The vast inequality of rental inflation
Rent increases are something the average renter needs like a hole in the head. But according to analysis released by the New York Federal reserve, it looks like rent increases have been highest for those least able to pay.
For the highest rents in the U.S., rents didn’t change much between 2011 and 2013.
For units with the lowest rents in the U.S. – places where the poorest Americans live – average rent inflation was 15.9 percent per year.
This divide has existed in some way for decades, the NY Fed’s data show.
As with all data, there are many ways to slice it. The most frequently reported rent increase at the top was 1.24 percent, the most frequently reported rent increase at the bottom was three times that, 3.56 percent.
“It’s not surprising,” said Paul Habibi, lecturer of real estate UCLA. Low rent units don’t make much money, he said, “so in less affluent communities the rents don’t support the cost of new construction.”
Developers build where they can turn a profit. That increases supply, and keeps rents from rising as much. In communities where rents are low, it’s the opposite.
That parallels the view of economists at the NY Fed, who point out that the source of supply for higher rent units is new construction, whereas the supply of lower-rent units tends to be older, depreciated units.
“For the highest-income quintile,” they write, “new construction (10.8 million units) is about 2½ times the net increase in housing units (4.3 million units) [between 1989 and 2013]. As one moves down the income distribution, new construction represents a declining share of the net increase in housing units.”
Susan Wachter, professor of real estate at the Wharton School, argues there are additional factors.
“What we’ve seen since 2004 is no increase in homeowners,” she said, whereas the number of renters has increased by the millions. The lower the income level, the harder it’s become to own a home, the more people opt for renting. “And that is driving the demand side of this equation,” said Wachter.
“Over the time period we’re looking at, land prices have gone up and so the land component will be a bigger share of what you pay in rent,” said Chris Mayer, professor of real estate at Columbia. For low rent units, land prices already figure prominently in the cost of rent, impacting renters there more. “One of the things we’ve seen is in places like New York and Boston, low income people have in particular seen their share of income in rent grow a lot,” said Mayer, “so that’s consistent with the idea that in some of these coastal markets where we’ve seen sharp increases in real estate and in land prices, that also disproportionately burdens low income renters.”
The NY Fed’s numbers, he said, emphasize something many people already know: “There’s this group of people in this country who are facing really significant challenges, and this study adds to the evidence. “
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