California to Vote on Rent Control Overhaul

Plenty of consequential races are on the California ballot this year, but voters will also consider a fundamental change to the state’s longstanding rent control policy. The measure that could set that change in motion is Proposition 33, designed to expand local governments’ authority to enact rent control.

Prop 33 is the subject of intense interest. By late last month, it had attracted $174 million in contributions, according to the CalMatters news site. That far outpaces the nine other propositions on the state ballot. Yet its chances of success are uncertain. By late last month, polling showed that only 42 percent of likely voters were in favor, CalMatters reported.

At issue is the Costa-Hawkins Rental Housing Act of 1995, the state law which prevents cities and counties from limiting the initial rental rate residential property owners may charge new residents in all kinds of housing. It also prevents them from limiting rent increases for existing tenants in residential properties first occupied after Feb. 1, 1995, single-family homes and condominiums. 

The proposition’s official support statement sums up its key argument with the slogan, “The rent is too damn high!” It goes on to state that 1 million people have left the Golden State, that the state’s 17 million renters need relief and that rent control has worked in the U.S. for more than a century.

Opposing views

About 30 percent of California apartments were built in 1995 or later and could be subject to additional rent controls, according to National Apartment Association research, reports Zach Quimby, the organization’s director of public policy.

“Our members in the state are very concerned this would open up the floodgates for bad local policy,” said Nicole Upano, NAA’s assistant vice president of housing policy and regulatory affairs. “Rent control in any form has perilous consequences, not only for rental communities but for renters.”

Upano pointed out that Costa-Hawkins limits the ability of California’s local jurisdictions to adopt rent control policies. “It exempts single-family homes, condominiums and post-1995 rental housing. And then it also allows for vacancy decontrol, meaning housing providers can reset rental rates to market rates when a renter moves out.”

Passage of Prop 33 would “absolutely depress” new apartment construction in California, and push investment elsewhere, Upano said. She added that Prop 33’s passage would not only affect the amount of new-construction apartment communities and units but impact the quality of existing housing as well.

Rent controls constrain how much housing providers can raise rent, leading to less certainty about the rental income they will generate to pay employees, fund their property taxes, maintain the housing in good condition and give back to the local communities in which they operate, she said.

Ratcheting down

Already, more than 30 California cities have some form of rent control in place above what is allowed by state law. “So there’s even less certainty for housing providers,” she noted. “That initial cap is never the end of the story. There’s always a ratcheting down of allowed rental rates.”

She added that whenever rent control is permitted in a locality, housing providers must get more than the allowable rent increase in order to fund improvements. In addition to the cap, the heavy regulation of rental rates creates a rent board that must approve increases before multifamily housing providers can proceed with needed capital improvements.

“It creates more uncertainty in property management and operations,” Upano said. “That would otherwise not happen in non-rent control situations.”

Analysis of measure

The Legislative Analyst’s Office, the California Legislature’s nonpartisan policy adviser, reported that renters in California generally pay about 50 percent more for housing than other states’ renters. In some California regions, they pay more than twice the national average.

Some local California governments, notably Los Angeles, San Francisco and San Jose, have enacted laws limiting how much landlords can boost rents from year to year. About one quarter of Californians live in communities with local rent control. In addition to local laws, a state law in force until 2030 prohibits owners from hiking a resident’s rent by more than 5 percent above the rate of inflation, up to a total of 10 percent in one year. The Costa-Hawkins Act stipulates that rent control laws can’t tell owners what they can charge a new renter on move-in; they can only limit increases for existing renters.

In its analysis, LAO states that Prop 33 would exert effects on renters, landlords and rental properties. Some renters residing in properties covered by rent control would spend less on rent, while some living in properties not covered would spend more.

Further, some renters would move less often. Fewer homes would be available for rent, because some landlords would sell their properties to new owners who would live in the properties rather than renting them. And rental housing values would decline because potential owners wouldn’t pay as much for these properties.

The LAO also concluded that a decline in property values would reduce the amount of property taxes landlords would pay, cutting revenues for cities, counties, special taxing districts and schools.

In time, the reductions would total tens of millions of dollars or more annually, amounting to less than one-half of one percent of all property tax revenue. In addition, expanded local rent control would increase local governments’ enforcement costs, which would likely be paid by fees levied on landlords.

Unforeseen consequences

Graham Hill, a Los Angeles investor and real estate consultant for Find Hokkaido Agents, reports the unforeseen costs to property owners, such as spiraling property insurance rates in the state, are among the reasons he opposes Prop 33.

“Generally, many well-meaning social policies have unintended consequences,” he said. “Many of the classic problems with rent control are well known. For those who care about the availability of rental units in a community, rent control tends to reduce rental units, as property owners have less control and lower returns under rent control.”

When rent control regulations are inflicted on properties, owners are incentivized to sell these units and take their money to other markets, Hill continued. “Incoming buyers are also unlikely to use the housing as a rental for the same reasons. When they do, rent goes up due to increases in property tax and other costs.”

Multifamily housing investors are driven by returns on capital. Rental boards are focused on capping the upside of property owners but are rarely interested in the rising costs being paid by property owners.

“Property insurance in California is a good example,” Hill added. “A community may feel OK with limiting the income on a rental unit, but don’t put limits on the costs landlords pay to maintain their units, which are rising beyond rent increases each year.”

Often, initiatives such as Prop 33 are supported by voters who don’t fully understand the market and in turn, vote for ideas that have serious unintended and unforeseen consequences and thoughts, Hill remarked.

“We should not expect the voting public to understand rental models, but we shouldn’t invite the public to govern these markets either,” he said.