons that rents can rise in price. The first is that the same units cost more money. The second reason is that the mix of rental units change so that the the typical unit costs more.

It is clear that the main cause of higher rents is the latter, as shown below.

rent-cpi

This graph shows that the owner equivalent rent index from the Consumer Price Index (CPI) has almost exactly tracked the overall rate of inflation since the start of the century. (I used owner equivalent rent since this excludes the cost of utilities. The cost of utilities has likely outpaced inflation, but that is a somewhat different story.)

If this index from the CPI, which is effectively a quality adjusted price index, is not outpacing inflation, then it implies that the problem must be the quality is getting better. In other words, the units added to the rental housing stock (either by new construction or conversion of ownership units) are either bigger or better in some way than the average rental unit in 2000. 

The other factor that could explain a rise in the ratio of the median rental price to income is a decline in real income, which we have seen to some extent in this century. In that case the problem is not really high housing prices, but low wages.  

Comments (12)Add Comment
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written by Larry Signor, April 14, 2014 3:29
Using 1984 as an index year=100 yields an even more pernicious story of rent seeking.

https://research.stlouisfed.org/fred2/graph/?graph_id=172539&category_id=
Supply and demand
written by NB, April 14, 2014 4:02
Dean, part of the problem is that in many large cities there are strict limits on new construction. This benefits incumbent landlords and homeowners at the expense of renters and would be homebuyers, and I would think that these sorts of government regulations to benefit the already wealthy should be a target of BTP's ire.
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written by LSTB, April 14, 2014 5:20
The rental vacancy rate is still slightly higher than in the 1990s, so if rents are going up because of a change in the composition of the supply, then it sounds like landlords are holding out for tenants with high incomes. Meanwhile poor people are forced to live elsewhere.

Sounds like a job for land taxes to break the monopoly.
30% of Gross Income!!??
written by John Parks, April 14, 2014 8:04
Living in a State (Idaho) which, until recently,
had the highest percentage of minimum wage
workers in the Union it is estimated that a minimum wage worker must work 78 hours per week to be able to pay the average rent.

It can also be very expensive to work. In one of our more famous areas of wealth, Sun Valley, workers have to commute quite a distance because they can not
afford to live in the area.

But Idaho is not without glory! We finally underpassed Mississippi and achieved the national ranking of 50th when edjakashional success was measured.

I did not think I would see it in my lifetime when any state would be able to underpass Mississippi.

Continually cutting educational funding does yield results!
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written by Fred Brack, April 14, 2014 9:48
Dean: Hope you saw this re spending/housing bust:
http://houseofdebt.org/2014/04/14/the-consumer-as-a-shadow-of-its-former-self.html
...
written by watermelonpunch, April 14, 2014 10:46

The obvious answer is to fill these more expensive & larger unites with metal cages.
statistical mush
written by Steve Consilvio, April 15, 2014 7:32
You have made a very large conclusion from very sparse and questionable data.

It is this type of analysis that makes much of the study of economics seem more like alchemy than science: finding and shaping numbers in search of an assumption.

Science should involve cause and effect. What is the evidence that 'rents are pricing people out of the market'? The rich buy rich, the poor buy poor. No change there. You took an anecdote, turned it into a 'problem,' and found 'evidence' that the landlords are delivering higher quality units. You might as well be staring at your bellybutton, since everything 'studied' is a projection.

A better question to ask: why is 30% of income going towards rent acceptable? And, how do we fix it? You are trying to cover up the rental issue problem by suggesting that nothing has changed, when it is the baseline that is unacceptable.
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written by Alex Bollinger, April 15, 2014 12:44
Cities are making it hard to build new housing, at least from everything I read about urban development in the US. It would make sense for developers who have to go through so much trouble to get a project completed - community boards worried that increasing housing supply will decrease the price of their houses, mandatory off-street parking even in buildings not intended for people with cars, city councillors who pull the plug for any reason... - to focus on wealthier customers instead of poorer ones.
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written by MacCruiskeen, April 15, 2014 12:47
"If this index from the CPI, which is effectively a quality adjusted price index,"

The OER is not a quality-adjusted index. The BLS uses, or attempts to use, a fixed sample of rentals (in practice they've had a hard time maintaing the sample) to make a _quality-constant_ index. The assumption that OER tells you anything about apartment quality is baseless.
unsustainalbe disequilibrium....
written by pete, April 15, 2014 2:42
Your presumption that folks are being driven from the market because landlords are only building expensive units makes no economic sense. Higher income folks are demanding higher priced units makes more sense. Think of DC, NYC, San Francisco. There rents are clearly rising due to demand. True, as some have noted, building codes serve to restrict the minimum quality of housing, which also keeps upward pressure on rents. Some of these codes were written by electric and plumbing guilds to increase their work (e.g., maximum space between outlets, or GFI outlet requirements). SF recently tried to reduce the minimum size of the apartment to cater to lower incomes. Not sure where that ended up, but good luck with that. Chinatown in SF has grandfathered in occupant per apartment rules which allow them to place larger families in units, keeping rent per person down.

Bottom line, we have increasing demand for rentals by a variety of incomes (such as from those poor underpaid silicon valley employess), and the supply is somewhat constrained by regulation at the lower end.
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written by PeonInChief, April 15, 2014 6:24
The improvement in quality of new units doesn't explain the increase in rents in the same cities for units that aren't improved. That was explained a long time ago by John Gilderbloom--it's the "boomtown effect." (I don't think they teach that in econ classes. And anyone who thinks there's a "free market" in rental housing either can't define a free market or hasn't been paying attention. Yeesh!
No, Baker is absolutely correct
written by Gerry, April 16, 2014 5:20
Very glad to see this pointed out as it is rarely mentioned:
The first is that the same units cost more money. The second reason is that the mix of rental units change so that the the typical unit costs more.

And once the typical unit costs more landlords are free to charge more for the previously existing units - they are fewer in number when it becomes attractive to developers to tear down and replace with higher-value housing.
I'd question the assertion made by commenters above that cities make it hard to build new housing. Where I live the city policy is very much in favor of newer and higher-value development, in many areas under the guise of urban renewal. It improves tax revenue, all the trade unions are for the jobs in construction, and the green-minded liberal class loves density and the "new urbanism." The only losers are the poor, working class, young families, and the elderly. And they are getting cleansed out of our city in droves.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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