How supply and demand set rent: vacancy, absorption, new construction and why existing rents follow the market rather than the cost of the building.
Two different forces set rent, and confusing them causes most of the bad arguments about housing. In an existing building, rent is set by the market: what comparable homes are asking, how many are vacant, how quickly new ones are absorbed. The building’s original cost is irrelevant to the tenant. In a new building, rent must also clear a cost floor, because nobody will finance a project whose required rent exceeds what the market will pay.
New supply is the link between the two. When market rents rise above the cost of building, construction starts; when they fall below it, construction stops and, if demand keeps growing, rents rise until building makes sense again. Vacancy is the thermometer for this process, and effective rent after concessions is the honest reading. Articles here explain how these mechanisms work and what they imply for policy.
Existing buildings charge what the market will bear. New buildings are where the market meets the cost floor, and that meeting sets the direction of rent.
Housing 101
Two different questions: what rent a landlord can charge (set by the market) and what rent a new building needs (set by cost). Where market rent falls short of required rent, nothing gets built.
The evergreen pieces that explain the mechanics behind everything else in this topic.
Housing 101
Two different questions: what rent a landlord can charge (set by the market) and what rent a new building needs (set by cost). Where market rent falls short of required rent, nothing gets built.
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