What is market rent?
What is market rent?
There are a number of terms used in the rental market, some of which are hard to determine their meaning. One term I find people missunderstanding is “Market Rent”.
What is market rent?
Let’s look at the BC lower mainland rental market.
When the housing market experiences a tightening of product versus the number of people looking for a property and the vacancy rate is low we hear governments saying they are going to build new products that will be below “market rent”. We hear tenant advocates requesting greater rent controls including that rent should not be permitted to increase between tenancies.
The problem is what is “market rent”? Market rent in simple terms is what the market will pay for the product or service being offered. Karl Marx explained capitalism in the terms of if it costs you $10 to make a product and the buyer is only willing to pay you $9 then you will not make a profit. The difficulty with rental house pricing is that market rent is a moving target.
In good times market rent increases and in slow times it decreases. The biggest problem is it moves faster than you can build a new product. When a developer, builder or government says they are going to build a new project that will be “below market rent” pricing by the time the project is finished the market rate has changed.
Before covid the market rates had gradually increased over time, which is the normal course of action in growing cities. When covid hit, which is an unusual world wide situation the rental rates increased dramatically. After multiple years and various government interventions trying to control the increase, and now the world wide economy slowing due to US tariff action, rental rates are declining rapidly back lower than pre-covid rates. The amount of product entering the rental market today is greater than the number of people seeking to rent a property.
If the “market rent” changes monthly depending on the amount of product available for rent then what is market rent? When a unit is rented in July for the current market rent, and then another comparable unit is rented in October for the current market rent which is lower than what it was in July this means the unit rented in July is now above market rent. Does this mean the people who were promised below market rent should have their rent decreased to an amount below the price of the unit rented in October?.
The same could be said for the scenario if this was the other way. If the unit was rented in July and the rent increased by October should the unit July be required to move up to the current market rental rate? Tenant advocates always argue that rental rates should not be permitted to change in between tenancies, yet they only want it when the rents are increasing. If the rental market rates decrease they argue that is allowed as that is the current market rent. If rents are not permitted to change when increased maybe that should be the case when the prices are decreasing. This obviously won’t work as the market won’t pay for an overpriced product.
Market rent as we mentioned at the beginning is the rate someone is willing to pay for the unit at the time it is being offered for rent. After it is rented it is no longer part of the “market rent” equation as the rental prices have changed, up or down. It would be great if we could develop a better system of tracking the market rent prices, meaning when a unit is rented this would determine the market rent at that time. Unlike the sales industry there is not enough tracking of this information effectively to collect this data. Statistics Canada distributes information on rental rates though by the time they produce the information they are months old and not reflecting the current market rent. A system which provides monthly reporting would provide better insight to what market rent actually is, or at least give a better comparison to recent rental rates in the market. We are a long way from ever achieving this type of information unless a better coordinated system of tracking rental properties is developed.
Cartref Properties when looking to help a new client reviews the current advertised rental rates and compares that to our recent rentals to determine where we believe the rental market rates are at that time.
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