Following decades of underbuilding, California faces an unprecedented housing crisis. Housing scarcity is driving up costs for nearly 6 million renter households and could severely hamper the state economy.
According to the Joint Center for Housing Studies, nearly 54 percent of renter households in California were cost-burdened, spending more than 30 percent of their income on rent in 2016.
While many point to rent control as a way to help these households, evidence from across the country demonstrates that rent control actually reduces the supply of existing rental housing and impedes new development. That compounds the mismatch between supply and demand and exacerbates our current crisis.
Rent control in California was first introduced in reaction to the rapid inflation of the 1970s. While the goal was to slow the rise in housing costs, highly restrictive rent control rules in several cities severely reduced property incomes. This led owners to convert rental properties to condominiums and more-profitable commercial uses, reducing the supply of existing rental housing. Meanwhile, new development stalled because developers could no longer justify the cost of construction.
In response to this untenable situation, Democratic Sen. Jim Costa and Republican Assemblyman Phil Hawkins co-sponsored a bipartisan compromise: The Costa-Hawkins Rental Housing Act.
Enacted in 1995, Costa-Hawkins established a statewide framework to allow local rent control while also providing protection for property owners from excessively restrictive policies. Specifically, the law exempted single-family homes, condominiums and newly built properties from rent control, and protected the right to adjust rents when tenants leave.
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Despite other development hurdles in the years following Costa-Hawkins, new construction increased significantly in several cities, including San Francisco, Berkeley and Santa Monica.
Today, however, this compromise is in jeopardy. Proposition 10 aims to repeal Costa-Hawkins and allow cities to adopt unlimited rent control on any type of property. Although it is not clear which rules each city would pursue, the uncertainty for the owners, investors, lenders and developers is likely to stall new apartment development once again.
Beyond the supply impact, extensive academic research highlights additional unintended negative consequences that could result from a return to more restrictive rent control policies.
Specifically, rent control reduces property values and decreases tax revenue for local governments. Rent control hurts mom-and-pop businesses, encourages property owners to neglect building maintenance, and can lead to deteriorating neighborhoods. Rent control is need-blind, so the benefits often accrue to high-income households. Moreover, if applied to single-family homes, rent control could eliminate rental housing for many families and decrease property values for California homeowners.
While some dismiss these concerns and argue that only large corporations would be hurt by rent control, the reality is that stock in publicly traded real estate investment trusts (REITs) is owned by public employee and teacher pension funds, non-profit endowments and the mutual funds that are likely in your 401(k) portfolio.
During this housing crisis, we need new ways for owners and developers to work with communities to encourage more housing development. Prop. 10 would instead return to the failed policies of the past and compound the root cause of the state’s housing crisis: the insufficient supply of housing.
Kenneth Rosen is chairman of the UC Berkeley Fisher Center for Real Estate and Urban Economics. He wrote this piece for Bay Area News Group.
