In this second and last post we take a closer look at Proposition 10, the Local Rent Control Initiative.
Vote No on Proposition 10 – Local Rent Control Initiative
Proposition 10 seeks to repeal the 1995 Costa-Hawkins Rental Housing Act (“Costa-Hawkins”) put into place as a compromise between state and local municipalities. This state legislation limited existing local rent control ordinances.
Local municipalities were allowed to continue their control over housing occupied by current tenants but landlords were allowed to raise rents to market amounts once these tenants vacated the property. Further, under Costa-Hawkins, rent controls could not apply to housing units built after 1995. And, condos and single-family homes were also exempted from local rent control ordinances. This compromise under Costa-Hawkins allowed market forces to regain footing in the California housing market.
Currently, California is in the midst of a serious housing crisis. UC Berkley professor of economics, Kenneth T. Rosen, explains that our current housing crisis was created by strong population growth in California together with persistent underbuilding. This imbalance in supply and demand has resulted in higher housing prices and less housing opportunities for tenants and homebuyers alike.
The question is how to best solve this problem. When implementing, or in this case, reactivating, a regulatory scheme, we must be aware of the consequences, both intended and unintended.
Intended consequences of rent control
The intended consequence of Prop 10 is to make housing more affordable for renters by capping rental prices and expanding rent control policies to additional rental units, including condos and single-family homes. The question is whether or not capping rental prices and creating a haphazard patchwork of various municipal restrictions will actually accomplish these goals or make the housing crisis worse in California.
Untended consequences of rent control
Higher rental prices result from the lack of available housing. By focusing on the result (higher rental prices) rather than the cause (lack of supply), a distortion in the housing market will occur.
Both candidates for governor in California, Gavin Newsom (D) and John H Cox (R), are against Prop 10’s repealing of Costa-Hawkins. Newsom has put forward the Marshall Plan to build affordable housing. Cox supports removing onerous regulations in order to incentivize additional construction. Both of these positions focus directly on the lack of available housing rather than Prop 10’s focus on rental pricing.
By going back to a housing market restricted by rent control, we will actually experience a restriction of the supply of available housing exacerbating the problem rather than helping. See UC Berkley professor of economics, Kenneth T. Rosen’s paper here: Professor Rosen's Paper
In making his case, Rosen references a Stanford Study that measures the impact on the local San Francisco housing market after the passage which extended already existing 1979 rent controls to smaller “mom & pop” rental properties. See the full study in this link: Stanford Study Link
Rosen summarizes the three ways that rent control laws actually reduce the supply of rental housing as follows:
Conversion of Property Use
As landowners are incentivized to convert their property to other uses, there will be fewer available rental units. When landlords are faced with reduced income streams and property value, they find other uses for their property including converting apartments to residential condos for sale, moving into these properties themselves or switching the property to a nonresidential use.
Indeed, the Stanford Study found that rent control limited the housing supply by 15% from 1994 to 2016 due to landlords either converting the use of their rental properties or redeveloping these buildings. And a 2006 Brigham Young University study cited by Rosen found similar instances of increased conversions of properties to other uses under rent control environments.
The Stanford Study credits the San Francisco rent control laws for the gentrification of many neighborhoods and for the eviction of tenants of converted properties.
Inefficient allocation of housing units
Where resources are inefficiently allocated, scarcity occurs. Imagine a family decreasing in size as their kids move out. Under normal market conditions, this family would downsize to a smaller rental unit. But, as it becomes harder for these parents to find a new apartment in their area, they stay put in a rental that exceeds their needs making their larger apartment unavailable for a young growing family. Or, the example of tenants that can actually afford to purchase their own home but they do not since they do not want to give up their current rent controlled housing as it is significantly below market cost. This rental unit is now unavailable for someone that needs to rent because they cannot afford to buy.
New construction of rental units is discouraged
Unrestricted rent control discourages new construction of rental units as builders can no longer attract landlord buyers facing reduced income streams. Investors and builders have no incentive to invest capital in these rent controlled areas. And, this disincentive will extend further into other California cities if Prop 10 passes because there will be a loss of certainty statewide when the protections under Costa-Hawkins are removed. Developers in California would not know when a city decides to enact new rent control restrictions.
More housing is needed; not less
These impacts combine to decrease the supply of housing, which in turn, pushes prices up for those rental units that are available in a time when affordability and availability are at issue. In a vacuum, price controls sound enticing and simple. However, reactions to such controls produce unintended consequences that complicate this issue and cannot be ignored.
The best way to achieve lower rents is to encourage and enable more housing supply. Perhaps some short-term solutions are also required in conjunction with such long-term building incentive packages. Some have suggested that housing credits may also be a more direct short-term solution to this crisis. We do know based on past experiences that a patchwork of various city rent control laws is not the best solution for California’s housing crisis.
Navigating this confusing State/City rent control issue:
During the 1970s – Independent City Rent Control Laws enacted
1995 – State intervenes on these City Rent Control Laws with Costa-Hawkins
2018 – Prop 10 seeks to repeal Costa - Hawkins protections and return to patchwork of City Rent Control Laws that may impact the value of your home!
Vote NO on Prop 10