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California Market_Proposition 10

Landlords in California felt a sense of relief when 59.56% of the voters defeated Proposition 10 at the November midterm election. Even though the vote is now over, the way California residents voted could provide us some insight.

Understanding Prop 10

Prop 10 would have repealed an existing state law called Costa-Hawkins. Under Costa-Hawkins, local governments cannot pass rent control laws on single-family homes or housing delivered after 1995. In addition, local governments cannot tell landlords what to charge new tenants for rent.

Supporters believed there shouldn’t be any one-size-fits-all policy on rent control. Every local government has its own issues to address, and the decision-making should fall at the local level.

Opponents believe local governments should not be able to regulate rents for any housing.  Nor should they regulate how much rent landlords can raise on new tenants. Although cities still have to make it possible for landlords to have a “fair share of return”, who will hold them accountable?

If Prop 10 Had Passed…

California Market_Proposition 10

California has high taxes and heavy regulations already. With little potential to raise rents, some landlords and developers would have just left the market. They might sell their properties to owner-occupiers, who would be taking properties off the rental market. Even worse, landlords can legally evict all the tenants in the property before selling.

This well-intentioned policy to protect tenants may actually backfire by discouraging future development. Here’s a relevant case study on how Measure JJJ, an affordable housing regulation, killed construction activity in LA in 2017.

Rental property values would decline because the potential rental revenue may not be enough to justify high prices. This could present a good opportunity for homeowners to buy because rental rates do not directly affect them. However, when more people own houses, there will be fewer available for others to rent.

The measure can be costly. Landlords will pay less in taxes in the short term due to lower property values and profits. In addition, local governments could spend from very little to tens of millions of dollars to enforce this proposition, just on administration alone.

Tenants who already have a place will pay less in rent.  But tenants who have not found a place to rent will struggle to find a place under an even smaller housing supply. In addition, since landlords cannot charge more for having nicer properties, they simply may not invest as much to improve their units.

California Market_Proposition 10Insights from the Election

Californians are desperate for more housing. They are willing to keep paying high rents in the short-run to have more housing supply in the long-run.

“The stunning margin of victory shows California voters clearly understood the negative impacts Prop 10 would have on the availability of affordable and middle-class housing in our state,” said Tom Bannon, CEO of the California Apartment Association.

What tenant advocates often don’t understand is that rent control is meant to be a short-term solution to an emergency, such as an economic recession or sudden housing crisis. However, once they were enacted in the past, rent control measures were often there to stay.

It is much easier to pass a rent control measure than to repeal one. The government would have to tell people who have been living in rent control units that their units will revert to market rate. That in the long run, there will be more housing for everyone.

As a result, developing in California has become less feasible over time. This is from a combination of rising costs for construction materials, a severe labor shortage, and strict development regulations at both city and state levels.

Rent control is meant to keep some housing affordable.  However it is not the solution to address an overall housing shortage. In addition, it is the government’s responsibility to find a solution to provide affordable housing.  The government should not be forcing the private sector to provide affordable housing without providing sufficiently attractive incentives.

Rather than rent control, which should be only used to address short-term housing issues, the state and local governments should consider ways to make developing housing cheaper and more feasible. There is no other long-term solution to mitigate a housing crisis other than to keep building.

 

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