EXPLAINING THE DECLINE IN REAL RESIDENTIAL RENTS 1970-1980: THE RENTAL HOUSING CRISIS RECONSIDERED

The study documents the sharp decline in real dollar rents over the 1970s in the U.S. and seeks to account for lagging market rents during this period of high inflation. Rent declines are shown to be widespread, although significant inter- and intra-metropolitan variations are found in the rate of rent increase.;Declining rents during the 1970s are attributed to three main factors: weak rental demand in the context of a durable capital stock; lower effective supply costs for rental housing services due to appreciation in asset values; and dynamic lags in rental adjustment that were amplified by accelerating inflation.;For slow growth rental markets, lagging rents are primarily attributed to slack demand in the context of down-side supply inelasticities. With rents below current supply costs, new rental construction came to a virtual halt in these markets after mid-decade.;Although rental housing is less positively leveraged with respect to inflation than owner-occupied housing, expected capital gains from rising replacement costs reduced the effective supply cost for providing rental housing services in growing markets, thereby lowering the rents needed to attract investment capital to rental housing. Hence, new rental units continued to be built in growing markets despite lower real rents.;Despite criticism of the CPI rent index, hedonic rent indices for Chicago fail to find empirical evidence of a downward bias that could explain the apparent decline in rents.;Despite widespread concern about rental affordability and rental shortages, the evidence suggests that rental housing was actually a bargain in real dollar terms over the 1970s and there was an abundant supply of low cost rentals in most markets. However, affordability problems will become more pressing as market rents rise to long run replacement cost levels during the 1980s. Direct rental assistance payments to low-income renters will become an increasingly expensive policy strategy as rental markets tighten.