The Rent Gap Theory (2024)

FAQs

What is the rent gap hypothesis? ›

The rent-gap theory was developed in 1979 by the geographer Neil Smith as an economic explanation for the process of gentrification. It describes the disparity between the current rental income of a property and the potentially achievable rental income.

The gap between the actual rent paid for a piece of land and the rent that could be collected if the land had a 'higher' use. The idea is central to, but does not entirely explain, gentrification; see N. Smith (1996).

The theory of rent in microeconomics highlights that rent is considered a surplus, and it is not tied to land alone but also to labor, capital, and entrepreneurship. It is the difference between actual and transferred business earnings. The theory defines rent as an excess amount of the transfer earnings.

Assumptions of the Theory:

Rent of land arises due to the differences in the fertility or situation of the different plots of land. It arises owing to the original and indestructible powers of the soil.

The "rent gap" theory offers on the common explanations for gentrification. According to this theory, investors will be most tempted to purchase land when there is a disparity between the current rental income of the land and the potentially achievable rental income.

The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.

If you have gaps in information such as employment or rental history explain why that is. For example, if you are not currently employed, state that you are unemployed but plan on going back to school or finding a job once you move.

Thomas Malthus contributed the beginnings of the differential theory of rent, endeavoring to show that rent will not arise until land of inferior quality is taken under cultivation. David'Ricardo fully developed the theory of rent which is named Ricardian: rent is a surplus in the form of a differential.

In other words, the supply of land is completely inelastic. Therefore a price (i.e. rent) must be paid for the use of land. Since, the land rent appears due to the scarcity of land given the assumption that all plots of the land are hom*ogenous, it is also known as scarcity rent.

Rent-seeking can be defined as the practice of obtaining economic advantages and increasing profits through manipulative means, then failing to improve the economy productively. Rent-seeking involves manipulating public policies such as social service programs and government-funded social services.