California's Rent Control Advocates Are About To Get What They Want, Good and Hard
Everywhere rent control is tried, the same things happen. Landlords exit the market. Developers stop building apartments. Supply drops significantly.
Tenants' rights groups are ecstatic that two major rent-control bills have sailed through the Assembly's Housing and Community Development Committee. Democratic supermajorities and Gov. Gavin Newsom's blessing may assure the bills will become law, thus offering the latest affirmation of H.L. Mencken's infamous quotation: "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."
"We know that millions of tenants are one rent increase away from not being able to afford food, healthcare or even becoming homeless," said Assemblyman David Chiu (D–San Francisco), author of one of the bills. He's certainly right, but his "easy" solution will only make good housing harder to find and far costlier over the long term. He's just pandering to voters angry about high rents.
But the housing crunch largely is the fault of the Legislature's slow-growth land-use policies enacted over two decades, and local governments that have given in to the selfish demands of homeowners who are tired of congestion (and don't want lower-income people living nearby in apartments). Instead of fixing the mess government created, lawmakers want to make private owners subsidize rents of their customers. It's morally wrong and doesn't work.
Rent control has long been tried in California (Santa Monica, San Francisco), New York City and Europe. In Stockholm, the waiting list for a rent-controlled apartment is nine-to-20 years. But go ahead and get your name on the list. The same thing happens everywhere. Landlords exit the market. Developers stop building apartments. People stay in apartments for decades, thus eliminating housing mobility. Supply drops significantly, driving up rents region-wide. Young people and new immigrants have to double-up in overcrowded dumps.
In San Francisco, where typical rents are above $3,000 a month, there are 30,000 vacant apartments. Who would forego such enticing profits to leave units to languish? Owners who know just-cause evictions and rent control mean they can never get rid of tenants, even bad ones. Likewise, landlords don't upgrade buildings or remodel because rent control kills margins. They'll get to that stove repair when they get to it. Wherever rent control is enacted, the housing stock falls into disrepair.
It's not tough to research the perverse incentives of price controls, but California lawmakers are more about posturing than deep thinking. Fortunately, the worst measure, Assembly Bill 36, is dead. That would have amended the Costa Hawkins Act to allow localities to impose extreme forms of rent control. Voters rejected something similar in November.
But the two active measures are troubling. Following the lead of Oregon's recently passed statewide rental regulations, A.B. 1481 prohibits landlords from removing tenants unless the state deems it to be a "just cause" (failure to pay rent, limited types of bad behavior, the owner's decision to sell or move into the property if the lease allows it). Meanwhile, A.B. 1482 caps annual rent increases at 5 percent a year plus increases in the past 12 months' Consumer Price Index.
The philosophical arguments against such controls have not resonated with lawmakers. But perhaps they can think about what such laws to do the incentives of most small landlords. I've owned rental properties, so I can understand how property owners will react to these onerous rules.
Margins can be small after paying for repairs, mortgage, taxes, insurance, property management, any utilities and government fees. One roof replacement at $10,000 can obliterate a year's profit in a flash. Many landlords will sell their properties to single-family buyers and put the money in a mutual fund. It doesn't take many of these decisions to reduce a city's housing supply.
That mutual fund never calls at 2 a.m. about a stopped toilet, nor does it trash the living room. That gets to another point. Unlike big apartment complexes (where tenants might have to live after landlords with a few well-kept rental houses exit the business), small landlords don't have staff to attend rental-board hearings. They want few hassles. If tenants gain more legal rights to contest evictions, then landlords will have to expend more time and expense dealing with newly emboldened tenants. They will take fewer chances (e.g., allowing pets or renting to low-FICO-score tenants).
I rarely raise rents on residents, preferring to bring prices to market rate after they voluntarily headed to greener pastures. But if the state is going to dictate rent levels and encourage people to become permanent renters, then no landlord could afford to be lackadaisical about rent hikes. They will respond by imposing the full, legally allowable boost every year. They will become hard-nosed about payments and collect every cent in late fees.
That's reality, but California's hard-pressed tenants are demanding that the government provide rent relief. This is a democracy, so they're likely to get what they want, for good or ill. But they can't claim they weren't warned when the results fall short of the promises.
This column was first published in the Orange County Register.
