How Are Property Rents Determined?

In particular, according to conventional economic theory, in free competitive property market real estate rents adjust until demand (or the quantity of rental space or units demanded) and supply (or the quantity of rental space or units supplied) change until they become equal.

The key element of this mechanism is how rental demand and rental supply behave in response to property rent increases. This behavior is described by the fundamental laws of demand and supply.

In particular, the law of demand, as applied to the rental property market postulates that the quantity of rental space or units demanded decreases as property rents increase. For example, if apartment rents rise, the demand for apartment units will decrease (all else being equal).

The law of supply, as applied again to the rental property market, postulates that quantity of rental space or units supplied increases as real estate rents increase.

For example, if apartment rents rise, the supply for apartment units should increase as landlords that may have vacant units off the market may be inclined to put the units up for rent. In addition, with apartment rents and, subsequently, apartment values rising (all else being equal) some developers will be motivated to start building new apartment units.

Eventually, the market rents must stabilize at the level at which the quantity of space or units demanded is equal to the quantity of space or units supplied.