The Allowed Annual Rent Increase in Perspective

Just as we got accustomed to the 3% cap on the allowed annual rent increase, the city’ announced that it was rising to 4.1%. Whoa, a jump of more than one-third? As explained in a recent post, that bump-up reflects higher inflation. But the magnitude of the jump is regional: hot economy and rising rents.

What’s driving the bump-up in the maximum allowed annual rent increase in Beverly Hills? The same benchmark that’s driving it up in most rent-control cities: rising consumer prices. Why is the jump so large? Because inflation in our region is high and rising. And inflation is reflected in the annual change in a variety of consumer prices.

All About CPI

The Bureau of Labor Statistics (BLS) publishes the year-over-year changes in a variety of prices paid by consumers. It’s called the consumer price index. The BLS explains:

The Consumer Price Index (CPI) is a measure of the average change in prices over time in a fixed market basket of goods and services…based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and the other goods and services that people buy for day-to-day living. Each month, prices are collected in 75 urban areas across the country from about 5,000 housing units and approximately 22,000 retail establishments… — BLS Technical Note

The change in consumer prices to which we pay attention is the CPI-U for Los Angeles-Long Beach-Anaheim region. CPI-U refers to goods and services purchased by urban consumers, which is fully 93% of all consumers according to BLS. We look at that index in particular because prices vary widely across the country especially between urban and rural areas.

BLS calculates consumer price indices for a variety of regions and sub-regions and moreover dices-and-slices that price data by a host of factors. It’s complicated!

Looking at our region in particular, the price data show that Southern California consumers are beginning to pay a lot more for goods and services than is the country as a whole. That represents a year-over-year change. And we’re paying more at an accelerating rate, which means that the rise in prices is exceeding that observed a year ago this time.

Compare the year-over-year change for ‘all items’ in our region (up by 4.1% this May over a year ago) compared to a 2.8% increase for urban consumers nationwide. Our rate of annual prices increase is half again as high as consumers as a whole see prices changing.

The cost of rental housing is helping to drive our region’s CPI higher. BLS calculates the cost of purchasing shelter from the consumer’s perspective: it looks at the cost of procuring the housing as opposed to the cost of investing in it or operating it. (Those costs are captured separately.)

According to the CPI-U for the Los Angeles-Long Beach-Anaheim region, the year-over-year price for shelter increased by 5.1% and specifically rent of primary residence increased 5% May-to-May. That exceeds the overall change in prices for all consumer items for urban consumers in our region (up 4.1%).

Moreover, the ‘all basket’ consumer goods and services that make up our CPI more heavily weights the cost of housing because it is a major expense of households (one-third or one-half or more for some households). So the weighting of the change in the cost of rent is in part what’s pushing up the CPI.

The price of renting housing here increased at a rate 22% greater than all items in our region. Nationally, in contrast, the price of all items increased by 2.8% while shelter increased by 3.5% (a smaller increment higher).

The 5% increase in the price of rent year-over-year recommends our concern about housing affordability in Southern California. Beverly Hills City Council echoed the concern when it adopted an urgency ordinance to lower the 10% Chapter 6 cap to 3%:

Currently, there is a shortage of affordable housing that is available to all segments of the community both within the County of Los Angeles and specifically within the City of Beverly Hills…. [and] the rents that are being charged for apartment units are increasing dramatically […] At a minimum, the expense of moving to a new unit or having a rent increase of 10% will potentially cause the tenant to cut back on spending for health care, food, or medicine. Therefore, this Ordinance is necessary for the immediate preservation of the public peace, health and safety and its urgency is hereby declared. — Ordinance 17-O–2725

Is the Rent Too Damned High?

If the rent is not already only too damned high, the BLS data make clear it is getting higher and certainly at a rate that is too damned high! Of course the steep climb in the cost of rent comes atop steep increases for other non-discretionary items that gobble the household budget: transportation (up 9% over a year ago) and food consumed away from home (up 3.4%). Nondurables were up 4.9% and other goods and services were up 5.1%.

My summary table distilled from the May CPI bulletin:

Consumables May 2017-May 2018 Change
Motor fuel 23.6%
Energy 14.5%
Private transportation 9.6%
Transportation 8.9%
Rent of primary residence 5%
Housing 4.8%
All items 4.1%
Medical care 2.5%
Electricity 2.4%
Food 1.6%
Apparel -0.4%
Utility gas -5.9%

Not only is the rent getting too damned high, but the cost of living overall is getting too high!

Where Does It End?

Where will a steep rise in the cost of rent take us? Consider:

  • CPI takes into account the rising price of rent for existing tenancies;
  • Asking rents will increase even more quickly than do rents for established tenancies in a hot market because asking rents reflect the market;
  • The higher cost paid by new tenants is soon is factored in to the CPI which, because housing costs are heavily weighted, drives up the CPI even more quickly;
  • CPI is then used as a benchmark measure of the maximum allowed annual rent increase in rent control cities like Beverly Hills.
  • Rinse and repeat!

The upward rise in consumer prices will drive an even more precipitous rise in asking rents in a hot market. That trend will moderate as inflation comes down and we may return to years where inflation was near-zero. But will rents moderate or come down appreciably? What will put the brake on this vicious cycle?

Some rent control cities benchmark their allowed rent increase to just a fraction of CPI. Even when CPI rises precipitously, tenants in West Hollywood and Santa Monica are somewhat cushioned. Instead of 4.1% increase this year, for example, they see a 2.8% or 3% increase. It takes the edge off in high-inflation times.

Unfortunately Beverly Hills ordinance even after the recent changes allows rents to continue to climb even when inflation nears zero. Look at our rent stabilization ordinance (Chapter 6 section 3): the landlord enjoys a 3% floor on the maximum allowed annual rent increase. When prices don’t rise at all he can still hike the rent 3%. But there is no ceiling, so if consumer costs rise he rides that wave higher and higher and hits no ceiling on the maximum allowed increase.

Indeed for Chapter 6 tenants there is no floor to the allowed rent increase. Now that doesn’t mean that every landlord will take it. But they can. And that will help to drive the CPI even higher; which in turn allows for a higher allowed increase. Rinse and repeat