You may have noticed that in the past while, rent prices have skyrocketed in Northumberland Peterborough. No matter if you make $200 per week, or $2000 per week, rent has been eating up a much bigger proportion of your income.
As a professional in the industry, I wanted to try to explain how rent prices are determined.
This post is not meant to be an argument to whether or not this is the right way for our society to price rentals. It is simply explaining in a basic sense how it works right now.
I think we have all heard the term: supply and demand. But what does it really mean?
If there are 100 people looking for a house to rent, and there is only one house to rent, whomever doesn’t get the house may be in big trouble. They may have to live with relatives, in a hotel, and some may even end up homeless.
Out of the 100 people that are trying to find a house, some have excellent jobs and money in the bank. Some of them make enough to pay their bills and can afford to dine out occasionally. There are some that are struggling for various reasons and in various capacities. All of them have decided that renting is their best option or their only option.
On the other hand, the investor who owns the only house for rent, has made a choice to invest in the rental market. They could have chosen to invest in the stock market and get a 7 to 10% annual return. They know, if the tenants pay the rent, don’t destroy the house, and the amount of houses for rent does not increase significantly, they will be able to get a better return (profit) on their investment through real estate then stocks. What would happen if they invested in the stock market instead? All 100 looking for a rental would be in big trouble. Fortunately, this investor decided that it was worth the investment risk to rent out a house.
We know that one of the 100 people are going to rent out the investors house. We know the landlord wants the best return for their investment and risk.
So how does one determine what the price will be?
If all 100 people but 1 are about to be in big trouble if they don’t get to rent the house, with other other things being equal, the person that is willing and able to pay the most is the one who is going to get to rent the house.
The price will be set at the highest amount someone is willing and able to afford. Someone. Not anyone or some people. The person at the top.
If that person’s income is $100,000 per year, the typical ratio of rent to income affordability is 35% of their income and the person is willing to pay that much, then the annual rent will be priced at $35,000.
If the highest amount that someone in the group of 100 rental seekers will pay is $12,000, then that is all the investor is going to get.
If the number is too low, the investor will sell the house, invest somewhere else, and now all 100 people will be in big trouble instead of 99.
This can also work in reverse. If 100 houses are for rent, but only 1 person wants a house, the investors will all compete with lower pricing to attract the only customer.
This is nothing new. This is how everything is basically priced in our society.
I want to make a few things clear.
I am not giving an opinion in this blog as to whether or not the way rent prices are determined is right or wrong. I am explaining how things currently work.
There are landlords out there who go out of their way to help people and will sometimes rent to people below market value because they want to help people. I also realize there are landlords out there who would try to charge double what the top affordability is.
I should also mention my own bias and situation. I own a property management and leasing firm. Landlords pay me to take care of their real estate investments for them, just like people who invest in the stock market pay people to choose the best stocks and ensure a good return. My job is to ensure the landlord gets the best return possible. I am the one who recommends what rent price is achievable out in the market, and then attempts to get that price. Guess what? Sometimes units get overpriced and we have to correct. How do we know? No one rents the house! Sometimes units get underpriced and can potentially start a bidding war, however the top bid will never be over market price, because that is what someone is willing to pay.
I am also a renter. Yes, I also am stuck in this market of unaffordable prices for most people. If my landlord sells the house I rent today, I too will be in big trouble.
Yes, that sucks. Big time. But I also understand how it works.
Again, this isn’t meant to advocate whether pricing based on supply and demand is right but is meant to explain how it works.
Now that you know how market prices are determined, I will post again soon on some things that are affecting the supply and demand of rental properties, thus increasing the rent.
Talk soon, cheers!
Brandon Gignac has been a local residential property manager and leasing agent for 20 years and is based in the Peterborough and Northumberland, Ontario area. He is focused on modernizing the property management industry, helping landlords increase their ROI and helping tenants find a great place to live. When he isn't busy saving the day, solving problems or buried in paperwork, he enjoys spending time with his wife Rachal, kids and the family bullmastiff.
You can reach Brandon by:
phone: (705) 243-4016