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In Pricey California, Renters Near Respite From Landlord Gouging

Measure would cap rent hikes to five percent plus inflation for 10 years.

(Bloomberg) -- The housing crisis engulfing California has state lawmakers racing to pass bills that would boost construction and stop corporate landlords from egregiously jacking up rents.

The bills overcame key hurdles last week and are due for final votes before the legislature adjourns on Sept. 13. The hardest-fought measure would set a higher standard for evictions and cap annual rent increases at 5% plus the rate of inflation. While that’s below the typical pace of lease hikes -- and the bill has many caveats for landlords -- it would still mark the state’s most significant new protection for tenants in decades.

California’s housing shortage has led to soaring rents and home prices that are more than twice the national median, pushing residents further from their jobs and spurring some companies to relocate staff out of state. After the high-profile failures of a rent-control measure last year and a zoning bill in the spring, the latest legislation represents at least a modicum of progress in addressing the issue and will provide some relief to tenants, who’ve felt the brunt of the crisis.

“It at least stems the bleeding,” said Matthew Lewis, a spokesman for California YIMBY, an organization that advocates for more housing construction in the state. “There are a whole bunch of cities that have no rent control.”

Around the world, local and state governments are enacting policy measures to counter a growing housing affordability crisis, from a rent freeze in Berlin to a foreign-buyer tax in Vancouver. If successful, California’s rent cap would follow similar measures in New York and Oregon earlier this year.

California, home to one in eight Americans, has seen its median house price double since 2012, to more than $600,000. Fees, zoning and land costs have stymied building and prevented the state from constructing anywhere near the 180,000 new units a year it needs. Two in five households in the state are considered “cost-burdened,” paying more than 30% of their income on housing. Homelessness has surged.

Plenty of people have horror stories about struggling to keep up with rent increases as their leases end. Take Merika Reagan. The 44-year-old, who runs a pet-care business, rented a two-bedroom house with her partner in Oakland five years ago for around $1,700 a month.

Eventually, the house was sold to Invitation Homes Inc., which sought to increase the base rent by $350, or by about 20% a month, in 2017, Reagan said. She was able to work with the landlord to head off the increase, but subsequent renewals have pushed her monthly bill to $2,100. Next year, it goes up to $2,247.

“I just feel like every time my lease comes up I’m going to be in this negotiation battle,” she said. “It’s anxiety-provoking.”

Invitation Homes said in a statement that it operates in some of the most competitive housing markets in the country and sets rents according to “local market factors.” The company had no immediate comment on the rent-cap bill or Reagan.

Legislative Pressure

California lawmakers introduced a flurry of bills this year aimed at stemming the crisis, only to see the vast majority of them fail to advance. That’s put pressure on Governor Gavin Newsom, who campaigned last year with an agenda of building 3.5 million more homes in the state, to get some of the remaining legislation passed.

Apart from the rent-cap bill, the most significant housing measure still in the works would speed up the permitting process and limit cities’ ability to slow or block new development. Another group of bills would make it easier to build backyard cottages. And still other measures would support construction of affordable housing.

Assemblymember David Chiu, who introduced the rent-cap bill, announced a deal with legislative leaders and Newsom last week that would modify the legislation so that it caps rent hikes at 5% annually, plus inflation, for 10 years. That would translate to increases of about 8% a year, Chiu said.

“This bill strikes a balance between protecting tenants from egregious rent increases and predatory evictions, while allowing the rental industry a fair rate of return,” he said.

Limited Impact

Still, the bill’s passage is far from guaranteed, and even if it is, it’s limited in scope. Landlords can reset rents higher when tenants vacate a unit, and it provides a carve-out for single-family rentals that aren’t owned by corporations, according to Chiu. Housing built in the past 15 years is excluded from the caps.

An analysis by the Terner Center for Housing Innovation at the University of California, Berkeley found that the legislation would apply to 2.4 million apartments in the state, as well as some single-family rental homes.

Even so, the number of renters who actually saw rent increases exceeding the cap is probably far more limited. An analysis by Zillow Group Inc. showed that about 5% of apartments listed in the state this year saw hikes that exceeded what would be allowed. That’s down from 16% three years ago. Average rents for units in apartment buildings have been rising at about 4% annually statewide, the company’s data show.

“This probably would fall in the ‘sigh of relief’ camp for landlords,” given some of the other proposals that have been floated to protect tenants, said John Pawlowski, a senior analyst at real estate research firm Green Street Advisors.

The powerful California Association of Realtors has come out against the new version of the bill, saying it “discourages new rental housing.” But the California Apartment Association, which represents landlords, said this week that it planned to remain neutral on the legislation after successfully lobbying for changes.

“We still don’t like it, but it’s workable,” said Tom Bannon, the apartment group’s CEO.

That acceptance is in stark contrast to the industry’s opposition to a ballot initiative last year that would have overturned a state law limiting rent control. Major landlords including Blackstone Group Inc., Essex Property Trust Inc. and Equity Residential spent heavily and were successful in defeating it by a wide margin. But backers of that effort have vowed to try again at the ballot box in 2020. Bannon said the revival of that effort partially factored into his group’s decision to stop fighting the rent-cap bill.

Taken as a group, the housing legislation moves the state in the right direction, providing much needed protections for renters and making sure there are fewer barriers to building more homes, said David Garcia, the policy director for the Terner Center.

Still, they won’t get the state producing housing at the level it needs, he said. In recent months, permits for construction in California have fallen at the fastest rate since the Great Recession.

“These are positive changes,” said Garcia. “But they’re not enough to really stem the tide.”

--With assistance from Patrick Clark.

To contact the reporter on this story:
Noah Buhayar in Seattle at [email protected]

To contact the editors responsible for this story:
Rob Urban at [email protected]
Kara Wetzel

© 2019 Bloomberg L.P.

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