California Governor Gavin Newsom Throws His Support Behind Rent Control Bill
The Golden State toys with bad fixes to its worsening housing affordability problems.
Efforts to expand rent control in California got a big shot in the arm this week when Democratic Gov. Gavin Newsom announced his support for capping annual rent increases.
"I'm hopeful…that I will get on my desk in the very near term a rent cap bill because it is long overdue in the state of California," Newsom said, according to the Los Angeles Times.
The governor's endorsement should not come as a surprise. In 2018, Newsom threw his support behind a legislative rent control effort in the event that a rent control initiative on the ballot that year failed. (It did.)
Newsom's recent comments are a boost for AB 1482, sponsored by Assemblyman David Chiu (D–San Francisco). Chiu's bill would cap annual rent increases at 7 percent plus inflation, or 10 percent, whichever is lower. These rent caps would not apply to buildings less than 10 years old; single-family homes owned by small, non-corporate landlords; college dormitories; or to existing rent-controlled units with stricter rent caps.
The bill also prevents landlords, with some exceptions, from evicting tenants without "just cause"—meaning they'll have to show a government-approved reason for giving the tenant the boot. Landlords will also have to pay tenants relocation assistance equal to one month's rent if they initiate a no-fault, just cause eviction, a category that includes taking a unit off the rental market or substantially renovating it.
The legislation would expire in 2023.
These provisions constitute a significant watering down of the original proposal introduced by Chiu earlier this year, which would have capped rent increases at 5 percent plus inflation for 10 years.
So far Chiu's bill has passed the more left-leaning State Assembly, as well as several Senate committees. Newsom's rhetorical support might help it get over the finish line.
Rent control is typically derided by economists as a counterproductive way of ensuring affordability. Price controls, they argue, cap the returns to housing development, deterring investment in new construction or encouraging landlords to take existing properties off the market.
There's also evidence the policy encourages landlords to defer maintenance of their properties, leading to deteriorating housing stock, or 'shabbification'.
A recent policy analysis from the University of California Berkeley's Terner Center suggests that the relatively high rent caps included in the bill, and its exemption of new construction, would go a long way toward lessening its impact on new housing supply.
Outside of very hot markets, the Terner Center analysis notes, most California renters are not seeing rent increases higher than what Chiu's bill would allow.
But while some of the amendments to AB 1482 might mitigate some of the risks associated with rent control, it doesn't eliminate them.
A Standford University study of a 1994 rent control expansion in San Francisco found that landlords responded by taking their properties off the market, leading to a 15 percent reduction in rental housing and an increase in rents citywide.
When Oregon passed a similar 7 percent plus inflation rent cap bill, Mike Wilkerson, of economics consulting firm ECONorthwest, told Reason that the relatively generous price ceiling could still dissuade a majority of developers who build housing projects with the eye of selling them off to investors.
The three-year sunset provision of Chiu's bill might alleviate some of these concerns. That expiration date, however, also generates a lot of uncertainty about what kind of regulatory environment developers and investors are putting their money into.
The Terner Center analysis notes that even with a rent cap, plenty of units across the state are still unaffordable for most renters.
"Even capped, the current market rent of $3,727 for a two-bedroom in Oakland is unaffordable for all but the wealthiest households," reads their analysis. "A broader set of policies that target production and preservation—from streamlining the permitting and approval process for new construction to curbing construction costs to improving and expanding financing mechanisms—are also critical to ensure that the crisis doesn't continue to worsen."
The driving force behind California's high housing costs is its low rates of housing production. That, in turn, is largely a product of land use regulations that limit where housing can be built, charge high fees to developers of new housing, and require developers to navigate a cumbersome approval process that can delay the delivery of projects by years.
Rent control does nothing to fix any of this. Even the watered-down bill endorsed by Newsom could make the problem worse.