The Los Angeles City Council is considering changing the way it sets annual increases allowed for rent-controlled properties for the first time in nearly 40 years. That's good. The law must do more to prevent price shocks for tenants during periods of high inflation while ensuring that landlords can recover the costs of managing their properties.
About 650,000 units in the city were built before October 1, 1978, and are regulated by the rent stabilization ordinance. That's almost 75% of Los Angeles apartments.
Los Angeles has one of the least affordable real estate markets in the country, and that's the driving force behind the city's homeless crisis. More than half of the tenants in the greater Los Angeles region are rent-burdened, meaning they spend more than a third of their income on housing, leaving less money for savings, health care, transportation and other needs.
More than 10% of renters spend more than 90% of their income on rent, making them vulnerable to ending up on the street. That's why city leaders have a vested interest in keeping rents stable to help tenants stay in their homes.
But the city also has an interest in ensuring that landlords can charge enough money to properly maintain their units and get enough return on their investment to keep them in the rental business.
Los Angeles froze rent increases for nearly four years after the start of the COVID-19 pandemic, much longer than most jurisdictions. Landlords had to forego the 16% cumulative rent increase that would have been allowed under the current formula. The 4% increase allowed on February 1 was the first since the pandemic.
Meanwhile, owners' operating expenses, including salaries, maintenance, utilities and insurance, have risen faster than inflation in recent years.
It is not easy for policymakers to balance these 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 annual allowable 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, allowed increases have exceeded the CPI in 23 of the last 30 years, meaning rents were 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 allowed rent increases had followed the consumer price index, the same unit would rent for $1,500 today. However, with the guaranteed minimum allowable rent increase of 3%, the rent would be $1,705, according to an analysis by Keep LA Housed, a coalition of tenant advocates. That's still below the current market rent of about $2,000 a month.
Los Angeles allows annual increases of up to 8% based on inflation, which is higher than most other cities that have rent control. The city also allows homeowners to charge an additional 1% if they cover gas and the same if they pay for electricity. At a time when renters are already hurt by higher prices, the current formula allows landlords to increase most renters' biggest monthly expense by a significant proportion.
Tenant advocates have pressured the City Council to set a 3% maximum and set increases at 60% of the consumer price index to slow rent increases over time. Landlord groups want the council to keep the formula as is so its members can offset the pandemic rent freeze.
The Department of Housing has reached a good compromise: setting a new maximum allowable rent increase of 5% and a new guaranteed minimum of 2%. That would prevent steep rent increases while helping landlords keep up with rising business rates and expenses that may not be reflected in the consumer price index. Department staff also suggested eliminating the additional 2% potentially allowed for utilities after a study found that additional rent increases would likely exceed the cost of the service.
Other Housing Department proposals need a little more scrutiny from council members. To help homeowners keep up with rising costs in years when inflation exceeds the 5% annual limit, staff suggests “stacking” increases above 5% and applying them when the consumer price index drops by below 5%. That could cost tenants more because the additional percentage increase would apply 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 the proposed measure could be volatile, while landlords say it doesn't capture enough of their costs.
Rent control is a valuable tool to keep communities stable and prevent displacement and homelessness in an expensive housing market. It makes sense to adjust the city's formula for allowable rent increases to achieve a better balance.
But ultimately, the solution to Los Angeles' housing crisis is to build more housing, especially affordable housing. The City Council and Mayor Karen Bass' top priority should be making housing construction faster, easier and cheaper in every neighborhood in the city.
