What in your second paragraph doesn’t apply without rent control? In other words, what makes 7% the magic number? Your entire argument seems based on market forces (if you raise too much, your tenant leaves and if there’s no wealthy people to replace them, you're stuck). How is this not the case without rent control? Do wealthy tenants somehow appear without rent control?

Nothing. The parent comment was arguing that because the law now says that rent couldn't increase by more than 7% they were now being advised to increase rent by that much every year (ostensibly because they are now planning to do this), and my response is that it's absurd to claim that anything in the law will change things so that you could make that sort of increase now if you couldn't already make that increase before the law existed.

Many landlords are not paperclip maximizers. REITs are, but small time families often charge below-market rents to the long term tenants they personally like or can’t be bothered to replace. They feel comfortable doing this because they can always revert to market rate later. With that long-term optionality going away, some will revert to market rate or as close as legally possible right now.

So in other words, landlords love to reserve the right to kick a tenant they stop liking out at the drop of a hat for no specific reason, by jacking the rent up as high as they want. As compensation for this power, they are willing to charge well below market rates to help indigent tenants.

If they lose this “right”, they insist on becoming pure profit maximizing machines?

> So in other words, landlords love to reserve the right to kick a tenant they stop liking out at the drop of a hat for no specific reason, by jacking the rent up as high as they want.

It's disingenuous to pretend like the landlord is the only party with any control. Landlords cannot remove a tenant at "the drop of a hat" by any stretch of the imagination, nor can they arbitrarily increase rental prices. Rentals usually involve a lease that protects the tenant from arbitrary removal and price modifications as much as it protects the landlord from unexpected vacancy. If you're renting, you should know when your lease is up and know that the landlord has the option not to renew and/or to modify the price. (If you're in California, you should also know that the new law punishes your landlord for trying to do you a solid and keep your rent stable across lease terms.)

On top of conventional lease protections, virtually every state has default tenant protections written into statute that can't be overridden by lease agreements, and that include a default implicit month-to-month tenancy term, providing at least basic protection from out-of-the-blue demands to vacate.

If an eviction must occur, it has to be conducted as prescribed in state law. Tenants overstaying or defaulting on their leases frequently can't be removed without 3-6 months of legal wrangling, which is no fun.

>>> (If you're in California, you should also know that the new law punishes your landlord for trying to do you a solid and keep your rent stable across lease terms.)

The CA law allows the rental price to reset to market rate for a new tenant, so unless the landlord doing you a solid was planning to stick you specifically with a rent increase down the line to recapture the present solid, they can still keep your rent stable across lease terms.

I am a CA landlord of a single house. Keeping track of “market rate” is an annoying exercise and I tend to just leave the rate unchanged for multiple years (3-5) then bring it up in one go. The last time I did this the rent increased ~12%.

Before, the tenant was happy because they got below market rent for 4 years, and I was happy because I could defer pricing work without long term penalty or risking a move-out during an already busy year. This new law will likely result in my tenant paying more, and me working more at times I don’t want to work.

It’s not the end of the world, it’s just one more annoying piece of red tape that doesn’t seem to help anyone.

Was the tenant happy when you increased it? Increasing rent 12% in one go effectively kicks out most tenants. A smaller annual increase will give them time to adjust to market conditions and choose over a longer period whether or not to move and to save up to do so.

You are doing no one any favors except short-term renters who never get an increase. In other words, your so-called benefit is actually a detriment to long-term renters.

I have done this twice with the same tenant without complaint or moveout. My tenant was presumably getting basic inflation based increases at work, which offset most of the delta.

Unclear on why doing it all at once is worse than doing it regularly and extracting more rent in the period in between. Is the theory that they will be unable to adjust their budget in 60 days?

It's beyond me why people would think this is worse for the tenant. Can I move to CA and be your tenant? You're basically giving your tenants free money.

Let's say the rent is $1000/month (for simplicity). That's $12000/yr in the first year. If you increase the rent by 12% ever 4 years they'll have 3 years of paying $1000/month, followed by a 4th year of $1120/month and so on.

If you instead raised it yearly by 2.87%, which give-or-take is the same as a 12% one-off increase we can calculate the net rent paid over the period in the two scenarios:

    $1000*12*3 = 36000

    r=1000;x=1.0287;
    (r*x^1*12)+(r*x^2*12)+(r*x^3*12) =~ $38106

The result is that by deferring rental increases you've given your tenant a benefit of $2106, and we can safely assume the rent is a lot higher than $1000/month. I.e. every month of the rent not keeping with market increases is more money for the piggy bank.

Not only that, the money saved in the short term (those 4 years without a rent increase) can be allocated however the tenant chooses. It can be frivolous spending, or the tenant can choose to turn it into long-term investments for compounding effect. I love being a tenant in these scenarios.

I think people that are arguing bigger rent increases that happen less often are bad are assuming tenants are stretching their housing budget to the max and won't be able to afford the large hikes. In which case they wouldn't have been able to afford it with smaller increases either.

Getting a surprise bill for 48 months of interest free credit is still a surprise bill. The landlord in question admits both to deferring out of disinterest in tracking market value (which as a trend is simply not hard work to determine) and to increasing the rent enough to recoup the rent lost by deferring the increase. During this time a tenant has no idea there is a claim on some undisclosed portion of their budget and has every incentive to set their operating budget accordingly.

It is well known that most people can not afford significant sudden expenses. I think the inability of some folks here to recognize how bad a 4 year rent hike can be have the privilege of not being in that group.

Renters generally understand that rent can be changed when the lease runs out and should be braced for the possibility that there will be a moderate increase. If the renter doesn't understand that, they probably haven't rented much before, and they'll learn it the first time their rent increases. If you are lucky enough to go multiple years without any adjustment, you should expect that the landlord will want to correct the differential at some point and budget accordingly.

Note this works both ways. If the market goes down, if no one wants to live there anymore, tenants have a lot of room to negotiate. Vacancies are expensive and the hassle of getting a new tenant is not something many people want to handle even in good conditions.

To clarify, when I increase, I bring it up to market rate, not over market rate. So my losses on missed rent are not recouped.

I also contend that not all markets make this easy. I rent a single family home in a town of 4,000. This is not a super liquid market. There are not a lot of good comps - my house is a block from the town’s best park, and walking distance to the small downtown. On the other side, it is a substantially smaller lot than the average house. There are essentially zero houses that are equivalent, and I have to do a lot of digging (including calling up other folks I know that are landlords) to figure it out.

My tenant is not on the verge of financial collapse. They’re a manager at a local business, they probably spend about 20% of their gross pay on rent. They have demonstrated an ability to absorb the bump without issue.

Could the tenant not save the amount of money the rent was not going up to be prepared for the day when rent did go up? The tenant could have saved 5%’s worth of increase, invested it in an index fund for the day that the rent eventually did rise. A 12% rise after 3-5 years would be no big deal since the tenant would have been prepared.

> Was the tenant happy when you increased it? Increasing rent 12% in one go effectively kicks out most tenants.

No, the market kicked out most tenants. The tenant should be expected to also monitor market prices for their rental and know automatically when they're getting a deal or when to expect an increase.

If I own a house or an apartment complex, my costs are relatively fixed -- that is, after all, the primary argument for owning rather than renting -- which means that if I am leasing that house or units in that complex to someone else, there is nothing requiring me to raise rents to keep up with "the market" rather than merely keeping up with my own actual costs. I can choose to make the same absolute amount of net income year after year. If "the market" is increasing faster than inflation and property tax, I can choose to take advantage of that.

"The market" is not an entity with its own volition, and speaking of it as if it were obscures the reality that it's comprised of individuals and collectives making individual or collective choices about what to charge and what to pay.

Sorry, didn't mean to ehumanize it. In the aggregate, it could be viewed as having its own volition.

Two viewpoints, one tree.

You can still do it that way. But instead of raising the rent 12% in one year, you can just raise it by 7% one year and then by 4% the next year.

The tenant still gets below market rent for 4 years, you and can defer pricing work for as long as you want without penalty or risking a move out during a busy year.

I think you might be overly worried for your situation. Your 12% example is an amortized difference of at most 1.5% compared to the new 7% cap (1.12yroot3 vs 1.07yroot5).

The point is, if you decline an increase now-- and costs increase unexpectedly, you have a hard cap on how much you can do to adjust. This incents landlords to be more aggressive with pricing, because a mispricing now can extend to be mispriced for many years.

It also may change the equilibrium behavior, because it upsets a social norm and affects landlords' estimations of what other landlords will do.

FWIW, this is still more bookkeeping for me (have to track when to raise, how much remaining to raise). I also personally feel like a dick every time I serve the rent notice - it’s a small town and everything feels a little personal.

It’s not a lot of work, but my FT job isn’t being a landlord, and we’re talking about a property that nets maybe $8k/year. It’s been a better rate of return than the stock market, but the alpha is small relative to my SWE salary.

I guess another possible outcome of this is pushing marginal small landlords out, or pushing them to use property management firms since the fees possibly start making more sense. Neither of these seem like good outcomes to me.

An increase by 7% followed by 4% is an increase of 11.28%, not 12%.

$1000 +7% = $1070, $1070 +4% = $1112.80

$1000 +12 = $1120.

Fine.

Increase by 7% followed by an increase of 4.67289719626168224299065420561‬%.

The point is that the 12% hike every 3 to 5 years can be accomplished over the same time frame because the max the law allows for is 22.5043‬% in 3 years and 40.25517307‬% in 5 years.

But the reality is that landlords aren't going to want to take the risk that they'll have to spend extra time at a below-market rate, and since there's no way to predict what the market is going to do, there's no guarantee that they'll only be missing 4% of that value for only one year. Landlords are thus incentivized to increase rent by the legal maximum each year to keep the risk minimized.

Your hypothetical also assumes that in the next year, the market value will stay the same, when in reality the expectation would be that it would increase another percentage point or two, meaning they'd have to come close to maxing that second year's increase to fully recapture the value.

It also creates an effect where now that there's a legal range, the landlord will still feel like a nice guy by increasing rent "only" 4% each year, for example, and that's worse for tenants overall. It strongly incentivizes small-time landlords to imitate commercial landlords and squeeze the tenant for more each year, which other posters have adequately demonstrated is a significant loss to the tenant over a simple periodic adjustment every 3-5 years.

These policies may be better justified in high-density areas like San Francisco (probably still net negative), but applying them state-wide is crazy. California is a very large state and they just made things substantially more complicated for both tenants and landlords throughout.

A better way to think about it is that a social norm that constrains landlords will be completely upended by the new legal norm. This legal norm will likely encourage behavior that otherwise wouldn't be exhibited, due to unintended consequences - in particular the landlord's estimation of what other landlords are going to do under the new law.

More like a household renting to a family friend, a student, an artist, someone who helps with child- or elder-care, etc. Homeowners put situations like that on the "market" in large part because they're allowed to change their minds later when the lease is up.

Landlords love to reserve the right to increase their prices.

Maybe inflation gets crazy, maybe taxes increase, maybe maintenance turns out to be more expensive, maybe they realize they've been underpricing, maybe they sell the property to someone who has the same reasons.

If you tell them that you will limit their freedom to choose the rent price, they will try to retain as much freedom as they can.

It's like a use-it-or-you-lose-it budget game.

The landlords own the building. They don’t owe the tenant anything beyond the lease.

Dude, they own the property. This is OK.

Sure some absolutely will, but there were enough paperclip maximizers relative to the total available rental units that a law limiting their maximizations had enough political will to actually pass through the legislature even though it's blindingly obvious that putting a limit on rent increases encourages all landlords to always increase rent by the maximum allowed.

If eligible landlords in SF all started raising rents by 7% per year, every year, the city would empty out. As much as housing is crazy expensive in SF, there's no way the market would bear those kinds of increases

SF already has rent control, which limits most landlords to increasing rent at 60% of inflation.

Needless to say, costs are increasing faster than 60% of inflation... In turn, landlords are only willing to write leases at very high prices and the supply of rental units is even lower than it would be otherwise...

You can still revert to market rate if your tenant leaves. As a landlord who values consistent occupancy over maximizing profit, I am fine with this. And I agree with above comment, if you are raising rent 7% every year then you or your prop manager lowballed your rent, that’s not the fault of rent control.

you didn't have to make that response before the law, as a hot market that drove up rates by 15% could be addressed shortly. If you loose the option to make quick upward decisions and any downward movement is essentially irreversible, game theory suggests you'll try to minimize how much increase you leave on the table.

Downward movement isn't irreversible, it's rate of reverse is capped. And the rate limit is pegged to inflation. And roughly equivalent with expected average stock market returns [1].

https://www.creditdonkey.com/average-stock-market-return.htm...

What has changed with the new rent control law is the risk to the landlord increases, and that means rents rise to pay for the risk.

The thing that would be different is the game theoretic situation where every landlord feels compelled to do that so the market rate increases by 7% per annum.

They could already do that. Nothing was stopping them from forming an oligopoly or landlords association/guild or whatever you want to call it and raising rent in lockstep by 7% each year. The entire point of the 7% cap is to stop that from happening above 7%, because certain hotzones experience that already, not because of a formal agreement, but because the demand outstrips supply by that much and supply can't (or won't) catch up.

However, there's an issue with how you're calculating the market rate: You're assuming that tenants can/will bear that cost indefinitely, so the market rate can be "whatever the landlords want to make it". That won't always be true, not just from landlord defectors who might try to undercut the oligopoly on price, but because the tenants can move elsewhere and effectively remove demand.

> Nothing was stopping them from forming an oligopoly or landlords association/guild or whatever you want to call it and raising rent in lockstep by 7% each year

Well, “Nothing” is an unusual way of referring to the Sherman Anti-Trust Act.

With the current administration and Supreme Court, it's a very apt way of referring to the Sherman Anti-Trust Act.

Let me put it more simply, all that rent control does is put a damper on large increases [1], but the rental market will still seek a market price. The only way to do that is to spread the increases to leaner years where the natural rate increase would be lower than the cap. Every landlord would independently conclude the same, no collusion needed.

To undercut that this year would mean being below market price in a future year. The only arbitrage would be between present and future prices. Perhaps some subset of landlords only seek to rent out for the front-end years, so they would have a different calculus, but all that would do is to pull down the average transaction price by a little, according to their size in the market. So if the current price demands a natural increase of 2%, maybe the market will clear at 5% instead of the 7% max, but it remains the case that there will necessarily be years where the clearing price is higher than without rent control.

[1] This is assuming the government "guesses" it right that 7% is the average rate of increase over the long term. If it is below average, then the market gets severely distorted.

I'm saying that game theoretic situation you proposed where every landlord raises their price by a similar amount is exactly what the law is working to limit to a fixed ceiling because the situation you described already exists in enough areas that there's political will to do something to limit the maximum yearly percentage increase.

And the cap was explicitly set to be below the average rates of increase for many areas because the effects of the higher increases in those areas is what the law is explicitly trying to prevent.

Spreading the increase to a leaner year only works if the unit is below the market rate. If the unit is already within 7% or so of market rate, then market won't bear that increase. Instead the tenant will move out to a market rate unit. If the entire city increases in lockstep that means people near the bottom of the market will be literally priced out and either move to another city or resort to sleeping in their cars or become homeless, but everyone else will just downgrade the size of the unit they rent since once the price of the current unit exceeds their ability to pay. At the very top end of the market that will mean units will have decreasing occupancy rates assuming the landlord refuses to compete on price to increase demand and insists on capturing the 7% increase.

> Nothing was stopping them from forming an oligopoly [...]

You are forgetting about transaction costs.

The new law does provide a Schelling point. (But I do agree that it's probably not going to be an important one.)

These guys going to pretend they did not raise rents out of the goodness of their hearts and not cold hard economic reality. What's even the point except to spread FUD?

I think your argument is contradicting itself at least partially because you say if an LL (landlord/landlady) was already getting market price, they’d price themselves out of the market so the 7% cap is more than enough... so in essence you’re saying the market will tell the LL not to raise the rent... which then means you’re relying on market forces... but you’re saying despite that you need a YoY cap... so something seems amiss...

No no that's not my argument here at all. I'm not making any argument about whether the cap is enough or needed. The parent comment was arguing that because the law now says that rent couldn't increase by more than 7% they were now being advised to increase rent by that much every year (ostensibly because they are now planning to do this), and my response is that it's absurd to claim that anything in the law will change things so that you could make that sort of increase now if you couldn't already make that increase before the law existed.

Ah, gotcha I see what you are saying.

I think what OP was saying was that in an unrestricted market they have wider range (due to discretion) but given this shackle on hikes, they are going to max it out. Maxing it out means there will not be downward adjustments when warranted (economic trends) and will instead ride it out (not make it avail at lower price) because when the economy picks up they’ll more than make the loss up.

what you are arguing is the captured surplus under the supply curve. We can assume that demand is essentially inelastic for a relatively large price range (hence the introduction of rent control) so the extracted value is the area under a curve that changes rapidly over the short term, or a less volatile curve that shifts out 7% every year. I don't see how either of you can be confident in the expected future actuals.

You’re missing a few things:

- He may be socially responsible and not want to charge through the roof. E.g. likes the tenants, prefers stability etc.

- The whole point of the law is indeed to prevent large raises. But what if expenses suddenly skyrocket, or inflation does, and he has to increase more or go bankrupt? That’s the worry here. No, the law won’t react quickly enough. It’s preventing him from being socially responsible.

- You assume annual 7% would not work eventually because it will raise the price too much in the market. This assumes free market, but you don’t have it anymore, now you’re regulated. In particular, your missing that everybody else will adopt the same rational self-preserving policy. Approximately the entire market is going to grow 7% YoY now.

- nitpicking: 7% before, not after

This makes me curious... is it the property management company or the landlord that sets the rental price? I recently rented a house and tried to haggle with the PM but they refused to budge on price but were willing to negotiate on other factors (like lease term and property rules), which made me wonder if the PM's hands were tied re: price.

I don't know exact specifics of typical PM agreements, but usually yeah the PM follows whatever the landlord specifies. If the PM doesn't like the landlord's terms, they will just decline to do business with them, but ultimately they're just the landlord's agent.

I'd hazard that the PM charges a percent of the gross rent, but has a minimum irrespective of the rent actually charged, so the landlord will then just tell them that they don't want the PM to rent at a price where the PM's minimum fee is more than the fixed percentage. (or in hard numbers. If the PM requires the greater of 10% or $100, then the landlord will just say "don't rent below $1000")

Most property owners leave rent decisions to their property managers, as they're treating their property as a somewhat passive investment. It's basically the entire point of having a property manager.

Some PMs will try to act the opposite, but if you're the property owner, you're HIRING the property manager to find you tenants and/or manage the rental process. Their responsibilities are defined in the property management contract.

Sadly, their contracts are pretty slimy - they usually absolve the property manager of any wrongdoing whatsoever. Do they hold up in court? KINDA. Unless you're incredibly rich and have a fantastic lawyer.

So then what’s the point of not being able to make those larger adjustments?

There's certain hot zones in cities where the rent can increase by much greater than 7% YoY. In those hot zones no one's wages are rising at the same rate, so that law is the only thing that prevents the people previously living there from being forced to move even if they would rather stay. Essentially, it's the policy that is in response to all the stories about retirees being forced out of a home they rented for decades or the stories about the cops and firemen sleeping in their cars because their job is a 20 hour drive from their house and they can't afford anything closer to their job.

Cops and fire fighters are unionized, protected and well paid. For years the argument for higher pay for cops in Frisco was that cops couldn’t afford to live where they worked. That was effective marketing, cops never wanted to live in the city they all live in Santa Rosa. Perhaps using teachers as an example would be better.

What happens to the people that want to live there and are willing to pay a higher price for it?

"What happens to the firemen and teachers?" is a more important question than "What happens to the tech workers?"

Why?

They outbid everyone else on every available unit.

They use their money to build new units in that area or entice someone to build new units on their behalf on which they will then outbid everyone else.