Lanser: Is Rent Control The Future In Orange County?

Rent Control

In these times of populist politics, if I happened to be an Orange County landlord I would be very careful.

Rents are increasing at pre-recession rates, and a lot of the rise is due to sound economic reasons: increasing demand meeting up with limited supply.

However, for many tenants that doesn’t mean it is easy to digest.  With the absence of any easy solution on the horizon for the housing shortage is a political fix a viable option?

Yes, I am talking about rent control.

First of all here are some numbers.  

I added a yardstick’s worth of tenant costs into my spreadsheet – or “rent of primary residence” statistics for Orange and Los Angeles counties from the Consumer Price Index.   It reflects the stated living costs of a sample of renters versus what the average asking rents are at the major complexes that numerous industry studies have cited.  One good thing about the CPI: it includes the regional CPI – which is the local consumer cost overall – for gauging the impact of these rent increases.

In the first five months of 2016 the regional rent index increased 4.4 percent compared to 2015.  It is the largest increase since 2008 and higher than the average 3.4 percent rate increase for rent over the last 30 years, and is part of an overall trend.  Last year during the year’s first five months, rents were 3.8 percent higher.  It was the biggest surge since 2008 at the time.  Rent Control

When inflation is factored in, the rent increases also look large.  Over the past two years regional rent costs have increased at an average of 4.1 percent.  The regional CPI increased to a 1.3 percent yearly pace.  Historically, this 2.8 percent gap in the increases between overall inflation and regional rent costs is large.  With the exception of 2004-2005, it is the largest gap since 1986.  Over the last three decades it is quadruple of the 0.7 percent average rent-to-CPI increase.

We have a fairly good indication that the current rent increases are large historically and exceed increases in other everyday living costs.  A hot regional job market has helped to boost the demand for rentals, so there are still many people who are  able to afford higher apartment rents.  However, we know a large percentage of the population is unable to completely benefit from the fairly impressive economic recovery.

The high costs have resulted into action, with not all of it being positive.  Finally developers are building new rental at a practically pre-recession pace.  Unfortunately a lot of the new supply is being priced on the higher end.  With very few affordable housing options available, many neighborhoods are becoming over populated.  Renters double or triple up, which has created some of the nation’s most crowded rentals.

The important question that landlords need to ask is: how angry are Orange County renters?

Renter control isn’t at all good for landlords.  

Over the long term, it is also not good for renters since eventually it ends up distorting the housing market towards whatever niche regulations favor.  (There is less overall supply as well)

However, as Bay Area rents have surged, it has created lots of discussion – as well as some political action recently – towards legal caps being add on rents.  There is a fair amount of rent control in Los Angeles as well as surrounding cities.

Of course I am very well aware of the different political nature of these two markets compared to Orange County.  However, over time, pocketbook needs and politics also change.

Rent control isn’t something I am advocating.  The free market usually works well when it comes to allocating resources that are scarce… up to a point.  Whenever a service or good happens to be a life necessity sch as housing – the amount that the highest bidder might pay – or what is the most profitable – isn’t something that always satisfies the needs of society.

Many of the business executives that I speak with complain about over regulation by government.  I sympathize on the one hand.  However, quite often regulation is a poor attempt to fix the perceived wrongs in the marketplace.

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