Older Apartment Rent Growth and Housing Affordability
A recent Freakonomics episode, “Why are Cities Still So Expensive”, explores the causes behind the lack of affordability in U.S. housing. The usual suspects were identified: lack of new supply, caused by zoning restrictions and NIMBYism, and increased construction costs.
Interestingly, newly constructed apartment rents have basically tracked inflation, while older apartment building rents (which are overwhelmingly small-to-midsized multifamily #smmf) have grown much higher than inflation, according to University of Washington Economist Jacob Vigdor (whose chart I’ve included). This divergence became apparent in the 70s and beyond.
Vigdor’s thesis is that in the 70s, landlord-tenant law reforms took place in many states and moved from a legal standard of “quiet enjoyment” to a “warrant of habitability”, requiring more care by landlords in order to provide decent living conditions. As the older housing stock comes into compliance with this standard, it becomes more expensive and that expense is passed along as increased rent.
I’m not convinced this is the “smoking gun” that Vigdor claims, but it could be a contributing factor to affordability problems. And, it should be noted that it’s important for people to have a decent place to live, of course—this isn’t merely an economics problem.
As we’ve noted on this blog, the 70s is the decade during which new deliveries of small-to-midsized multifamily fell off a cliff. It seems more likely that the increased regulatory burden as identified by Vigdor is one of the contributing factors that led to a shift toward delivery of commoditized, large apartment buildings, and away from small-to-midsized buildings, as the economies of scale of larger buildings allowed them to more easily absorb the increased regulatory costs.