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Are Higher Rent Increases Justified By Rising Costs

by Rebecca Webber, May 13, 2003
 

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The Rent Guidelines Boardgave preliminary approval for the highest allowable increases for rent-stabilized leases since 1990. If approved in the final vote to be held on June 19, one-year leases will rise 5.5 percent, and two-year leases by 8.5 percent, beginning October 1, 2003.

The board’s justification for the large increases lies heavily in one of the reports they issue annually – the Price Index of Operating Costs(pdf format). That report looks at the costs for a market basket of goods and services needed to operate and maintain rent-stabilized apartments in New York City.

The 2003 price index jumped 16.9 percent, largely due to sharp increases in fuel costs, insurance premiums, utility prices, and taxes. Labor costs, contractor services, administrative costs, parts and supplies and replacement costs showed more modest increases. It was the second highest price index increase in the 35-year history of the report.

Landlord representatives argued that higher prices proved the need for higher than usual rent increases, while tenant advocates discounted the price index entirely.

The 2003 Price Index of Operating Costs

A handful of factors came together over the past year to cause the spike in the price index.

Fuel Costs – Up 66.9 percent

The price of heating oil (chart) began rising last November, just as cold weather set in. Those higher prices and a colder-than-usual winter combined for an unprecedented one-year increase in the cost of heating a typical rent-stabilized apartment.

The cold weather accounted for about 40 percent of the cost increase. The remainder came from the rising price of crude oil, which made itself known at gas stations and beyond, as it neared $40 per barrel.

Insurance Premiums – Up 40.5 percent

It wasn’t just the losses of 9/11 or the fears of more terrorist attacks that boosted insurance premiums for city landlords last year. Wall Street’s poor performance played a big role. Just like hopeful retirees across the country, insurance companies watched their reserves deplete as the stock market dropped and scrambled to refill them with higher premiums.

But 9/11 did cost insurers $ 40.2 billionand made them more reluctant to stay in the New York City market. And owners who increased the insured value of their properties, or added terrorism coverage faced premium increases of almost 50 percent.

Utility Prices – Up 21.7 percent

Natural gas and electricity costs rose by more than 40 percent over the past year. They both correlate to rising crude oil prices. Natural gas can be used as a substitute for heating oil, and high oil prices increased demand and price of natural gas. And both oil and natural gas are common feedstocks in the production of electricity.

While water and sewer costs rose minimally over the past year, the New York City Water Boardrecently passed a price increase of 5.5 percent, effective July 1, 2003.

Taxes – Up 14.8 percent

The strong housing market has meant that assessments of property value have gone up. Furthermore, the city’s 18.5 percent property tax increase was implemented in January. Property owners are now paying more and hoping to pass along the increase to renters.

While these numbers would seem to support the need for higher than usual rent increases, tenant advocates caution that they are not the whole story. First, they say, the price index only looks at changes in prices, not at actual landlord expenditures. Previous Rent Guidelines Board studies have noted a difference, since landlords find ways to economize when prices spike.

Secondly, “It only looks at one side of the profit equation and ignores income,” said Michael McKee, associate director of New York State Tenants & Neighbors, a statewide tenant organization. While the Rent Guidelines Board does consider income and expense studies(pdf format), they use data which is outdated by the time the board makes its annual decisions on rent increases. Landlords should be required to submit real-time income and expense reports for the Rent Guidelines Board to consider in its calculations, tenant advocates say.

“We reject the price index methodology entirely,” said McKee. “It is fundamentally one-sided.” In support of this notion, a bill was recently introduced in the City Council to bar the use of the price index in the determination of rent increases. For this year, however, “we are hoping we can persuade a majority of the [Rent Guidelines] Board to lower the number for the final vote,” said McKee.

Half a percentage point or a percentage point could make a big difference for tenants. Even the relatively modest 2 and 4 percent increases that were adopted last year resulted in a citywide rent increase of $174 million in the first year. “That’s a transfer from a million-plus tenants to 25,000 landlords who include some of the wealthiest people on the planet,” said McKee.

But landlord advocates are also hoping to persuade the board to alter the numbers before the final vote. They would like to see bigger increases than the current proposals.

“It’s totally inadequate, given the extraordinary increases in costs that owners have experienced in the last year,” said Frank Ricci, director of governmental affairs of the Rent Stabilization Association, the city’s largest residential landlord group.

Landlords have greater faith in the accuracy of the Price Index of Operating Costs, although, they point out, the numbers always lag a year behind rent increases. They had asked for rent increases of 9 and 15 percent for one and two-year leases respectively and were disappointed by the lower numbers the Board voted through.

“For a certain segment of property owners, it’s going to be extremely difficult,” said Ricci.

Rebecca Webber is a journalist who has covered housing issues for Gotham Gazette since July 2000.


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