In Times of High Inflation, What Happens to Rents?

A 'For Rent, For Sale' sign is seen outside of a home in Washington, on July 7, 2022. Sarah Silbiger/Reuters

Commentary

In times of high inflation, what happens to rents?

Tenants are getting squeezed with higher prices for food, medical care, gas, and everything else, hence they have less money available for paying rent. Will this also create a crisis for rent-collecting landlords that have their own set of mortgage and property-operating expenses?

Any other outcome seems as unlikely as the rise of pickleball.

Inflation is embedded in the economy. The latest annual Consumer Price Index (CPI) inflation number reported an 8.2 percent annual increase, exceeding expectations. Electricity is up 16 percent. Airfares have spiked 43 percent. Worse? The Producer Price Index is soaring, too. It’s a more forward-looking inflation measure, tracking wholesale prices.

Consumer pocketbooks are being stretched.

When it comes to forecasting what can happen, it’s often wise to tap history over hunches for the answer. In this case, we have to go back 40-plus years. That’s when we last saw inflation at today’s levels.

During the years 1974–85, a period that included three separate economic downturns, rents increased 7–12 percent each year.

Rents are soaring again today, faster than historical norms. But why? After all, American wage growth is only 5 percent, lagging inflation and rent increases. And no, renters don’t share Netflix passwords, master “SAVE20” discount codes, or turn free Costco samples into dinner.

There are at least three reasons why rents rise fast despite high inflation and a possible recession.

1) Renters Move Down a Class

How will your tenant pay the rent if it’s hiked from $1,600 to $1,800?

The market is not static. Some move from higher-end Class A housing, for which they’re paying $2,500 rent, down to inferior Class B housing, to pay $1,800 rent, or move from Class B to C, etc.

Yes, this makes for a more austere standard of living. That’s what happens in a recession. I discuss this in a video here.

2) More Renters Double Up With Roommates

Early in the pandemic, the opposite occurred—a decoupling trend. However, unlike 40 years ago, doubling up should be limited this time around. The work-from-home trend is now a fixture in society, which means the need for more space.

3) Today’s Low Housing Supply and High Demand

This effectively means renters are bidding up rents. Often, prospective tenants are lining up to lease a unit like it’s the latest iPhone. In “hot” real estate markets, renters desperate for housing are even offering gifts to prospective landlords.

After nearly two years of media reports about spiking house prices and interest rates spiraling ever higher, primary residence buyers are spooked.

This moves residents out of the buyer pool and into the renter pool. That’s why rental demand has surged. I discuss this and housing’s future extensively on my podcast.

Now that you understand three reasons why rents have a history of spiking despite high inflation, what’s the result today?

Sure enough, after more than a year of high inflation, rents are soaring. Single-family rents have spiked more than 12 percent annually. Apartment rents have increased 10–11 percent.

It works the other way, too: rising rents contribute to high inflation.