California Realtors Oppose Rent Control Initiative

WRITTEN BY California Realtors Oppose Rent Control Initiative

The California Association of Realtors® (CAR) has, to no one’s great surprise, adopted a position opposing a rent-control initiative (Proposition 10) that will appear on the upcoming California ballot. Here, we will discuss the current situation, the initiative, and one set of arguments opposing the initiative.

The initiative does this:

Repeals state law that currently restricts the scope of rent-control policies that cities and other local jurisdictions may impose. Allows policies that would limit the rental rates that residential-property owners may charge for new tenants, new construction, and single-family homes. In accordance with California law, provides that rent-control policies may not violate landlords’ right to a fair financial return on their rental property.

The act, then, is not one that would set detailed rent control policies. Rather, its major significance is that it would repeal the state’s current over-arching rent control legislation. That legislation is found in what is widely referred to as the Costa-Hawkins Act. The Act, so-named because it was sponsored by Senator Jim Costa (D) and Assemblyman Phil Hawkins (R), was adopted by the Legislature in 1995. It is embodied in California Civil Code §1954.5 – 1954.535.

The Costa-Hawkins Act did not prohibit all rent control in California. It prohibited most new rent control, but it allowed the continuation of rent control in jurisdictions that already had it. It did severely limit the rent control provisions that could be adopted by a local municipality. Probably the most notable provisions of the Costa-Hawkins act are these:

1. It prohibits “vacancy control”. Vacancy control would require that a vacated unit must remain at the same rental rates that applied to the previous occupant.
2. It prohibits rent control from applying to units whose certificate of occupancy was issued after Feb. 1, 1995.
3. It prohibits rent control from applying to single-family homes or condominiums.

If the proposed initiative passes, it will repeal the restrictions that are currently imposed by Costa-Hawkins. It is important to note that the Affordable Housing Act does not impose any new rental housing restrictions. Instead, it leaves it up to local jurisdictions to adopt, essentially, whatever rules they want, as long as they do not “violate landlords’ right to a fair financial return on their rental property.”

Currently, fifteen California cities have some kind of rent control ordinance. Prominent among them are Berkley, Oakland, San Francisco, Santa Monica, Los Angeles, and West Hollywood. They all operate within the limits of Costa-Hawkins, If Costa-Hawkins is repealed, those ordinances would still remain in place. However, they could then be changed. For example, vacancy control could be added.

Recently CAR made available a paper on the topic written by Kenneth Rosen and published by the U.C. Berkeley Fisher Center for Real Estate & Urban Economics. The title of the paper is The Case for Preserving Costa-Hawkins: Three Ways Rent Control Reduces the Supply of Rental Housing. We’ll endeavor to summarize it here.

Rosen’s paper argues that “…rent control policies, which are often touted as an affordability solution, exacerbate the problem by significantly reducing the supply of rental housing, even as demand continues to rise.” Specifically, he cites three ways in which rent control ordinances have this effect: “1) Rent control incentivizes property owners to convert rental units to other uses, such as for-sale housing units or non-residential buildings. 2) Rent control reduces the effective supply of available rental units through an inefficient allocation of housing, and 3) Rent control limits the creation of new rental supply by discouraging development activity, especially without guaranteed exemptions for new properties and assurances that property owners can adjust rents to market level upon tenant vacancies.”

1. Rental Conversions Shrink the Number of Available Rental Units

In 1994 San Francisco extended its rent control to include “smaller multifamily buildings with four units or less. In response, property owners converted rental units to single family housing, condominiums or renovated properties into new offers not subject rent control.” A Stanford study found that nearly 10% of the properties newly covered by the updated ordinance were redeveloped [to non-rental uses] during the period from 1994 through 2016. Studies from Boston and New York city showed similar results. In Santa Monica, a total of 3,042 units were withdrawn from the rental market from 1986 through 2017. During this time only 1,094 of these units were replaced with new apartment units.

2. Insufficient Housing Allocation Increases Scarcity

“In addition to conversion, rent control creates unintended consequences that further reduce the supply of rental units through an inefficient allocation of housing, especially over long periods of time. In an environment of scarcity, it is difficult for residents to find new housing and many existing tenants may feel stuck in their units, unable to move or downsize as their housing needs change along with their stage in life.” Studies in both New York City and San Francisco confirmed this with 25% reductions in the number of renters living in rent-controlled units over a ten-year period.

3. Unrestricted Rent Control Impedes New Construction

“As rent control actively shrinks the rental housing supply, it is critical for developers to add more units through construction activity. However, if rent control were expanded to include newly constructed properties, or even applied to newer properties on a rolling bases based on the building age, such as after 15 or 20 years, these limitations on apartment rents, or on the pace of rent increases, could significantly impact the feasibility of many development projects. Importantly, developers do not build apartment units in a vacuum…” As one example, Rosen cites an Ontario, Canada study that showed that in a four-year period preceding rent control, “rental starts averaged more than 36,800 units. In contrast, rental starts dwindled to an average of approximately 14,500 units during the five years that followed.”

So, in a few words what might we conclude from all this? It’s pretty simple, really. If you want an adequate supply of rental housing, stay away from rent control.