The False Hope of Rent Control – September 12, 2018
In 2015, over half of all renters in CA were considered cost-burdened (that is, their housing costs take more than 30 percent of their salaries) and nearly 30 percent are severely cost burdened, spending half or more of their income on housing, according to analysis by the California Budget and Policy Center. Of cost-burdened renters, more than two-thirds are people of color. In L.A., almost one-third of renting households face severe cost burdens, paying more than 50 percent of their take-home pay for housing. These costs continue to limit resident’s ability to spend on other goods and services as well as save for a down payment, retirement or children’s college.
One solution to this challenge – rent control, which impose limits on rent increases during the duration of a tenant’s stay – has been gaining momentum, but as history has shown us before, it is a short-tern fix with long-term consequences. Rent control grew in popularity in major cities throughout the United States during the 1970s, when inflation was high. But in most states, including CA, the decision about whether to impose rent control has been decided by states legislatures, which then preempt cities from passing their own rent control measures.
Throughout the past 25 years tenant activists in CA have been pushing CA’s legislators, without success, to the repeal a state law – Costa-Hawkins – that forbids rent control from being applied to new housing units. The Costa-Hawkins Rental Housing Act, was originally passed in 1995 and it prevents cities from enacting rent limits on any structure built after 1995, bans vacancy controls, and excludes single-family homes from rent control ordinances. It has been blamed for many ills associated with CA’s current housing crisis, including rising rents, evictions, displacement, and even homelessness.
These activists have now found a new vehicle – Proposition 10 on the November 2018 ballot – to repeal state-wide rent control limits and growing political support at the state and local levels.
In 2016, Mountain View and Richmond became the first CA cities to pass new local rent control ordinances in decades, both limiting how much landlords could increase rents on buildings constructed before 1995, the years not covered by the state ban. A 2017 poll by the Institute of Governmental Studies at the University of California, Berkeley, found that 60 percent of likely voters support rent control. And as the midterm elections approach, nearly a dozen CA cities either have rent control measures on their ballots, or local activists are trying to get them on the ballots. The CA democratic party and L.A. Mayor Eric Garcetti have endorsed Proposition 10.
Just yesterday, four out of the five L.A. Board of Supervisors voted for a set of new rent control measures for L.A. County’s unincorporated areas. The measure will cap rent increases at 3 percent per year and require that landlords have a legitimate reason for evictions. Apartments first occupied after 1995, condominiums and single-family homes would be exempt, in accordance with the state’s Costa-Hawkins Rental Housing Act and the ordinance would require just cause for evictions and include “due process” to ensure property owners are entitled to a “fair and reasonable” return. The Supervisors backed up their support with research from the CA Housing Partnership Corp., a nonprofit group that advocates for more affordable housing. They highlighted that L.A. County’s inflation-adjusted median rent increased 32 percent from 2000 to 2015, while median renter income decreased 3 percent. Supervisor Kuehl, the lead author and her staff estimates that the ordinance would apply to approximately 57,000 households, or about 200,000 people.
For those who do not study history, they are doomed to repeat it. Since the 1970’s push for rent control, a large majority of researchers have found that over a long period of time, rent control measures actually make housing less affordable overall, which has led a majority of states to ban the practice. I have compiled a list of research to highlight some facts around this issue to better inform – see below.
Economic Literature on Rent Control
- Key Point: To help California’s low-income families secure housing, elected officials should focus more on encouraging private residential development and less on existing government programs that subsidize construction or impose rent control.
- Focus: The LAO considered the impacts of expanding rent control in two ways — applying the policy to more properties and barring landlords from resetting rents at market rates when tenancies turn over.
- Unintended Consequences: Neither of these changes would increase the supply of housing and, in fact, likely would discourage new construction. Households looking to move to California or within California would therefore continue to face stiff competition for limited housing, making it difficult for them to secure housing that they can afford. Requiring landlords to charge new tenants below–market rents would not eliminate this competition. In turn by depressing rents, rent control policies reduce the income received by owners of rental housing. In response, property owners may attempt to cut back their operating costs by forgoing maintenance and repairs. Over time, this can result in a decline in the overall quality of a community’s housing stock. Additionally, households may be discouraged from moving from their existing unit to market–rate housing even when it may otherwise benefit them — for example, if the market–rate housing would be closer to a new job. This lock–in effect can cause households to stay longer in a particular location than is otherwise optimal for them. Furthermore, most low–income Californians receive little or no assistance.
Economic Study of Rent Stabilization Ordinance (RSO) and the Los Angeles Housing Market – August 1, 2009; Commissioned by City of L.A.’s Housing Department and Authored by the Economic Roundtable, Daniel Flaming Patrick Burns, Michael Matsunaga, Mirna Ponce, Ken Baar, Raphael Bostic and Malcom Bennett – August 1, 2009
- Key Point: RSO does not result in affordable rents for most tenants; it only slows the rate of rent increases for tenants who remain in place during periods of rapid housing inflation and benefits renters who stay more than five years in a unit (average length in L.A.?) All RSO tenants pay market rates when they move into their units and half move out within five years, meaning that many tenants receive little rent relief from the RSO.
- Current Market Reality: The purpose of the RSO is to protect tenants from excessive rent increases, while allowing owners a reasonable return on their investments and this balance is difficult to achieve in a rental market with both long-term decline in renter incomes and inflation in housing prices.
- Data Points: Surveys of 4,859 renters and 2,083 rental property owners found that a majority of both renters and owners agree that it is important to provide housing families can afford. Survey responses about rent increases showed that 30 percent of renters received smaller rent increases than could have been made under the Rent Stabilization Ordinance, but 27 percent of renters had rent increases that exceeded the allowable ceiling under the ordinance.
Rent Control and Housing Investment: Evidence from Deregulation in Cambridge, Massachusetts – Authored by Henry O. Pollakowski Housing Economist, MIT Center for Real Estate Editor, Journal of Housing Economics – May 2003
- Key Point: What happens when policymakers deregulate? When policymakers in Cambridge, MA implemented rent deregulation in 1994 housing investment greatly increased by approximately 20 percent over what would have been the case if rent control had been maintained. Investment increases occurred across a wide variety of settings; both affluent and modest income neighborhoods experienced an “investment boom”. These investment gains lead to neighborhood “spillover” effects as owners of property proximate to buildings experiencing new investment feel more comfortable making additional investments themselves.
- Question: What is the opportunity lost in the next three to five years if the rent ordinance stands?
An Analysis of the Rent Control Ordinances in California – January 2016 – Commissioned by the CA Apartment Association & Authored by Beacon Economics – January 2016
- Key Points: Research did not find strong evidence that rent control helps to reduce the number of low-income households spending 30 percent or more of their income on rent. Rent control can have a negative impact on low-income households not living in rent-controlled units through higher growth in citywide median rents. Rent control ordinances are associated with lower growth rates in the supply of rental housing and with higher rental price growth in the broader market. Rents are too high because multi-family housing and the state’s housing stock have failed to expand commensurately with the ever-growing population. The solution to this affordability problem is to expand the apartment stock in these cities, not introduce price ceilings.
Rent control in Los Angeles, The RAND Institute, by C. Peter Rydell, Michael Murray, 1987
- Key Point: It presents an analysis of Los Angeles’ rent controls and provides a quantitative forecast of the housing market effects of an actual rent control ordinance.
- Takeaway: The authors indicate that two of their findings should apply to other communities with rent control:
- First, the bulk of the transfers from landlords to tenants achieved by a rent control law are realized early in the law’s life, but the bulk of the economic cost of the law–the housing stock lost through inefficient workings of the market mechanism under rent control–is incurred later in the law’s life.
- Second, legal provisions that ameliorate rent control’s deleterious effect on landlords’ incentives to maintain their dwellings reduce the benefits of rent control to tenants.
The Politics
The California Apartments Association (CAA), a group that represents landlords, developers, property managers, and investors, has raised $22 million so far to fight Proposition 10, as well as local rent control measures throughout the state. The Los Angeles Times reports that CAA, which is leading the fight to keep California’s statewide rent control laws in place, is willing and able to pour more than $60 million into the fight.
Meanwhile the Yes on 10 campaign has raised only $2 million. But CAA isn’t the only group with deep pockets. So far, most of the funding for the repeal effort has come from the AIDS Healthcare Foundation. Its controversial leader, Michael Weinstein has poured millions into other initiative fights in the past.
As to solutions to the housing crisis, there are more than enough available and I will highlight some in progress being made and opportunities in up coming weeklies. But most of all these things require political will. Below are some examples of progress and the need for political will.
- At the state level the CA legislature has floated a number of proposals in recent years to help assuage the state’s housing affordability crisis, including a radical plan to up zone major transit corridors that failed in committee in January. Other housing related measures have found their way to the ballot – Proposition 1 would give the state $4 billion in bond money to provide grants and support towards building affordable housing for veterans, and Proposition 2 would provide the state $2 billion in bond money for homelessness prevention housing.
- The non-residential space in L.A. County is not being used to its fullest potential. In 2015, a report in the Journal of the American Planning Association estimated that 14 percent of incorporated land in LA County was used for parking. Overall, the County contains 18.6 million parking spots, or 3.3 parking spaces per car. The City of L.A. is a significant component of the County and is amidst reevaluating its transportation infrastructure and management of population density. Therefore, it is an appropriate moment to rethink the stewardship of both LA’s commercial and residential spaces. The City owns multiple parcels of land within its jurisdiction zoned for residential and commercial development, some of which are either underutilized within current zoning parameters or constrained by various zoning restrictions.
- Addendum (Written by Eric Freedman)
- I am going to outline very succinctly how Proposition 10 will actually hurt and NOT help ALL citizens of California.
- When any property is sold, the new owner is assessed a tax rate based on a mil rate of that purchase price. For example, if a property is sold for $100, on average, the annual property tax will be $1.25, or a mil rate of 1.25%. As real estate increases in value, properties are bought for more and more money which increases funds to the County of Los Angeles. In fact, property taxes make up 22% of the County’s annual revenue stream.
- These funds are then used to fund all programs through the County. In fact, of the City of Los Angeles 2019 Budget, Property Tax is the number 1 source of revenue, making up 31.69% of total Revenue.
- If the Proposition is passed, one outcome is that property owners might be not be able to increase the rental rate when a current tenant moves out; ultimately, handicapping a free market economy. Based on valuation of sales, this would mean that there would be no manner in which to raise the income to the property thus causing a loss of value across all apartments, homes and condominiums. This would cause housing to become a fixed bond and values to decrease.
- This is important because in 1978, California voters passed Proposition 8, a constitutional amendment that allows a temporary reduction in assessed value when a property suffers a “decline-in-value.”)
- By applying for decline-in-value, which cannot be denied, the County would need to decrease the property tax roll and thus revenue to all things that run our County and City. This includes Police, Fire, Public Health to name a few.
- I analyzed data points directly from the County Assessor’s Annual Reports from the last real estate correction in 2009 through 2012, to best estimate the loss of revenue.Using these years as a baseline, and using the 2018 County Budget of Revenue versus the 2018 City of Los Angeles Revenue from Property Taxes, the Percentage of County Funding to the City is projected to be 29.28% of its revenue.Given the value decrease in 2009 due to decline-in-value approvals was $44.458 Billion, and applying the average mil rate of 1.25%, this would create a lost revenue in the first year of the last downturn of $555M to the county and subsequently $162.7M lost revenue to the City. Doing this for 2009 through 2013 creates an accumulated loss to the City of Los Angeles of $307,816,219. Remember that this only for the City of Los Angeles let alone what this might mean across the entire County, let alone State. Tracking the Decline-in-Value assessments from 1990 to 2018 and comparing to a line graph outlining the nationwide housing market, these values mirror the timeline of these housing corrections though delayed by 12 months. This makes sense, as recession would need to first occur before applications for tax assistance would be applied.
- The numbers prove the theory.
- By Proposition 10 passing; we will cut off our nose to spite our face and tracking historical timing put the state into another real estate downturn.