The Los Angeles City Council is considering changing the way it sets annual allowable increases for rent-controlled properties for the first time in nearly 40 years. That’s good. The law needs to do more to prevent price shocks for tenants during periods of high inflation while ensuring landlords can recoup the costs of managing their properties.
About 650,000 units in the city were built before Oct. 1, 1978, and are regulated by the rent-stabilization ordinance. That’s nearly 75% of L.A.’s apartments.
Los Angeles has one of the least affordable housing markets in the country, and that’s the driving force behind the city’s homelessness crisis. More than half of tenants in the greater L.A. region are rent-burdened, meaning they spend more than a third of their income on housing, leaving less money for savings, healthcare, transportation and other needs.
More than 10% of tenants spend more than 90% of their income on rent, making them vulnerable to ending up on the street. So city leaders have a keen interest in keeping rents stable to help tenants stay housed.
But the city also has an interest in ensuring that landlords can charge enough money to properly maintain their units and get enough of a return on their investment to keep them in the rental business.
L.A. froze rent increases for nearly four years after the onset of the COVID-19 pandemic, far longer than most jurisdictions. Landlords had to forgo the cumulative 16% rent increase that would have been allowed under the current formula. The 4% increase allowed on Feb. 1 was the first since the pandemic.
Meanwhile, property owners’ operating expenses, including payroll, maintenance, utilities and insurance, have increased faster than inflation in recent years.
It’s not easy for policymakers to balance those competing interests. But reasonable changes can be made to the formula that establishes how much owners of rent-stabilized units can raise their prices each year.
The city ordinance sets an allowable annual increase in rents between a guaranteed minimum of 3% and a maximum of 8% based on the consumer price index, which measures inflation. Because inflation was low for so long, allowable increases have exceeded the CPI in 23 of the last 30 years, meaning rents were permitted to rise significantly more than inflation.
Fair market rent for a one-bedroom apartment was $490 in 1985, when the city adopted the current formula. If allowable rent increases had tracked the consumer price index, the same unit would rent for $1,500 today. With the 3% guaranteed minimum allowable rent increase, however, the rent would be $1,705, according to an analysis done by Keep LA Housed, a coalition of tenant advocates. That’s still lower than current market rent of about $2,000 a month.
L.A. allows annual increases of as much as 8% based on inflation, which is higher than most of the other cities that have rent control. The city also allows landlords to charge an additional 1% if they cover gas and the same if they pay for electricity. At a time when tenants are already crunched by higher prices, the current formula permits landlords to raise most renters’ biggest monthly expense by a significant share.
Tenant advocates have pushed the City Council to set a 3% maximum and peg increases to 60% of the consumer price index to slow rent increases over time. Landlord groups want the council to keep the formula as it is so their members can make up for the pandemic rent freeze.
The Housing Department has settled on a good compromise: setting a new maximum allowable rent increase of 5% and a new guaranteed minimum of 2%. That would prevent sharp rent hikes while helping landlords keep up with rising business fees and expenses that may not be reflected in the consumer price index. The department staff also suggested eliminating the extra 2% potentially allowed for utilities after a study found the additional rent increases likely exceed the cost of service.
Other proposals from the Housing Department need a bit more scrutiny from council members. To help landlords keep up with rising costs in years when inflation exceeds the 5% annual cap, staff suggest “banking” increases above 5% and applying them when the consumer price index falls below 5%. That could cost tenants more because the extra percentage increase would be applied to higher base rents in future years.
The Housing Department also suggests basing rent increases on a different measure of inflation that does not include housing costs, which have been a major driver of inflation. Tenant advocates warn that the proposed measure can be volatile, while landlords say it doesn’t capture enough of their costs.
Rent control is a valuable tool for keeping communities stable and preventing displacement and homelessness in an expensive real estate market. It makes sense to adjust the city’s formula for allowable rent increases to strike a better balance.
But ultimately the solution to L.A.’s housing crisis is to build more housing, especially affordable housing. The top priority of the City Council and Mayor Karen Bass should be making homebuilding faster, easier and cheaper in every neighborhood of the city.
