“A dream you dream alone is only a dream. A dream you dream together is reality.”
Yoko Ono
The cost of renting a home has become extremely high in recent years, making it impossible for many people to afford a decent living space. I am a realtor and I work with many first-time home buyers. You can watch a video on this topic on my YouTube channel here. I have many friends and acquaintances who often ask me why the housing rent is so high. They complain that their rents keep increasing year-over-year, however, the wages are almost the same. How can they afford to keep renting their place in a decent neighborhood? They want to buy a home so that they don't have to worry about rents anymore but they find it hard to save anything due to extremely high rents. Click here if you would like to read my post about the pros and cons of renting vs homeownership.
Definition of Rent
Before we begin, let us clarify what is meant by "rent." Rent is the payment made by a tenant to a landlord for living in the property and calling their home. Some landlords collect a flat rent each month that includes dwelling, utilities, etc. However, most landlords charge a base rent that includes dwelling, sewer, and internet and pass on the additional cost of utilities including water and electricity to the tenant. Sometimes the tenant is asked to pay for designated parking as well.
What are the Variables that drive the Rents High?
There are numerous economic factors that cause the rents to increase. Let's dive into 6 factors that keep the rents high-:
1. Supply and Demand
The success of any business is determined by the supply and demand. We all learned that in the Economics 101 class. The truth is that the demand for affordable housing has significantly exceeded the supply in many cities, especially in highly desirable areas. The inventory is historically low which means that there is a shortage of housing. Population growth, migration, and urbanization have fueled the demand for housing, and the supply has lagged far behind. People are willing to pay high to live in highly desirable areas. Thus, if a landlord has a rental property in a highly desirable area, they can choose to rent the property to someone who can pay high rent.
2. Inflation and Economic Growth
Secondly, inflation and economic growth have steadily contributed to the acceleration of rents. Normally, as the economy grows, people's incomes rise, creating more demand for housing, which pushes up the rents. Moreover, due to inflation, the cost of living becomes more expensive. The cost of building and maintaining a property is also getting more expensive with each passing day due to the increase in prices of materials, labor, insurance, etc. Thus, the landlords must charge high rents so that they are able to maintain and upkeep the property in a safe manner. If the current landlord sells the property, the new landlord would come in and might charge a higher rent depending on the market because he/she might have paid a premium to purchase that property in the first place. Most landlords are not rent sharks who want to rip off the tenants and keep charging higher rents.
3. Urbanization and Migration
More and more people are opting to live in big cities in search of better job opportunities and higher standards of living. This leads to the acceleration of urbanization and migration thus, fueling the demand for housing in cities. Consequently, the supply of affordable rental properties is strained.
4. Scarcity of Land
The land is limited. We cannot make more land. The developers have to compete for limited space available for new housing which contributes to high rents more and more people are looking for housing to rent.
5. Income Inequality
Inflation has skyrocketed housing prices and rent prices, however, the wages have not been able to keep pace. This leads to income inequality which widens the gap between rich and poor. Consequently, those with lower incomes struggle to keep up with rising rents. However, the state and federal governments incentivize homeownership through mortgage assistance programs and downpayment assistance programs, mortgage interest, and property tax deductions to promote homeownership.
6. Increasing Student Loan Debt
Student loan and credit card debt are historically high which makes it difficult for millennials to consider buying a home and henceforth, keeps the demand for rental properties high.
Conclusion
In conclusion, high rents are a multifaceted problem that requires a comprehensive approach. There are tons of programs available in the market today offered by the state and federal government that reward you for homeownership, especially if you are a first-time homebuyer. I specialize in working with people of all age groups who are first-time homebuyers. My goal is to help as many people as possible to achieve their homeownership dream and start building wealth. If you are someone who would like to be a homeowner and build wealth, comment below. It would be my pleasure to help you achieve your dream. If you'd like to know more about the benefits of homeownership, click here to read my blog.
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