An escalating trend

California’s renters are stretched paper thin in 2022 — and they may have to stretch even further in 2023.

As inflation continues to eat up their pandemic savings, Californians — especially renters — will need to tighten their belts another notch. This is because nearly three quarters of landlords plan to increase rent over the next year, according to a nationwide survey conducted by the Urban Institute.

These future rent hikes escalate an existing trend. National asking rents are up 14% year-over-year as of June 2022, according to Redfin.

Here in California, year-over-year rents are up:

Around 72% of landlords plan to increase rent in at least one of their rental units within the next year, according to the Urban Institute. However, 75% of those landlords planning to increase rent do not expect the price hike to exceed 10%.

The top reasons surveyed landlords gave for their planned rent increases include:

  • covering increasing ownership costs (43% of respondents); and
  • competing with increasing rental market prices in the area (41% of respondents).

Still, even with the coming spike in rent, many landlords are keeping their rent increases below market rates. For example, while 64% of landlords said their market rate has gone up by more than 10%, only 31% of landlords are planning another eye-watering increase exceeding 10%.

California’s expected rent increases will put further financial strain on tenants who are already cost-burdened.

Landlords, too, continue to operate on slim margins. Many will choose to raise rents only slightly beyond the bare minimum needed to remain competitive and profitable.

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Inflation raises California’s rent caps

California landlords aren’t just motivated by market factors to raise rent. Legislation also plays a role in their decision making — and one California law is making it possible for landlords to raise rent to a higher percentage than in 2021.

The Tenant Protection Act (TPA) went into effect in 2020 to limit the amount landlords may legally raise rent in any given year.

The TPA requires landlords to:

The TPA limitations apply to most multi-unit residential properties, but only those that were built within the last 15 years.

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Beginning August 2022, California landlords will be legally allowed to increase rents by as much as 10% due to inflation.

The TPA applies the April consumer price index (CPI) to rent increases effective on or after August 1 of each year.

Based on California’s April 2022 CPI figures, the CPI went up:

  • 8% in the Los Angeles-Long Beach-Anaheim metro;
  • 5% in the San Francisco-Oakland-Hayward metro;
  • 8% in the San Diego-Carlsbad metro; and
  • 10% in the Riverside-San Bernardino-Ontario metro.

Thus, all of these major California metros now meet the threshold for the cap to be set at a 10% rent increase.

As rents continue to soar beyond incomes in much of California, tenants will spend more of their income on rent and have less to spend on other goods and services contributing to local economic growth. [See RPI e-book Real Estate Economics, Factor 6]

The ultimate goal is to build more housing so the supply-and-demand imbalance will ease and rents will become sustainable for California’s residents.

Until then, tenants will continue to feel the squeeze.

Undeclared recession risks

The undeclared recession complicates matters for landlords anticipating rent increases.

Existing tenants are more likely to be able to pay rent within the next few years than a replacement tenant since the existing tenant has a proven record of paying rent from income earned from their occupation. By contrast, a new tenant is a new and different gamble: will they pay rent the next month or not?

The tenant who is consistent but leaves due to rent increases will be paying rent to another landlord, while the new replacement tenant who agrees to pay the higher rent and take on the risk of paying more going into the recession will be more likely to default. Now, the landlord who raised rent will be left with no rental income, a vacant property or a costly and complicated eviction process on their hands.

Thus, today’s landlords are best served within the coming years by making a deal with their existing tenant which will allow the tenant to survive the recession, rather than driving their tenant out with unsavory rent hikes.

Related article:

Lease renewals rise as housing options dwindle for California tenants

Want to learn more about renting trends in California? Click the image below to download the RPI book cited in this article.