For the first time in nearly 40 years, the Los Angeles City Council is considering changing the way it sets the annual allowable increase for rent-controlled properties. that’s good. The law needs to take further steps to prevent price shocks for tenants during periods of high inflation, while ensuring that landlords can recover the costs of managing their properties.
Approximately 650,000 units in the city were built before October 1, 1978 and are regulated by the Rent Stabilization Ordinance. That’s nearly 75% of Los Angeles apartments.
Los Angeles has one of the most affordable housing markets in the nation, which is a driving force behind the city’s homelessness crisis. More than half of tenants in the greater Los Angeles area are rent-burdened, spending more than a third of their income on housing, leaving less money for savings, health care, transportation, and other needs.
More than 10% of tenants spend more than 90% of their income on rent, putting them at high risk of living on the streets. That’s why city leaders have a vested interest in stabilizing rents so tenants can continue living there.
But the city also has an interest in making sure landlords can charge enough to properly maintain their units and earn enough return on investment to stay in the rental business.
Los Angeles froze rent increases for nearly four years after the onset of the COVID-19 pandemic, much longer than most jurisdictions. Landlords had to forego cumulative rent increases of 16% that would have been granted under the current system. The 4% increase granted on February 1 was the first since the pandemic.
Meanwhile, operating expenses for property owners, such as salaries, maintenance, utilities, and insurance, have increased faster than inflation in recent years.
Balancing these competing interests is not easy for policy makers. However, reasonable changes can be made to the formula that determines how much rent-stabilized unit owners can increase prices each year.
City ordinances set annual rent increases ranging from a guaranteed minimum of 3% to a maximum of 8%, based on the Consumer Price Index, which measures inflation. Because of long periods of low inflation, allowed increases exceeded the CPI in 23 of the past 30 years. This means that rents are allowed to rise significantly above the rate of inflation.
In 1985, when the city adopted the current formula, the fair market rent for a one-bedroom apartment was $490. If allowed rent increases tracked the Consumer Price Index, the same room would rent for $1,500 today. However, an analysis conducted by tenant advocacy group Keep LA Housed found that with a guaranteed minimum allowable rent increase of 3%, the rent would be $1,705. This is still lower than the current market rent of about $2,000 per month.
Los Angeles allows annual price increases of up to 8% based on inflation, which is higher than most other cities with rent control. The city also allows landlords to charge a 1% surcharge if they pay their gas bill, and the same goes for if they pay their electric bill. At a time when renters are already being squeezed by soaring prices, the current system allows landlords to significantly increase most tenants’ maximum monthly expenses.
Tenant advocates are calling on the city council to cap the CPI at 3% and cap increases at 60% of the CPI to curb rent increases over time. Landlord groups want councils to keep the scheme in place so their members can make up for the rent freeze caused by the pandemic.
The Housing Authority settled on a reasonable compromise, setting the new cap on rent increases at 5% and the guaranteed minimum amount at 2%. This would prevent sudden rent increases while also allowing landlords to account for higher business fees and expenses that may not be reflected in the consumer price index. Department staff also proposed eliminating the additional 2% potentially allowed on utility bills after a study found that additional rent increases would likely exceed the cost of service. did.
Other proposals from the Housing Authority require a little more scrutiny by City Council members. Staff said that in order to help landlords cope with rising costs in years when inflation exceeds the annual cap of 5%, the “banking” price increase exceeds 5% and the consumer price index falls below 5%. I am proposing to do so. The additional percentage increase will be applied to future base rent increases, potentially resulting in higher costs for tenants.
The Ministry of Housing also proposes that rent increases be based on a separate inflation measure that does not include housing costs, which are the main driver of inflation. Tenant advocates warn that the proposed measures could be destabilizing, while landlords argue they do not recover enough costs.
Rent control is a valuable tool for maintaining community stability in an expensive real estate market and preventing displacement and homelessness. It makes sense to adjust the city’s formula for allowable rent increases to strike a better balance.
But ultimately the solution to Los Angeles’ housing crisis is to build more housing, especially affordable housing. The top priority of the City Council and Mayor Karen Bass should be to make housing construction faster, easier and cheaper in every part of the city.
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