Investment property rental income vs. inflation vs. property values

A widely held theory by many realtors is that rents will increase alongside inflation. This theory maintains that increasing rents will increase the value of the property at rates similar to the rate of inflation. Rents that increase at the same rate of inflation are nothing more than a coincidence. Supply and demand relationships are what change rents. Rents will increase when the supply/demand ratio changes. As an example, given any rate of inflation, if you have excess supply, high vacancy, and jobs declining, rents will not increase. Quite the contrary, they will decrease. Another comparison would be the double digit gains in real estate values from 2001 through 2005, and the subsequent significant softening of real estate values from 2006 through 2007, yet rents remain fairly stable.