In 1946 San Francisco politicians were mulling solutions to the city's housing shortage, born of a booming population and a failure to construct more units during World War II.
Rent control, already deployed liberally during the war, was one proposal for bringing prices down. But it would be destructive and counterproductive, two young free market economists argued.
"Rent ceilings do nothing to alleviate this [housing] shortage," Milton Friedman and George Stigler wrote in a pamphlet for the Foundation for Economic Education. "Indeed, they are more likely to perpetuate it: the implications of rent ceilings for new construction are ominous."
Seventy years on from that warning, California is once again tossing around the idea of using rent control to deal with a severe housing shortage.
Tomorrow, the state's voters will be asked to consider Prop. 10. This ballot initiative would repeal the Costa-Hawkins Rental Housing Act, the state's law limiting localities' abilities to impose price restrictions on new rental units.
Since qualifying for the ballot in June, Prop. 10 has attracted endorsements from the state's Democratic Party, from Sen. Bernie Sanders (I–Vt.), from Rep. Maxine Waters (D–Calif.), and from a string of newspapers, including the Los Angeles Times.
The AIDS Healthcare Foundation—which has recently gotten into the affordable housing development game, and was instrumental in getting Prop. 10 on the ballot—has given $23 million to support the initiative.
Even some members of the state's fiercely pro-housing development YIMBY (Yes In My Backyard) faction—usually on the right side of housing policy disputes—have endorsed Prop. 10.
Polls show that the measure is likely to fail. An October survey from the Public Policy Institute of California, a nonpartisan think tank, show some 60 percent of voters opposed to Prop. 10. Yet when Californians are asked about rent control in general, most are enthusiastically in favor of it. That same survey found 52 percent of all likely voters—including 69 percent of Democrats and 34 percent of Republicans—favor rent control.
That kind of support among both elites and the public suggests that even if Prop. 10 goes down in flames tomorrow, the state's destructive flirtation with rent control will not disappear. It's therefore important that we understand what the initiative would do, and what any future expansion of rent control would mean for the state.
What is Costa-Hawkins?
Beginning in the late 1970s, a number of California cities, mostly in Los Angeles County and the Bay Area, passed a particular form of rent control called rent stabilization ordinances (RSOs). These capped the rate at which landlords could raise rents on their tenants each year, usually in the 7 to 10 percent range.
Fearful that this would retard housing constriction, the state legislature passed the Costa-Hawkins Rental Housing Act in 1995. This bill barred localities imposing rent control on units built after 1995, and on single-family homes and condominiums. It also reserved for landlords the right to increase rents on a rent-controlled unit after the original tenant moves out.
But Costa-Hawkins also allowed cities to maintain price restrictions on rental units built before their own RSOs had been passed. It also allowed cities to impose rent control on developments that receive public subsidies. For a time, Costa-Hawkins was also assumed to allow "inclusionary zoning" policies, which require landlords to rent a fixed percentage of units in new developments to lower-income tenants at below-market rates. (A 2009 court decision ruled that this too was outlawed by Costa-Hawkins, but a 2017 housing bill reinstated the practice.)
The upshot of all these exemptions is that even with Costa-Hawkins, much of the rental housing in California's biggest cities is rent-controlled. In Los Angeles, some 638,000 units are covered by the city's RSO. In San Francisco, 60 percent of renters (and about 40 percent of the total population) live in rent-controlled apartments.
Lesson from past rent control
Having so much housing stock subject to rent control gives us a glimpse into what California would look like under Prop. 10.
A detailed 2018 study by three Stanford economists, published by the National Bureau of Economic Research, examines the effects of a 1994 expansion of rent control in San Francisco.
It finds that tenants living in units subject to the rent control expansion were far more likely to stay in their homes than those living in non-rent-controlled units, and that the new price restrictions saved them anywhere from $2,300 to $6,600.
But these benefits came at a heavy price. That same study says that the expansion of rent control resulted in a 15 percent decrease in the supply of rental housing, largely thanks to landlords converting their rent-controlled units into pricier condominiums. City-wide, rents went up by 5.1 percent.
"On net, incumbent SF residents appear to come out ahead, but this is at the great expense of welfare losses from future inhabitants," the authors conclude. They add that "rent control has actually fueled the gentrification of San Francisco, the exact opposite of the policy's intended goal."
A broader survey of the economic literature on rent control, published by the Brookings Institution, came to much the same conclusion.
"Rent control appears to help affordability in the short run for current tenants," writes Rebecca Diamond, one of the authors of the San Francisco study, "but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood."
Housing death spiral?
Favoring the short-term interests of incumbent parties at the expense of new market entrants is the defining feature of California housing policy. It should come as no surprise, then, that so many have embraced Prop. 10 as a way of getting current tenants some relief right here, right now.
That is the explicit case made in a September 2018 paper from Berkeley's Hass Institute, which—in addition to downplaying the risks of deterring new construction—argues that California's policymakers should make "an intentional choice to center the needs of existing renters in defining the policy objective at hand."
"Focusing entirely on other housing policy goals means ignoring the urgent and immediate needs of millions of overburdened renters across the state," write the study's authors.
The Los Angeles Times editorial board made much the same argument in its endorsement of Prop. 10.
While acknowledging that "the root of California's housing crisis is the lack of supply," the Times says that California's cities "need the ability to stop the bleeding. Proposition 10 would give them an additional option for helping those at risk of losing their homes."
Yet if the consensus opinion among economists is correct, then any gains from rent control will be temporary at best and will flow to a minority of renters, while the loss of new housing construction will only exacerbate the state's ongoing supply crunch. As the headline of one OC Register op-ed put it, "Proposition 10 just throws gasoline on the housing crisis fire."
Indeed, if cities were let off the leash to impose rent control on new construction, it's not too hard to imagine something like a housing death spiral—where the imposition of rent control causes rental housing to become scarcer, while any construction takes the form of expensive single-family homes and condominiums, leading to less affordability and calls for even more rent control.
The ever-prescient Friedman and Stigler warned of this very phenomenon:
"As long as the shortage created by rent ceilings remains, there will be a clamor for continued rent controls. This is perhaps the strongest indictment of ceilings on rents. They, and the accompanying shortage of dwellings to rent, perpetuate themselves, the progeny are even less attractive than the parents."
Short-term fixes for long-term problems
The passage of Prop. 10 would have no immediate effect. In the absence of Costa-Hawkins, cities would still have to write and pass their own rent control policies.
Plenty are already chomping at the bit to do just that.
In San Francisco, Supervisor Hillary Ronen has already introduced legislation that would prevent landlords from raising rents on family members of deceased tenants in rent-controlled housing. (Costa-Hawkins currently protects the right of landlords to raise rents after the original lessee dies or moves.)
Ronen's colleague, Supervisor Aaron Peskin, says that he'd like to see rent controls applied to rental housing built before 1998. (Costa-Hawkins allows only pre-1979 housing in San Francisco to be rent-controlled.)
Down in Los Angeles, Mayor Eric Garcetti—an enthusiastic Prop. 10 supporter—says he'd love to expand rent control if the measure passes.
If the polling bears out, the politicians licking their lips at the idea of price controls on housing will be continue to have their hands tied.
That would be a blessing. California is just now beginning to reckon with its high cost of housing by proposing—and occasionally passing—sensible policies.
A state bill from 2017, SB 35, streamlines the approval process for certain construction projects. It is starting to be employed to get controversial housing developments past obstructionist city councils and anti-development activists.
The 2018 legislative session saw another serious, if ultimately unsuccessful, attempt at reform in the form of SB 827, a bill that would have allowed more housing construction near transit stops.
At the local level, YIMBY candidates are starting to win elections and set policy. This includes San Francisco Mayor London Breed, who has levelled unabashed criticism at her city's byzantine approval process for new housing construction.
During the state's gubernatorial primary, the crop of Democratic contenders tried to one-up each other with extravagant promises of how many units will be built under their tenure.
These are all baby steps given the size of California's housing shortage, but they are progress nonetheless.
But if cities get a free hand to impose rent control, these halting, difficult reforms may be ditched in favor of a destructive quick fix that will only perpetuate the state's housing woes.