“When will it ever end?”
That’s the question my friend posed during a conversation we had about skyrocketing rent in our city. For various reasons – dollar depreciation, influx of foreign (mainly Chinese) buyers, buildout capacity – the rental market simply exploded, often beyond the reach of normal, everyday folks.
It’s a situation that’s repeated throughout the country. Nearly everywhere, and especially in major metropolitan areas, skyrocketing rent has caused individuals and families to dig deeper than they’ve ever had to. Worse yet, the rental market shows no sign of abating, which means that cost of living expenses have reached egregious levels.
So my friend is absolutely correct in question if there’s light at the end of this tunnel. If you’re looking for a definitive answer or solution, all I can say is that skyrocketing rent confirms vast, economic instability.
Put another way, this trend is not sustainable, which I firmly believe will lead to a severe correction in the rental market, and real-estate prices as a whole. If you consider the rental market post-World War II, you’ll notice that this core component of cost of living expenses has never truly declined.
According to the consumer price index of the rental market, the worst month-to-month decline measured a mere 0.14%. This occurred in 1992 during a very temporary period of economic slowdown. The only other instances of month-to-month declines occurred between July 2009 and August 2010. That’s it! If you want to find other examples, you won’t see them.
More troubling is the fact that wage increases are not keeping in line with skyrocketing rent. For instance, the average pay-raise is approximately 3%. That’s likely a generous estimate as companies have only recently started hiring en masse. In many cases post-Great Recession, businesses either laid-off employees or froze pay raises altogether, irrespective of performance.
But when compared to the rental market, the cost of living will eventually become untenable. Here’s why. If you earned a 3% raise on $1,000 starting from the year 2000, by the end of 2017, you will have $1,652.85. On the other hand, if your $1,000 rent increased based on the rental market CPI, you will have to pay $1,733.32.
|3% Raise||Rent Increase||Differential|
The average differential between skyrocketing rent and your pay raise during this time frame is 4.56%. At the highest, the differential is 7.79%, while at the lowest, it dips to 2.16%. But no matter what, the rental market (according to CPI) always outpaces your pay raise.
This dynamic becomes more exacerbated in key metropolitan areas, where most young Americans live. Indeed, while financial institutions patronizingly urge Millennials to save money for retirement, they just can’t.
The deck is stacked against every demographic.