A Market is a Market

Financial Post reporter Garry Mar seems to be surprised by the Toronto rental housing market, so we thought we’d offer an explanation. 

Fundamental economic theory suggests that an increase in population will cause an increase in demand for most goods and services. This includes rental accommodations. In the near term, or short run as economists call it, an increase in demand causes prices to rise. Rents will increase as the population rises. 

In a market that is capable of continuous adjustment, prices change rapidly to equate the quantity of goods or services desired with the quantity produced. In an efficient market there are no shortages or surpluses. Economists call this an equilibrium. 

An increase in the price of an output without a corresponding increase in input prices causes profits to rise. Profits are a signal to current market players to increase output and for other firms to enter the market. 

This is exactly what we are witnessing in the Toronto condo rental market and the North Dakota hotel market. (See the BloombergBusinessweek article) An increase in Toronto’s population increased the rents that landlords were capable of charging. In response, more rental condos were built. Last year, rents rose by less than the rate of inflation. The vacancy rate is around 1%. In North Dakota, the oil industry has increased the demand for labour. Wages in the sparsely populated state have risen, attracting workers from other parts of the country. These workers, perhaps unsure of the permanence of these jobs have chosen to rent rather than purchase housing. Rents in Williston have risen to $2,000 per month for a two-bedroom. The increase in demand for temporary accommodation by the new workers has provided the incentive for firms to start building hotels. 

An increase in demand causes market prices to rise. Profits rise and new firms enter. This process occurs in all markets. Some adjust faster than others.