By Scott Cook
No one likes a rent increase, but as with all expenses, it is normal for rents to increase over time.
While reasonable rent increases are to be expected, a small number of owners have taken advantage of high demand for housing to impose larger rent hikes. These rare instances of “rental price gouging” have made headlines, but they don’t reflect the reality of most renters in California. Unfortunately, new statewide legislation designed to address these isolated incidents could actually mean the majority of tenants in San Diego and across the state will see their rent payments increase every single year.
Having passed the Senate and Assembly this week, Assemblymember David Chiu’s Assembly Bill 1482 is now headed to Governor Newsom’s desk for his signature. It would create a government-approved annual increase to rental housing rates. While this legislation would indeed prevent owners from making dramatic rent hikes, it also has an unintended consequence: a strong incentive for owners to impose the maximum allowed rent hike, every single year.
Certainly, price gouging is wrong in any industry or trade — but the idea that gouging is widespread just isn’t backed up by statistics. The vast majority of property owners set reasonable rents and many haven’t raised rents annually, even in today’s strong housing market.
A severe lack of supply makes it expensive to purchase or rent a home in California, and the high price of homes is putting further pressure on the rental market. In San Diego County, AB 1482’s government-approved rent hikes would be more than double the average increase in rent over the past decade, according to data provided to stakeholders by the bill’s author and consultants in the California Assembly Housing & Community Development Committee. As a matter of fact, the data shows in the period between 2007-2017, the median annual increase in contract rent was 2.9%.
This legislation would limit property owners to one annual rent increase at 5% plus inflation as measured by the Consumer Price Index, for a total increase of roughly 7.5% per year — more than double the annual increase local renters are used to seeing.
Today, many owners make a choice to keep rents stable for quality, long-term tenants. They prioritize the long-term relationship over short-term cash gains. But owners will be much less likely to make that choice under AB 1482, which penalizes them for keeping rates the same with a use-it-or-lose-it scenario.
Here’s how AB 1482 works: It tells rental-property owners that they must make a choice: Raise rent each year, or lose out on the annual opportunity to align rent levels to those of comparable properties. Those who do not raise rents each year fall behind and it becomes exceedingly difficult for owners to bring the property back to market rates.
Property owners need flexibility to set rents to allow them to pay off mortgages, maintain and improve the property, cover property insurance, make emergency repairs and other costs of ownership — and, yes, provide a reasonable profit on their investment. AB 1482 takes away the owner’s ability to set rents according to financial realities.
History tells us that such onerous rent control will suppress construction of new housing — which would be a real step toward addressing our state’s housing needs. And as The San Diego Union-Tribune has opined, AB 1482 ignores the will of the voters, who rejected rent control last year.
At the Southern California Rental Housing Association, roughly 65% of our membership is what is commonly referred to as the independent owner. Some are retired and using their rental investment as their sole source of income. They could be a construction worker, teacher, nurse or firefighter using their rental property to supplement their income or to plan for their retirement. We know from talking to our owner members that they tend to be the folks who don’t raise rents each year or raise them very little.
Many of these owners now find themselves in a position where they are charging a rental rate that is dramatically below-market. They are facing a scenario where it will be tough to ever catch up.
AB 1482 is not the solution to isolated instances of rent gouging and, in fact, will likely create higher rent increases for many renters in all areas of the state while unfairly impacting independent owners and discouraging new rental housing production. We join the California Association of Realtors in opposing it. Unfortunately, we will soon see these impacts if the legislation is signed by Gov. Gavin Newsom.
Scott Cook is executive managing director of SVN Asset Advisory Group and 2019 president of the Southern California Rental Housing Association.