Does Wage Growth Cover Apt. Rent Growth?

DALLAS—Apartment rents have grown faster on an annual basis than wages, says Axiometrics. Have wages grown enough to cover rent increases? A look at the numbers suggests that they have.

“The continued strength in the apartment market can be partially attributed to the increase in wages during the past several years,” according to an Axiometrics report. “Though wages have been slow to rise during the recovery, they have increased enough in recent years to allow more people to rent more expensive apartments.”

In fact, Axiometrics says, “Earnings growth has been slow and steady, despite apparent peaks and valleys” over the past few years. The analytics firm notes that the “when looking at the linear level, we find the gap between earnings and rent growth narrowing, as wages overall have increased—despite the month-to-month volatility.”

For its part, effective rent growth rebounded “sharply” after the Great Recession of 2008 and 2009, before sliding to about 3% at the end of 2013. Since then, effective rents have grown steadily, reaching about 5% this past May.

“The five-year trend for rent growth is flatter than that of hourly earnings, but earnings have not exceeded 2.3% annual growth in that period,” according to Axiometrics. “Rents, meanwhile, have averaged 3.9% annual growth over those five years.”

Nonetheless, Axiometrics notes that a 2.3% increase on a $60,000 salary equals $1,380 in additional annual income. If a tenant paid rent equal to one-third of his or her salary—i.e. $19,980 per year—a 5.0% rent increase would be almost $1,000. “The salary increase would more than cover the rent increase,” Axiometrics says.

Average hourly earnings have increased 2.0% so this year, according to the Bureau of Labor Statistics, although they were unchanged from May to June. The average hourly wage was $24.95 in June for private, nonfarm employees.

That same month also saw job gains of 230,000 positions, a lower average than the 250,000 per month seen over the past year, while the annual job-growth rate was 2.1%, slightly lower than the past six months. However, both the annual job-growth rate and the latest monthly average were up year-over-year from June 2014, Axiometrics pointed out.

In a blog posting earlier this year, Axiometrics economist Chuck Ehmann noted that wage growth has barely outpaced inflation. “The chief explanation for sluggish wage growth is an abnormally high number of people who still cannot get full-time work: 6.8 million people work part time for economic reasons (i.e. they want to work full-time) and another 7.2 million are unemployed but looking for full-time work,” he wrote.

Although the ranks of the underemployed and unemployed have thinned from a record combined 22.5 million in 2010, “that figure is still higher than at any time before 2007,” Ehmann wrote in February. “Employers can tap the large pool of part-time workers and the unemployed to fill open full-time positions, and the workers might be willing to accept lower wages in return for full-time jobs.”

Another potential source of “lackluster” wage growth is the type of new jobs being created, wrote Ehmann. “Millions of higher-paying construction, manufacturing and financial jobs were lost during the Great Recession. Many new jobs during the recovery have been in retail, hospitality or food services, some of the lowest-paying jobs available.”