On October 8, 2019, California Governor Gavin Newsom signed a bill into law that will cap rent increases throughout the State. The law provides a cap of 5% plus the increase in the local CPI (consumer price index).
The bill’s lead author, David Chiu, was quoted by the Orange County Register upon the bill’s passage as saying, “Our bill ensures tenants are protected against rent gauging and predatory eviction while allowing landlords to make a fair rate of return without disincentivizing new construction.”
Further, Newsom explained that the new law is not designed to be a cumulative solution. “We have to address the issue of production in the state of California. We need to build more damn housing.” He said at a ceremony in Oakland.
Newsom has always stood on the platform of housing. When he was running he made it clear this was his marquee issue claiming he would push for 3.5 million new houses built by 2025. This year, California is predicted to build around 120,000 new units. This is up 2% from the new units built in 2018 but does not put him on pace to meet his lofty goal.
The new law may remind people of Proposition 10, which appeared on last year’s laundry list of California ballot measures. The proposition would have allowed local authorities to enact rent control in their jurisdictions, but the people voted against it by a 62%-38% margin.
Proponents of Prop 10 believed it would solve the state’s consistent rent increases. Those against thought the proposition would negatively incentivize developers, creating a future shortage of rentals available.
Newsom went ahead with a statewide protocol for a rent cap despite the people voting against rent control in 2018.
Local real estate broker Paul Oster expressed his hesitation to the bill in a conversation with the Sheet. “The law is designed to help tenants but it might actually end up hurting them,” he said.
Oster said he has spoekn with landlords in the area and came to the conclusion that the negative ramifications were more obvious than the positive ones. “Their (the landlords) opinion is that this incentivizes them to schedule annual rental increases. Mammoth has a lot of old school landlords who
know turnover (of a tenant) costs them money. If they have a good tenant they won’t jack the rents up.”
One of those old school landlords who just got out of the game is Rich McAteer. At one time, he used to have eight rental units in Mammoth.
McAteer summarized the issue as one where the state is using a blanket policy to police a few bad apples.
While some landlords try to extract every last penny and don’t do much upkeep on their properties, most landlords run things in a decent fashion, have good tenants, and know you keep good tenants by keeping rents low.
Every 1-3 years, he’d raise rents 5%.
All his tenants were on month-to-month deals.
The last two-bedroom unit he just sold had been renting for $1,075/month, well below market rate.
Of the new law, McAteer said, “It certainly gives people who are into the extraction model the means to raise rents [the maximum allowed every year] with impunity.”
McAteer says he’s not against the concept of the new law, but “I just don’t know how it’s gonna work.”
He cautioned against another law, the law of unintended consequences.
Kelly Litschge is a second homeowner in Mammoth who also owns one Airbnb unit here, but also owns multi-unit dwellings down south.
She is not a fan of the new law. “I don’t want the state to dictate what I can or can’t do with my property.”
“As a landlord,” she said. “I don’t want to be behind the 8-ball where rent is too low.” Typically, she says, she doesn’t raise rents consistently.
This law may have the dubious effect of reminding her to [raise rents].”
“My tenants are not going to be happy,” she said.
She believes the law was passed despite the will of the voters, and disagrees with Mr. Chiu in that such a law may absolutely disincentive new construction.
While she thinks that 5% plus CPI is a decent allowance for a rent increase, it doesn’t take into account the sort of one-off capital expenditures/repairs that can really pressure a landlord.
“Will it affect a landlord’s investment in his/her property?” she asked.
When an entity is doing cost projections that involves any inflationary measure, the obvious decision is to plug in regular increases to keep up.
Colin Fernie, Owner of Black Tie Ski Rentals has had a different experience with rentals.
“We bought property two-and-a-half, three years ago and have mainly had local workers living there so our situation is different.” Said Fernie, “We are below market rate already and aren’t looking to increase rent more than 5% so it won’t affect us specifically.”
He felt the situation wouldn’t lead to anything drastic in the Eastern Sierra, “Mammoth is a unique market. It isn’t like Santa Monica where you have companies scooping up large pieces of land to make money on rentals. Here (in Mammoth) you don’t have someone parking a lot of money in rentals so the prices are dictated by the free market.”
But Fernie did express a similar sentiment to Oster, “Some landlords might put in regular increases to protect themselves.”
The bill received support from the California Apartment Association, which represents landlords, after Governor Newsom negotiated specific amendments to the bill.
However, the bill is also receiving backlash as the National Realtors Association said the measure discourages new rental housing.
A spokesman for California YIMBY, a group “focused on housing and land use policy at the state and local level to ensure grassroots organizers and city leaders have the tools they need to accelerate home building,” issued this statement.
“Rent caps don’t solve the housing crisis,” and then explained how the only solution is to build more homes.
The housing market is currently not keeping up with population growth. Rent caps may mitigate some of these housing woes in California but even Governor Newsom would admit this was not intended to solve all the issues.
The bill only lasts ten years, ending on January 1, 2030, and will begin January 1, 2020, with the highest rent being a 5% increase on whatever rent was being charged as of March 15, 2019.