Rent Control & Higher Rents: Chicken-and-Egg Conundrum!

A Renters Alliance foot soldier forwarded a recent business section article from the Orange County Register titled, Fallout From State’s Rent Control Debate: More Rent Hikes. It caught my attention because it presupposes a familiar landlord argument: rent control leads to higher rents. Or is it that sharply higher rents lead to political support for rent control? Seems to me that this classic chicken-and-egg question deserves more thought than the premise implied by the article title.

First things first: we can’t presume that a business section article from an Orange County newspaper would give a fair shake to rent control. Not a single city in Orange County has enacted rent control. Moreover the OC is the spiritual home of California conservatism. It is the county that launched the political careers of both Ronald Reagan and Richard Nixon.

Were that not enough, it was an Orange County businessman, Howard Jarvis, who birthed the modern tax revolt movement and the signature victory at the ballot box came with Proposition 13 in 1978. The landmark measure was championed by landlords because it gave them a huge break on commercial property taxes. That gift keeps on giving, especially to longtime owners who pay property tax on an assessment that can be frozen-in-amber in 1978.

Though there was an implied promise at the time, landlords never did lower rents after Prop 13. In fact they kept on raising rents which lead to political support for rent control (enacted at that time in Beverly Hills and a handful of other cities.)

The Register article’s primary argument talk of rent control will spur landlords to “move fast and hike their below-market rents.” The article continues, “Similar hikes are occurring throughout Southern California as landlords raise rents preemptively out of fear local or state tenant protection laws could pass, forever trapping them at below-market rates.”

The trouble with that the premise is at least twofold: it suggests that rents are below market. The article offers no support, though, and even undercuts the suggestion by later pointing out that rents are rising fast. More importantly the article suggests a causal relationship between rent control and rising rents.

To support the claim that rent control leads to rising rents the article then quotes ten landlords who provide some anecdotal claims. One Long Beach owners said he raised his rents between 10–15% in one shot  as rent control in his city came to the foreground. (Essentially it went nowhere.) “You’ve always got a couple people you want to help,” he was quoted as saying. “It ends the charity.”

In that landlord’s view he’s the victim because he just can’t afford to be mister nice guy anymore. (He’s a professional real estate broker and is indicated as an owner of 1224 Bennett Street in Long Beach. Plenty of curb appeal!)

Ten percent happens to be a threshold for rent increases that is associated with excessive rent hikes. Long Beach City Council for example stipulated in June that a relocation fee would apply when a rent increase exceeds 10%. For good measure that landlord added half again as much to his rent increases. You gotta feel bad for him!

Indeed landlord after landlord told the Register they had no choice but to raise rents due to the prospect of rent control. One Newport Beach landlord claimed her rents were 60% below market. Rent control forced her hand. “But now we have no choice but to raise the rent,” she said. “That’s unfortunate for the renters.”

Never mind that Newport Beach will never enact rent control. She had to do it!

Some claims strain my credulity. One landlord with a family portfolio of apartment buildings claims that over a 5-year period she raised the rent only upon a vacancy. But now that rent control was in the air she had to be more aggressive. She imposed 5% increases, requires tenants to sign more restrictive leases, and has paid-off tenants (or perhaps pressured them) to move them out.

She had to do it because her property was in Glendale and the city was talking about rent control. (However Glendale wasn’t likely to cap rent increases and doesn’t do so today.)

These are all professional landlords. They own more than the fabled mom-and-pop duplex. And were their rents really below market? The Register didn’t did too deep into their claims. Had there been digging I guarantee that not one of these landlords would have opened their books to support a claim.

Let’s apply some common sense. Even if Glendale did enact a cap what difference would it make? If that landlord’s family could operate profitably with rents 60% below market, then she could continue that business practice and still cover her increasing cost of operation with a capped rent increase. Why? Because a cap is generally indexed to inflation (and may be significantly higher) which would allow the rent to rise in tandem to her annual increase in costs.

Moreover, state law requires any city that controls the rent to allow the landlord a larger-than-allowed increase when a rent cap diminishes the operating income.

If she is worried about statewide rent control, well that has been a tough sell in Sacramento and any proposal so far would allow rents to rise far faster than inflation. Even below market, her rents would continue to rise and she would catch up with the market in a period of some years. But again, where is the need? If she was operating profitably with rents 60% below market she will be saved by vacancy decontrol and her own efficient operation anyway.

I would want to criticize the Register writer as lazy were the article not so clearly angling to make the landlord’s argument anyway. To that end he does let one landlord off with some easily disprovable claims. That landlord would be Beverly Hills local Daniel Yukelson, a CPA and executive director of the Apartment Association of Greater Los Angeles and a fourplex owner here in town.

“They’ll never be able to recoup their costs,” Yukelson said of his fellow landlords, justifying their rent hikes. “They’re not going to be able to operate their buildings profitably,” he added.

That is not true. But the claim is familiar because he made it during the Beverly Hills rent stabilization discussion too. The Register writer could have asked Yukelson why:

• Landlords who claim to rent apartments at substantially below market even where there is no rent control can’t operate in that fashion even after rent control is enacted;
• Landlords can’t recoup their cost of operation when industry data shows that landlords on average clear about 66 cents of every rent dollar in net operating income (profit on operations);
• Landlords lose flexibility to accommodate unforeseen costs under rent control when those costs should always have been factored into the cost of doing business (a new roof is maintenance after all!); and,
• Landlords say they can’t operate profitably under rent control yet choose not to open their books to support the specious claim.

Helpfully the Register cites a couple of back-of-the-envelope figures about how rents are rising. Namely that the average rent has increased by more than $430 a month since 2010 in the Inland Empire; increased $600 per month in Orange County; and increased $700 a month in Los Angeles County. The Register says that 57% of rental households in Southern California are “cost-burdened.” (All of which sounds plausible even if not properly sourced.)

However providing those figures seems to undermine the premise of the article. Those rising rents and high rent burden suggest to me that rent control is less a causal factor than a consequence. I wish I had seen that premise addressed in the article.

The Register will have no choice but to focus on the high cost of rental housing if grassroots efforts in Anaheim and elsewhere prove successful. Let’s hope that soon we will read in the Register about a revolt by the proletariat renters against the petite bourgeoisie landlords right there in the Kingdom of Disney. Now that’s a story!