Property values vs. rents

[Leo R.]

Hi all, I have a couple questions about property values vs. rent prices in and around Salt Lake City:

As we all know, property values in the area have gone way up over the past 5 or so years (particularly for single family homes in Salt Lake City).

However, rent for typical single family homes in and around SLC seems fairly steady (I moved to SLC in 2015, and I haven't noticed much change in rent since then).  

So, I'm wondering if folks have any thoughts about why rents have not increased much in the last 5 or so years (given the large increases in property values)? 

Also, what do you think will happen with rent prices over the next few years--is there any evidence that rent is likely to increase significantly? (or any evidence that rent is likely to remain steady?)

Thanks in advance for your thoughts!

[William Hochstedler]

A couple of factors are at play.

First, rents trail purchases because it's a less efficient market.  This is because of typical year-long leases and independent landlords that aren't as efficient charging market rent at every turnover.

The second factor is that rents are a function of monthly payments not purchase price.  Because of the dropping interest rates, mortgage payments haven't gone up that significantly.  So cashflow hasn't gone down as much as real estate values have gone up.

We see it in the commercial and multi-family sectors as well.  Cap rates are very low right now because appreciation has been strong (which drives up prices without corresponding cashflow) and interest rates are down (which increases buying power per $ spent).

Going forward, rents will probably climb as the inefficiencies in the market catch up, interest rates climb, and a greater percentage of the population is unable to purchase homes.  In more expensive markets where the rent to value ratio makes renting much more affordable than buying, rents go up and a greater section of the population become tenants.