The Los Angeles City Council is considering changing the way it sets the annual allowable increase 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 renters in times of high inflation while ensuring that landlords can recoup the cost of running their properties.
About 650,000 units in the city were built before Oct. 1, 1978, and are governed by the rent enforcement law. That's about 75% of apartments in LA.
Los Angeles has one of the most affordable housing markets in the country, and rightfully so driving force behind the city's homelessness crisis. In addition to half of the tenants in the greater LA region are burdened, meaning they spend more than a third of their income on housing, leaving little money for savings, health care, transportation and other necessities.
More than 10% of tenants spend more than 90% of their rent, putting them at risk of ending up on the street. So city leaders have a vested interest in keeping rents stable to help renters stay in their homes.
But the city also has an interest in ensuring that landlords can charge enough to maintain their units properly and get enough of a return on their investment to stay in the rental business.
LA rents are rising nearly four years after the start of the COVID-19 pandemic, much longer than most places. Landlords have had to forego a 16% rent increase that would have been unallowable under the current formula. The 4% increase approved on February 1 was the first since the pandemic.
Meanwhile, property owners' operating costs, including payroll, maintenance, utilities and insurance, have grown faster than inflation in recent years.
It is not easy for policy makers to balance those competing interests. But reasonable adjustments can be made to the formula that determines how much stable unit owners can increase their rates each year.
City law sets the annual allowable rent increase between a guaranteed minimum of 3% and a maximum of 8% based on the consumer price index, which measures inflation. Because inflation has been low for so long, allowable increases have exceeded the CPI in 23 of the last 30 years, meaning rents have been allowed to rise significantly more than inflation.
The fair market rent for a one-bedroom apartment was $490 in 1985, when the city adopted the current formula. If the permitted rent increase had followed the consumer price index, the same unit would rent for $1,500 today. With a 3% guaranteed rent increase, the rent would be $1,705, according to a study by Keep LA Housed, a coalition of tenant advocates. That's still less than the current market rent of about $2,000 a month.
LA allows annual increases of up to 8% based on rent, which is higher than most other cities with rent control. The city also allows landlords to charge an additional 1% for gas coverage and the same for electricity bills. At a time when renters are already being squeezed by higher rates, the current formula allows landlords to increase renters' gross monthly expenses by a significant percentage.
Tenant advocates have pushed the City Council to cap the top 3% and peg increases at 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 cover epidemic rent.
The Department of Housing has decided to compromise: setting a new maximum allowable rent increase of 5% and a new guaranteed minimum of 2%. That would prevent rent increases while helping landlords keep up with rising business costs and expenses that may not be reflected in the consumer price index. Department staff also proposed eliminating the potential additional 2% allowed for utilities after a study found that potential rent increases would exceed service costs.
Some proposals of the Department of Housing need to be looked at more carefully by the council members. To help homeowners keep pace with rising costs in years when inflation exceeds the 5% annual threshold, staff suggests “banks” increase above 5% and be used when the consumer price index falls below 5%. That would cost tenants more because the additional percentage increase would be applied to higher base rents in future years.
The Department of Housing is also proposing to base rent increases on a different rate of inflation that excludes housing costs, which have been a major driver of inflation. Tenant advocates warn that the proposed rate could be volatile, while landlords say it does not adequately cover their costs.
Rent control is an important tool for keeping communities stable and preventing displacement and homelessness in an expensive housing market. It makes sense to adjust the city's approach to allowable rent increases to strike a better balance.
But ultimately the solution to LA's 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 faster, easier and cheaper in all areas of the city.
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