High Rent Prices are Persistent
What comes after a period of steep rent price rises? Housing crash, building boom, or perhaps rent controls?
Economists are suggesting these high rent prices are going to persist for some time. Last August, in a CNBC report, Peter Boockvar, CIO of Global Advisors said “Rental increases, which is the biggest chunk is only going to accelerate here. I don’t see rent increases as transitory.”
So far, it’s been accurate with the fundamental price factors pointing to more in 2022 and housing permits not even keeping normal pace.
The economy is okay (even if headed for a slowdown), employment is strong, and there is good growth in the south. Due to inflation, renters are hurting and many ask when home prices will fall, or whether rent prices will drop. Florida, Texas and California cities are seeing strong rent rises so in those hot cities, low rents are definitely disappearing.
NAHB reports that so far this year, the South has seen an increase of 7.6% in single home construction while the Midwest declined 7.0%, and Northeast receded 4.7%. In multifamily, permits increased in the Midwest (+29.3%) and the South (+16.2%), and in the West (+12.5%) yet the Northeastern region saw a decline of 12.3% compared to last year.
Despite that growth, the US needs millions of new apartments by 2030. This affordability issue is likely to lead to political responses, with the most expedient being rent controls.
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Price Rises Hitting 30% in some Cities
While high rising rent prices and zero vacancy are a positive situation for landlords who need a return on their rental property investment, at some point (we may be there) rents will be too high for tenants to handle. There’s little doubt voices will be pushing out radical responses such as rent control.
Even in the UK rental market there are expectations for big increases (up £800 a year on average next year).
According to Apartmentlist, in the US, rents of primary residence in March rose 4.4% year-over-year, the highest increase since 2007. With CPI inflation hitting 8.5% in March, the rent rises are actually moderate. Yet some cities have show extreme rent price growth of 21% to 30% over the last 12 months.
Screenshot courtesy of Apartmentlist.com.
Apartment List’s last report shows 2021 rent rises were up (2.7% at peak year over year growth) but the rate this year is much lower and slowing.
The News: Rent Controls Being Mentioned More
Interest in rent controls are usually highest in the fall season, and given the mid term elections are next November, that interest will grow. Rent controls can be instituted by state and local governments.
Rent controls were used in the past, and they do tend to discourage investment in new rental housing . In general, rent controls can become a permanent law.
This report from NAAHQ show rental property development isn’t feasible in major cities after rent controls are implemented
Impact of Rental Control: Chicago market. Screenshot courtesy of NAAHQ.
Screenshot courtesy of NAAHQ report.
In an election year, those politicians wanting to hang onto their office might make moves in favor of rent controls.
And it’s not just frozen rents that could present issues for landlords (i.e., landlords who didn’t raise rents yet). Additional issues are the cost of unit turnover, re-leasing, property taxes, rising renovation costs, and increased regulatory paperwork. This will push rent prices even further. Rising mortgage and refinancing costs will only add to the price pressure.
Migration to the sunbelt states plus unprecedented illegal migration may result in big demand for rental housing in the top cities.
And while high rents (supported by a wicked housing shortages) might sustain landlords and property managers, the bottom could conceivably fall out of the barrel. Complaints about homelessness will become louder during 2022.
For sure, rising rates are generating significant churn in tenancy which is expensive and raises the workload for property managers.
REALTORS® should make a conscientious effort to pursue a proactive affordable housing agenda before rent control ever comes to the table. Get involved early. There is no substitute for early involvement! Early involvement allows you to anticipate, prepare for and respond to controversies BEFORE they get to the ballot or the city council agenda, and before they become emotionally charged. — from STRATEGIES FOR FIGHTING RENT CONTROL AT THE LOCAL LEVEL by California Realtors Association.
What Can Landlords do to Prevent the Inevitable?
Rent controls during an inflationary period are a real danger to your business income, outlook, and asset valuations. Here’s what you might do to stave off rent controls:
- get educated on this issue and how it has evolved in the past – gather facts and related information such as the Brookings Institute study on rent control outcomes.
- Organize with allies (apartment owners, homeowners, builders, lenders, business owners) to identify your position and plan to communicate it.
- contact your local and state politicians reminding them of the real harm of rent controls.
- attend government meetings (while they organize to institute rent controls).
- lobby to have the $22 billion that was unspent from the stimulus package used to subsidize rents.
- communicate more to support investment in rental housing in your city.
- contact developers to encourage them to remind politicians that a healthy ROI is needed to attract new developments.
- avoid huge rent price increases just because you can.
- agree to raise rents at market rate and not above that.
- petition local NIMBY politicians and HOAs to allow more development and ease up on their restrictive growth policies.
- ask local politicians to adopt a rent price mediator to settle disputes on fast rising rents.
- remind politicians, tenants, and the media about how harmful rent control is to new development and how it erodes neighborhoods and communities.
- communicate how unfair it is to have the affordability and low supply issues dumped on landlords.
- raise funds and hire a lawyer to represent your legal defense.
Rent prices are a direct reflection of an economy and government policies, not of rental property owners. The big picture solution is pro-housing development policies that offer tax breaks and risk mitigation for builders. In fact, given population growth, migration to new cities, and neglected housing and apartment construction, this is the only way to create a healthy, balanced rental market.
Hopefully, you’ll be a able to short-circuit the call for rent controls by tenants and politicians with evidence that it’s not needed and will harm tenants. Definitely do improve how you manage rentals and use the choice of wise property management companies.
ManageCasa has all the tools to help you establish a better rent price, collect rent, and build solid relations with tenants. Show your tenants how you manage intelligently to keep their rents as low as possible.
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