THE RENTAL NON-BUBBLE….Ezra Klein is puzzled that although housing prices skyrocketed over the past eight years, rental prices have stayed steady as a rock:
Obviously, no one’s shocked to see we had a housing bubble, but I’m a bit surprised that rents were totally unaffected. In theory, the run-up in costs should’ve made it relatively more profitable for landlords to sell, thus depleting the rental stock, and forcing renters to stay competitive by paying more. That didn’t happen, though I’m not sure why.
A couple of guesses here. First, part of the housing bubble was caused by low interest rates, something that doesn’t affect rental rates. In fact, low interest rates generally help to keep rental rates low. Second, the housing bubble took a lot of renters off the market: home ownership rates went up a couple of points and rental rates went down a couple of points. That kept pressure on landlords to keep rents low. Third, there might be a psychological effect, at least in the short term: as long as property prices are rising smartly, landlords might be willing to accept lower rental rates. You’re more likely to accept a lower cash flow ROI if you think there’s a big capital gain coming your way a few years down the road.
Anyway, just guessing here. The fact that the housing/rental ratio was going up so fast was one of the signs that pointed to a housing bubble in the first place, so maybe the easiest thing to say is simply that a bubble in one market doesn’t necessarily suggest there should be bubbles in other markets. After all, if you have bubbles everywhere, that’s just inflation.