A recent nationwide survey finds that rental demand for US property is set to continue. Pressure from new demographics and a changing economic scenario mean that the supply of rental properties in the US will remain well below demand.
The Joint Center for Housing Studies of Harvard University (JCHS) released a comprehensive survey of rental housing in the US in early December. America’s Rental Housing examines the market for rental properties over the last decade and comes to the conclusion that the current imbalance is here to stay at least for the medium term.
Unprecedented demand for rental properties
JCHS reports that since 2005 the number of American households living in rental properties has risen by around 9 million, the biggest increase on record. And over the last ten years, the share of rental households in the US has gone up from 31 to 37 per cent to reach its highest level for more than 50 years.
The sharp rise in the number of rental properties in the US has been particularly pronounced since 2010. Some 1.05 million new rental households have joined the market every year since then putting “the 2010s on track to be the strongest decade of renter growth ever recorded”, says JCHS.
Reasons for high demand
Several explanations lie behind the massive increase in US rental property, most of which have their roots in new demographics and recent economic changes. America’s population pyramid has shifted, particularly at the lower end as the so-called millennial generation ages. This huge sector of the population (born between 1984 and 2000) currently accounts for 11.3 million renter households. Over the next ten years, this number will double putting additional pressure on the already tight market for rental properties in the US.
Another population trend moving the rental market is the growth of minority households. This population sector is predicted to grow significantly over the next decade and account for over 75 per cent of the increase in households. Hispanics are expected to make up 40 per cent of these.
However, the trend for renting over buying a property in the US has increased across the population board regardless of age or ethnic origin. JCHS reports that households aged over 40 account for the majority of renters and that the number of families who rent has risen by 2.2 million since 2005.
A shift in the economic scenario is the main reason for this. The recent burst of the housing bubble, lower salaries and a general tightening of credit conditions mean Americans are now less likely to buy a home. In fact, homeownership levels currently sit at their lowest for years.
New economic conditions have led to more short-term job contracts making renting a home a more practical option. Americans generally appear to be realising that renting rather than buying has considerable financial benefits and fewer risks attached in the face of economic uncertainty.
Lack of supply in US rental properties
The survey reports that 2015 saw an upsurge in supply of rental property across the US. Permits for apartments rose by 17 per cent in Q3 last year and 8.2 million apartment units joined the rental supply. There was also a significant increase in the number of non-owner occupied single family homes on the market.
However, as JCHS points out, “the supply has not responded fully to the rising tide of demand”. Vacancy rates stand at the lowest since 1985 and the report cites research showing that there’s a rate of less than 5 per cent in almost 75 per cent of the largest US property markets.
Outlook for US rental property
In tandem with the lack of supply goes a rise in rental rates, currently at 3.5 per cent a year according to JCHS. And this increase shows no sign of abating. In fact, monthly rental rises in many areas in the US are now outpacing salary increases and reducing the affordability of housing, particularly at the lower end of the market.
The report concludes that the market for rental properties in the US is likely to sustain its growth, albeit at a less frenetic pace than currently, because “growth in the adult population alone will be enough to drive the addition of more than 4.4 million renter households by 2025”.
Source: Joint Center for Housing Studies of Harvard University
