What Does Inflation Mean for Tenants?

According to the federal Bureau of Labor Statistics inflation is marching upward. After years of very moderate increases in consumer prices, the bureau in September reported a 5.4% increase nationally with consumer prices bumping up 4.6% in our region over last September. Those price hikes will push our rents up too — especially for single-family and condominium renters — once our local moratorium on rent increases is lifted. Let’s look at inflation and its effect of inflation on housing costs for both prospective and current tenants.

About Inflation

Inflation describes the erosion of purchasing power. If consumer prices increase but wages don’t keep pace, then our dollar won’t go as far. Modest inflation isn’t a problem because rising prices and wages reflect a growing economy. Indeed federal fiscal policymakers prefer an inflation rate of about 2% annually. When deflation looms as a threat, as it did after the last recession, then federal fiscal policymakers will push money into the economy to keep interest rates low and thereby encourage consumer spending.

When inflation looms as a threat, as it does today, federal policymakers can raise interest rates to reduce the inflationary pressure. To some that is tantamount to taking away the proverbial punch bowl. But our long era of ultra-low interest rates has only encouraged speculative investing and has kept asset values high relative to economic fundamentals. Increasingly there is consensus to cool the economy before rising prices become an inflation spiral.

The Bureau of Labor Statistics measures inflation by observing the national change in consumer prices for a variety of goods and services every month. The bureau then plugs the change in prices into an index called CPI that weights those goods and services to reflect an average household’s consumption.

The annual change in national consumer prices reached 5.4% in September while our Los Angeles-Long Beach-Anaheim region saw a year-over-year rise in consumer prices of 4.6%. Each represents the largest annual increase in many years.

The rising cost of shelter has helped to push-up CPI because, along with food, energy and transportation, housing consumes a large share of the average household’s budget. Less-affluent households are particularly exposed to the risk of higher inflation. Where a moderate-income household may experience a dip in its standard of living, a less-affluent household will chose between necessities like food and transportation and paying the rent.

The rise in consumer prices is alarming because it is an additional destabilizing factor for vulnerable renting households who are facing displacement as state and local moratorium protections end.

Inflation Drives-Up Housing Costs for New Tenants

Inflation exerts an outsized and long-lasting upward pressure on rents. We can see the effect of inflation on our regional housing market in the Bureau of Labor Statistics CPI data. For several years prior to the pandemic, the ‘rent of primary residence’ (the CPI measure of the cost of rent) was rising at a rate of 5% annually which was double or triple the rise in consumer prices generally (the red line in the chart) and it outpaced wage gains too.

Annual Change in Rent of primary residence
The CPI measure of the annual change in the price of rent for years was well above the rise in consumer costs overall. The result was a hot market for rental housing in our region.

Simply put, apartments were becoming less and less affordable in the Los Angeles region even before the pandemic. That inflationary pressure is continuing today after a lull during the pandemic. Apartment List finds Los Angeles area rents are up 9% compared to last year’s listings with the average rent for a Los Angeles 1-bedroom apartment is $2,888 ($3,100 in Mid City and as much as $3,600 on the Westside). “If you are renting an average priced 1-bedroom apartment in Los Angeles, your annual salary should be around $103,968 or higher,” Apartment List says — a sobering reminder that rents are outpacing wages.

Closer to home we have data from the rental unit registry that shows actual rents by the date a tenant moved-in. The average tenant who moved into 1-bedroom unit in Beverly Hills this year paid an average rent of $2,426 according to a recent rent stabilization report. Two-bedroom units on average rented in 2021 for nearly $3,500. That’s inflation!

Move-in YEAR Studio 1-bedroom 2-bedroom 3-bedroom 4 bedroom
2021 $1,890 $2,426 $3,465 $4,147 $3,800

Inflation Also Means Existing Tenants Pay Higher Rents

So far we’ve looked at asking rent as a leading-edge indicator of inflation in rental housing. Also important is the effect of inflation on rent paid by established tenants.

Like many rent-stabilized cities, Beverly Hills ties the allowable annual rent increase directly to the percentage change in consumer prices. Higher consumer prices will inevitably be reflected in larger rent increases. Pandemic aside, today the maximum allowable annual rent increase for Chapter 6 households is 3.9%. That percentage would have been established in June but the moratorium put a brake on rent increases.

Let’s look ahead. The cost of goods and services in our region (CPI) increased by 4.6% in September over the year prior, according to the Bureau of Labor Statistics. If that trend continues we will see a significantly higher percentage rent increase when the city revises it in June.

These two charts show the relationship between consumer prices in our region and the allowed rent increase for each Chapter 5 and 6 households. The rising prices are clearly reflected in the rent-increase percentages set by the city through it varies somewhat between Chapter 5 and Chapter 6.

Chapter 5 maximum allowed rent increase compared to CPI
The maximum allowable annual rent increase for Chapter 5 tenants is tied to the change in consumer prices (CPI). However it is calculated to smooth out variations. As a result it more closely reflects the effects of inflation while buffering those households from inflationary spikes.
Chapter 6 maximum allowed annual rent increase compared to the change in consumer costs
City of Beverly Hills establishes the allowed Chapter 6 maximum annual rent increase percentage at 100% of CPI for the Los Angeles region (with an allowed 3% increase in low-inflation years). As a result, rent increases for existing tenants will reflect the change in consumer costs but will exceed inflation over the longer term.

But for the moratorium on rent increases we would be paying a higher rent today. Instead we have enjoyed a temporary reprieve. But when the moratorium ends we all will our rent rise almost immediately. Chapter 6 tenants that see a 3.9% hike and the few remaining Chapter 5 tenants will probably pay 3% more. (Read more about how these increases are calculated in our explainer: Maximum Allowed Annual Rent Increase: What You Need to Know.)

Higher rent may come sooner than we think: in October the Rent Stabilization Commission voted to recommend that City Council lift the moratorium. Once the landlord provides 30 days notice we will pay the increase. We are likely to see the rent rise again this spring if the landlords is allowed to carry forward the increase that was delayed during the pandemic. That second and subsequent rent increase will be whatever percentage is allowed at the time. Due to inflation it is likely to be significantly higher than 3.9% for Chapter 6 households.

The Fallacy of the Landlord’s Burden

Landlords like to complain that their costs of providing rental housing are always rising while the rent increase they are allowed to demand each year is far too low. They say are squeezed between tenants paying below-market rent even as they pay more every year for real estate taxes, maintenance and utilities. “It is always on the back of landlords,” one of our landlord commissioners reminds us at every opportunity.

But is that true? Yes, it is more expensive to provide rental housing today. The CPI data show rising costs that the landlord will pay. However landlords are being disingenuous when they complain about higher costs given their fat profit margins. The city’s consultant in 2017 estimated that the average landlord’s net operating income (profit) was more than 70 cents of every rent dollar. That figure is estimated because no landlord ever shares his profit-and-loss statement so we can’t verify their claim to the poorhouse.

As for those costs, let’s remember that most landlords skimp on maintenance; they fail to renew key systems like plumbing and electrical and then they complain that it is expensive to repair older rental properties. Yes, it is expensive to continually patch the failing plumbing and to remove mold after moisture has done its damage. The real problem is that most landlords prefer to profit from the investment rather than maintain it.

Let’s also not forget that Proposition 13 keeps property taxes low on rental property because it caps the landlord’s annual tax increase at 2%. Heck that’s a better deal than tenants get! Landlords are allowed to raise the rent for Chapter 6 households by 3% annually even when inflation is zero. Moreover a landlord can petition for a decrease in his tax assessment in an economic downturn. Tenants have no process why which we can petition for a reduced rent.

As for energy and utilities many landlords have that cost covered if tenants pay those bills. (Some tenants even pay a share of the ‘house’ utilities too.) Moreover, landlords have other sources of income like coin laundries and late fees that are generally not declared for business tax purposes. But those revenues pad the bottom line in addition to the allowed annual rent increase. Let’s keep that in mind.

Landlords like to grouse about rent stabilization because it caps the annual rent increase. The director of the Apartment Association calls it communism. But that’s actually a red herring! Most tenants pay near-market rents. Just 1-in-10 households in Beverly Hills rented longer ago than 15 years, according to rental unit registry data; over half (55%) of Beverly Hills households in rent-stabilized apartments rented only in the past five years. Landlords were able to charge market rent on every one of those units.

Finally, the real payout for Beverly Hills landlord comes on the back end when it is time to sell or transfer the wealth to heirs nearly tax-free. Landlords never talk about asset appreciation but it is an inflation slayer! The landlord makes more on appreciation than on rent. We haven’t run the numbers but suspect a longtime owner could give away the housing and still beat inflation when it comes time to cash out.