Is rent control the only realistic hope for Southern California tenants?
Is rent control the only realistic fix for nearly half of Southern Californians who don’t own a home?
I know rent control is not perfect. In fact, it’s got plenty of shortcomings. But even if you think residential construction can magically be increased, how soon would all that building reverse the financial pain for some 8 million renters — 47% of the population in the four-county region?
And that assumes there are enough private dollars awaiting development’s “green light” to build enough units so the skyward path of local rents might be mitigated. If this is truly a regional emergency, aren’t tough, unpopular actions needed?
Let my trusty spreadsheet show you a renter’s plight using historical data from the Consumer Price Index. Simply put, yearly rent hikes of 4% or 5% seem odd when overall inflation has cooled dramatically. Just look at this year’s trends.
The CPI says rents have risen 5.4% in Los Angeles and Orange counties so far in 2019. Not only is it a 12-year high, but only Phoenix had a larger jump among 23 metro areas tracked. And a new CPI for the Inland Empire shows rents in Riverside and San Bernardino rising at a 4.4% pace — fifth-highest among the 23 metros.
Look back even farther and you see this year’s 5.4% rate of L.A.-O.C. rent hikes is the 18th highest in the past 60 years, a period in which rent gains averaged 4.2%. What makes 2019 rents odd, though, is that they’re jumping at an 82% “premium” to the overall local inflation rate of 3% for 2019.
It adds up to plenty of pricing power for today’s landlords. Since 1960, rents have increased only at an 11% “premium” to overall SoCal inflation. This is ugly — with plenty of blame to share for this imbalance — leaving renters often scrambling to find empty units at any price.
In some ways, it’s nothing new.
This century, rents hikes by CPI math have run 3.9% annually while overall inflation has been just 2.4%. That’s a 62% premium over 19 years.
How big is that? Think of the economically turbulent 1980s and 1990s — which featured everything from double-digit inflation (and interest rates) to stock market crashes to the savings and loan crisis to huge cuts to SoCal’s defense industries.
Rent hikes were actually greater — averaging 4.7%. But inflation — often a loose benchmark for pay raises — averaged 4.2%. So rent’s pricing premium was just 12% in those days.
However, rents outpacing inflation over long stretches is actually new.
Think about a time many folks seem to think were SoCal’s “good ‘ol days,” the 1960s and 1970s. (We’ll overlook civil unrest and killer smog, to name a few challenges of those fast-growth years!) In these two decades, rents couldn’t keep up with inflation — probably because the era’s building boom kept a lid on what landlords could charge. Average rents hikes of 4.3% trailed inflation’s 5.3%-a-year jumps.
Yet nostalgia doesn’t cure problems.
We certainly haven’t built enough rentals considering the overall vitality of the economy. Since 2000, builders statewide constructed an average 44,222 multi-family housing units annually. In the previous 25 years, the pace was 64,107. It would take six years at the building pace of the late 20th century just to make up for that shortfall. Not likely to happen.
So what’s best for renters?
It doesn’t seem like their finances can wait out a building spree of unprecedented scale. So, can reasonable folks enact reasonable guidelines for reasonable rent increases?
One knock on rent control is that it only helps a segment of renters — tenants that stay in place. Well, the current situation helps very few renters.
And don’t tell me a significant amount of real estate investment will leave the region if more rent control is put in place, as is frequently suggested by rent-control critics. Landlords stand to lose, too, if unsustainable rent hikes hurt the local economy. It’s bad news for the industry if the promised building spree — after regulations are thinned — floods the market with supply.
Also, I don’t expect our homeowners will allow massive apartment construction. In some ways, who can blame them? These folks live in homes with perhaps $2 trillion in combined equity, wealth that could be at risk if too many rentals were created.
The bottom line is that the status quo is pretty good for everybody … but renters.
That means tenants will need to fix their mess either at the ballot box — voting for leaders who’ll support development or rent control, or both — or with their feet, departing for cheaper locales.
PS: Renter relocation has costs, too. If their moves are just a few miles down your favorite freeway, everyone pays with added commute times and the need for more transportation options.