Explaining the Vacancy Rate - Rent Paradox of the 1980s

Theory and most empirical evidence point to a negative relationship between vacancy rates for rental housing and changes in real rent. This paper highlights and explains the absence of the expected relationship in the national data on vacancies and rents, especially during the 1980s, when rents soared despite high and rising vacancy rates. We argue that this unexpected pattern resulted from several factors: an increase in the natural vacancy rate, changes in the rent-setting behavior of landlords, changes in housing search of tenants, measurement of nominal and real rent in the CPI, and distortions of the vacancy rate because of high levels of new construction. Some of these influences are quantifiable, but others are not. About 30% of the unexpected gain in rents in the 1980s can be explained by those factors that are quantifiable. Implications are drawn for the relationship of rents to vacancy rates during the 1990s.