Does inflation cause rent prices to increase?

Inflation can make things difficult for a lot of people. Things get more expensive, and in our current environment, paycheques don’t always keep up. That can make for some uncomfortable decisions you might be forced to make. Some may be forced to forego a night out with friends or the latest concert. On the other end of the spectrum, some may have to decide between eating or making a car payment.

It would be nice if inflation didn’t hit certain things that we need, like our homes, cars, or our next trip to the grocery store. Unfortunately it does, and one of the things it impacts most is your rent payment. Here, we’ll talk a little bit about how inflation can affect your rent, some of the other reasons your rent may be headed up, and round it out with some of the things you can do to help protect your budget.

Inflation & Rent

Inflation is an economic phenomenon that causes the purchasing power of a given currency to decrease. In essence, it requires more money to purchase the same products. This happens for a whole host of reasons. One of the biggest reasons, and why it has happened in the last few months, is there has been a flood of money into the economy. In order to support Canadians through the pandemic, the government provided plenty of monetary support via rebates, tax credits, and direct payments. This increased the actual amount of currency in circulation. In tandem, the economy faced severe supply constraints as companies failed to keep up with sick workers and to scale up hiring and production.

Economics works on supply and demand, and when demand is high and supply is low, prices head upward. Combine that with a lot of money floating around and you’ve got yourself a perfect storm for inflation.

The Bank of Canada can help regulate inflation by raising its benchmark interest rate – which currently sits at 3.25% – in order to make money a bit more expensive to lend. Why does this matter as it relates to rent? Well, two big reasons. First, inflation causes everything to become more expensive.

This includes the cost of maintenance of rental buildings, the cost of processing payments, and even just landlords taking advantage of the situation. Rent becomes more expensive because costs must be defrayed and because the economy can support higher prices. Second, as housing stock remains low and rates remain high, fewer people can afford the houses that are available. Either the houses are too expensive because the sellers are trying to take advantage of the higher value, or it's far too expensive to get financing with interest rates being as high as they are. The people that can afford the higher rents tend to be wealthier individuals, who, after being liberated from working in the same expensive city for a job, are now able to work remotely anywhere they like.

Finally, the Canadian government froze rent increases in 2021; this pandemic program, designed to keep people in their homes with affordable rent, expired at the end of the year, prompting landlords to tack on increases all at once in the new year.

All of these aspects force the rental prices up as more people look to rent or continue to rent.

Can my landlord just raise rent to whatever they want?

No. The Residential Tenancies Act, or RTA, limits the amount your landlord can increase your rent each year. The amount they can raise your rent, and when they can do so, is often dictated by province, so be sure to check your local jurisdiction’s policies.

So what’s the answer?

Well, unfortunately, the answer is to stop inflation, which helps prices come down naturally. Unfortunately, in order to stop inflation, the Bank of Canada has to increase its benchmark interest rate to make it more expensive to borrow money. Doing so too quickly or for too long can also cause a recession, which is the economy shrinking. This comes along with its own problems, including a softening job market and reduced value in goods. Because your landlord is paying more to service their mortgages and other loans, they’ll likely try to pass some of that on to you in the form of rent increases.

The other thing the government could do is alleviate some of the supply side pain by increasing the housing stock, thereby lowering the price of housing in the first place. The government has noticed this problem and has spurned the supply by promoting new construction, now at its highest rate in years.

What can I do?

You may feel powerless if your landlord tries to raise your rent. In many ways, you are at the whim of the market. However, there are a few things you can do to help keep yourself from feeling the pain of a rent increase.

Don’t Panic

If there is one mantra in all aspects of finance, it’s don’t panic. Economics and the economy more broadly are cyclical. This means that for every dip we experience in value or increase in rent prices we weather, there will almost always be a downturn. This will occur when there’s less inflationary pressure and when housing stock grows, allowing people who want to purchase a home to do so again. Additionally, developers could continue to build apartment buildings to meet demand.

Budget

If don’t panic is the first mantra, budget is the second one. If you have a good budget set up to help you meet your financial goals, a rent increase – even a drastic one – shouldn’t really upset or affect you too much. Yes, it won’t be fun sending more money to your landlord every month, but you can weather that storm by making some tweaks to your well-laid budget.

If you don’t have a budget yet, what are you waiting for?! Take a look at your income and expenses and write them all out. Understand how much is coming in and what you’re sending out, along with whether those expenditures are actually worth the money you’re spending.

Move

Easier said than done, perhaps, especially in an environment where rents are going up everywhere. Still, if you can move, you should consider doing so. This is part of the reason that rents have gone up in the first place. Folks from higher rent areas of Canada have moved to cheaper areas now that they can work remotely. That said, what’s stopping you from doing the same? There are plenty of cheaper places to live than Vancouver or Toronto, and most of them have stellar internet for you to work.

Buy

Also a difficult sell given interest rates at the moment, but buying a home can allow you to move out of renting completely. Yes, you’ll still be paying a premium compared to a few months ago, but you’ll be paying into something as opposed to throwing money into a hole. When rates do come down, you can refinance your mortgage and either get a new rate or pull out the equity you’ve gained in cash. Pretty nice! Of course, purchasing a home is a big decision, so make sure to take a close look at your budget to make sure it makes sense for you.

Reassess

On the subject of refinancing, make sure your current debt is a fixed rate. As your rent rises, you’ll have less capital with which to make debt payments and still live the life you’ve made for yourself. If you have variable rate debt, that amount can fluctuate constantly, making it difficult to plan.

Negotiate

It seems silly but you might be able to negotiate your rent with your landlord, especially if you’re renting from an individual or smaller company. Large rental companies often have guidelines and standards to which they must adhere, but smaller companies and individuals do not. There are all sorts of ways to make this work. Offer to take care of all the landscaping in lieu of the landlord’s service. Another option would be to offer your services – perhaps you’ve got a passion for woodworking that your landlord can put to good use. Who knows, but you definitely won’t know unless you ask.

Final thoughts on if inflation causes rent prices to increase

Rent typically does increase with inflation, but it doesn’t mean that you’re completely out of luck. Remember, landlords can only increase your rent so much, meaning you’ve got lots of options with how and if you decide to pay that increase.