Consistent rent increase is a very important indicator because it means couple things:
- More people are moving into an area, due to new jobs, more economic activities, etc.
- It's easier to rent than to buy so people moving into an area would rent first. Buying takes more commitment so it lags. Rent is a leading indicator of buying.
- As more and more people move in, housing supply can't keep up. Vacancy goes down. 5% is kind of the frictional vacancy barrier. At below 5%, rental market is white hot. Rent would creep up slowly first and then faster.
- The rent vs buy debate would tilt to the buy side.
- With more people in an area, lower vacancy, and ever increasing rent, more people will favor buying.
- House price goes up as a result.
In the last cycle in the SF Bay Area, rent had noticeable increase starting around 95 and 96. House price started going up around 98 after being flat since 89. Rent became white hot around 2000 and 2001. Then crashed at the dotcom bust. But house price kept going up abnormally because of Fed's low interest rate policy until the 2005/2006 bust.