The Real Reason Housing Costs Are Way Up — And What Can Be Done About It
Rents have been rising all across the United States for the past several years. On average, rents are up about 8% from where they were in 2011. Demand for rental properties has simply been on the rise, thus driving up rents. Some of this demand is due to demographics as the Millennial generation moves out of mom and dad’s place. Some demand is also the result of the real estate crash of 2008, which forced many out of the home buying market. In some areas, rent increases can also be attributed in part to strong “pull” factors that attract people to those areas. The high-tech jobs in San Francisco are one example. The climate, topography, and perceived quality of life in places like Seattle, Portland, Austin and Denver are others. Meanwhile, places like New York, LA or Miami simply attract people from all over the world.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Increasing rents are not well received by everyone. In Portland, Oregon, some tenants are trying to form a union to fight rent increases and force landlords to keep their rents below market level. They want moratoriums on rent increases, longer rent increase notification times, and an end to no-cause evictions. I understand their concerns, and I too would be upset if my housing costs increased by 50 percent. But I think that these activists are barking up the wrong tree and should change their focus. It's not always the landlord's fault.
Here is why.
When Supply Doesn’t Meet Demand
Rent is a price, plain and simple. And prices are subject to the forces of supply and demand. If demand is strong but supply is low, prices (rents) will climb, and of course, so will profits. These increased profits are a signal to entrepreneurs and developers to provide more rental housing. If they were left alone and allowed the opportunity to provide these housing units, the market would eventually clear. An increase in supply of rental units would meet the increase in demand, and rents would begin to stabilize or perhaps even decline. Landlords might actually have to begin to offer incentives for tenants to move to their properties.
But it is often not very easy to provide the rental units that the market is demanding.
Jurisdictions put up all kinds of barriers that work to restrict the supply of all housing types, not just rental housing. Zoning, building, and housing codes all can work in this regard. Portland, Oregon, for example, has an urban growth boundary that limits what can be constructed inside it. In some parts of California, it can take years to get the necessary approvals for a development. Property owners everywhere scream, “Not in my backyard!” and petition elected officials to prevent and restrict new housing developments, rental or otherwise. If you think about it, you discover that property owners have a vested interest in keeping new development out since restricting development actually benefits them. How? It keeps the values of their properties artificially high. Restricted supply again translates to higher prices.
The Role Restrictions Play in Housing Supply
With such restrictions, opportunities to develop new housing can be few and far between. So our old friend supply and demand rears up again. Low supply of development opportunities means a high cost for those opportunities when they become available. In other words, the land gets very expensive.
Developers in these markets are therefore forced to cater to high-end customers who can pay higher prices (rents) because they have to cover their high development costs. This leads to concerns and arguments about gentrification and the resentment that developers are "only building for the wealthy." If there was profit in building lower and moderate income housing, they would do so, as they have many times in the past. But artificial restrictions tend to push values up and often inadvertently harm those that the restrictions were perhaps trying to help.
So, to lower rents and housing costs, there must be either an increase in the supply of housing on the market and/or a reduction in demand for it. Artificial controls placed on existing supply and landlords that many are clamoring for only further restrict the supply and make the problem worse. Unfortunately, I do not see many arguing for a relaxation in restrictions to help ease housing prices. Thus, I do not see many jurisdictions loosening up their controls to allow more housing opportunities. If anything, the rules and regulations are only becoming more and more restrictive, further exacerbating the problem.
Here in Memphis, we are perhaps a bit better off than many other jurisdictions. When it comes to development opportunities, there are plenty out there, and it is not overly difficult to get new development approved. Nor are we faced with a huge surge of new residents (fortunately or unfortunately, depending on your point of view), so demand is not as steep as is found in other areas.
So how are things in your community in this regard? Have you been raising rents? If so, are you receiving any blowback? Ever try to develop new housing or provide more housing units? What obstacles did you encounter?
Let me know with your comments.