New Maximum Allowed Annual Rent Increase is Posted!

City of Beverly Hills has posted the new maximum allowed annual rent increase percentages for both Chapter 5 and Chapter 6 tenants effective TODAY. For the first time, landlords will be allowed a higher percentage increase for Chapter 5 tenants than for Chapter 6 tenants. The world has turned upside down!

The rent stabilization ordinance program has reorganized how they are presenting the information. The new rent increase webpage includes a fuller explanation of the formulae behind the increases, as well as more information about when, and how, an increase can be lawfully levied on a tenant. The summary is once in any 12-month period and it must be noticed properly (notably 30 days in advance).

The Chapter 6 increase is now 3.1%. That represents a significant decrease from last year’s allowed Chapter 6 (4.1%) and is a greater decline than we expected. The new 3.1% allowed increase is in effect as of June 12th and will remain in effect until the next adjustment in summer of 2020.

The Chapter 5 maximum allowed annual increase is now 3.46%. For the first time Chapter 5 households will see a significantly higher maximum allowed increase percentage than Chapter 6 households.

Whoa, what happened? Has the world turned upside down? Chapter 5 tenants were long were accustomed to increases of just over one percent! How is it in the mid-threes now and even higher than Chapter 6?

There are a couple of explanations as to why the Chapter 5 maximum allowed annual rent increase for the first time is higher than for Chapter 6 tenants:

  1. The Chapter 5 increase follows the same CPI benchmark but it is recalculated monthly, not annually (as for Chapter 6 tenants). The Chapter 5 allowed increase more closely reflects the change in consumer prices (tracking the change month-by-month) and so the two percentages may converge or diverge depending on the trend in consumer prices. As it happens, the annual calculation for Chapter 5 households is a higher figure than for Chapter 6.
  2. The Chapter 5 maximum allowed annual rent increase is higher also because the city is now correctly calculating it. The Chapter 5 increase formula is an arcane holdover from nearly 40 years ago; and it is unnecessarily complicated. But there it is in the rent stabilization ordinance so the city must apply it. However the city for some unknown time was simply applying that formula incorrectly. We go into much greater detail in Has the City Been Incorrectly Calculating Chapter 5 Increases? but suffice to say we discovered the error because we could not replicate the city’s monthly rent increase percentages for Chapter 5 using the CPI data.

The combination of some natural variation in percentages produced by the formulae coupled with the now-correct application of the Chapter 5 formula has pushed the Chapter 5 increase higher than the increase allowed for the 97% of renting households that are Chapter 6.

For once Chapter 6 households are pleasantly surprised: a full percentage point has been shaved off our next increase compared to the 4.1% in effect until this month…that is, if the landlord is taking his maximum allowed rent increase.

More About CPI

The maximum allowed annual rent increase for both Chapter 5 and 6 rent stabilized households is derived from the Bureau of Labor Statistics (BLS) consumer price index (CPI). The index reflects the change in prices month-to-month for a mix of goods and services. The specific CPI our city uses to set the maximum allowed annual rent increase is the ‘all items’ basket for urban households in the Los Angeles-Long Beach-Anaheim region. Beverly Hills benchmarks our maximum allowed annual rent increase percentages to 100% of CPI.

CPI includes the rent of primary residence, though, and in our region housing costs are relatively high. Moreover, BLS weights the cost of housing relatively heavily because housing costs represent a large proportion of a household’s consumer costs. Not only are our housing costs higher, but they are weighted more heavily, meaning that the benchmark for our maximum allowed annual rent increase is in part driven higher by our rising cost of rent! We can imagine the positive feedback loop that can drive even stabilized rents higher.

CPI matters a great deal as a benchmark. Seniors will know that their annual Social Security cost-of-living adjustment (COLA) is much lower than the maximum allowed annual rent increase for Beverly Hills. That’s because the federal government uses yet another CPI to measure the change in consumer costs. However that CPI is not regional but national, which produces a lower percentage for the change in consumer costs than we see in our high-growth region.

And second, the COLA CPI measures the change in consumer costs for ‘wage earners,’ not all urban consumers, as does the CPI we use to benchmark our maximum allowed annual rent increase. By design the alternative measure used by Social Security underestimates the actual change in costs for senior household in much of the country. It allows the Social Security Administration to give seniors a smaller COLA…and at the end of the month they will make up the difference in more rent dollars out-of-pocket.