Rent-gap theory

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. Only from this difference arises the interest of investors, to renovate a particular object (to entire neighborhoods), resulting in an increase in rents and also the value of the property.

Investment in the property market will therefore only be made if a rent gap exists. Thus, it is contrary to other explanations for gentrification related to cultural and consumption preferences and housing preferences. The rent-gap theory is a purely economic approach.

While the processes described with the rent-gap theory can be observed especially in North America, the theory is being adapted for other regions of the world, including Chile, Lebanon, and Korea.

Application
The theory has been used in agent-based modelling of the effects of gentrification on real estate markets.