The Year's Most Important Housing Vote

Proposition 33 would repeal all of California's state-level limits on rent control. It's passage could prove to be a disaster for housing supply in the Golden State.

Happy Tuesday and welcome to another edition of Rent Free. Election day is fast approaching, and with it a decision that could have major implications for the country's housing shortage.

I don't mean the presidential election, in which I don't think there's an obvious "pro-housing" major party candidate. Harris and Trump are both offering a mixed bag of policies and rhetoric that will build housing with one hand and block it with the other.

Rather, I'm referring to California's Proposition 33, which gives voters the option of repealing all state-level limitations on rent control. The implications of a "yes" vote would be dire for new housing supply.

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The End of Rent Control Control?

Next Tuesday, California voters will be asked for the third time in six years whether they want to give local governments a freer hand in adopting rent control.

"The state may not limit the right of any city, county, or city and county to maintain, enact or expand residential rent control," reads the succinct but potentially far-reaching text of Proposition 33.

The initiative's main supporter is the AIDS Healthcare Foundation (AHF), a nonprofit operator of discount pharmacies for AIDS patients that has become the state's most profligate rent control supporter.

Twice now, in 2018 and 2020, AHF has spent tens of millions of dollars running initiatives that pare back state-level rent control limits on local rent control policies. Both times, roughly 60 percent of voters rejected them.

By repealing all existing state-level limits on rent control and forbidding the state Legislature from adopting future restrictions, Prop. 33 is perhaps AHF's most radical measure to date.

The third time might be the charm.

The initiative garnered the support of a slim majority of voters in one poll from late August. Another October poll found it had the backing of a slim 37 percent plurality of voters (with 34 percent opposed and 27 percent undecided.)

Prop. 33 has attracted predictable opposition from business and real estate groups, who have spent a combined $112 million opposing the measure. A healthy cadre of the state's Yes In My Backyard (YIMBY) academics and activists, some of whom have endorsed more modest rent control policies, have also come out against it.

The most recent poll from the Public Policy Institute of California shows support for Prop. 33 falling below a majority.

But a "yes" or "no" vote is well within the realm of possibility. It's important then to understand what Prop. 33 will do, and the dire implications it would have for housing production in the Golden State.

Background

To say that California's rent control regulations are a confusing patchwork is an understatement.

Some 30 municipalities within the state (including Los Angeles, San Francisco, and San Jose) have rent stabilization ordinances dating back to the 1970s that limit rent hikes to some fraction of inflation.

In 1995, the Legislature passed the Costa-Hawkins Rental Housing Act that placed several restrictions on localities' rent control powers.

Under Costa-Hawkins, cities with existing rent stabilization ordinances were forbidden from expanding them to cover newer housing. Cities without rent control could still adopt it but only on units built before 1995.

Costa-Hawkins also established statewide "vacancy decontrol," meaning landlords could raise the rent as much as they wanted at rent-controlled properties once an existing tenant moved out.

In 2019, the California Legislature approved a statewide rent control law that limits annual rent hikes at multifamily buildings built within the last 15 years to the lesser of 10 percent or 5 percent plus annual inflation.

Backers of the 2019 law argued it struck the right balance between guaranteeing stability for existing tenants while preserving developers' incentive to build.

But the state's more vociferous rent control advocates, including AHF, weren't mollified. They argued the 2019 law is much too weak and that Costa-Hawkins does too much to tie the hands of local governments.

Enter Prop. 33, which would repeal Costa-Hawkins in its entirety and give local governments free rein to adopt whatever rent control policies they want.

Damaging Supply

Even within the confines of Costa-Hawkins, there's evidence that California's rent control policies have reduced the supply of rental housing.

A landmark 2019 study on rent control in San Francisco found that the city's rent stabilization ordinance encouraged landlords to convert rental units into owner-occupied condominiums (which could be sold at any price).

Abolishing Costa-Hawkins' guardrails will almost certainly lead to an even greater reduction in the supply of rental housing.

By prohibiting localities from rent-controlling newer properties, the law helps ensure that builders have an incentive to construct new units. Whenever localities are allowed to control rents on new construction, developers have responded by building a lot less.

Witness the example of St. Paul. In 2021, voters approved a 3-percent cap on annual rent increases with no exception for new construction. As a result, developers canceled existing project proposals and fled the city.

Costa-Hawkins' vacancy decontrol guarantee prevents situations like we see in New York City, where more and more units are falling into vacancy and disrepair because landlords can't raise rents to cover the costs of renovating and turning over units vacated by long-term tenants.

Should California localities be allowed to control rents on vacant units, it's likely we will see an increasing number of rental units falling off the market completely.

Chomping at the Bit

Costa-Hawkins always allowed cities to adopt new rent control policies (within the law's limitations).

University of California, Los Angeles housing policy researcher Shane Phillips argued in a recent essay (that was otherwise highly critical of Prop. 33) that "if your city doesn't have rent control today, then it's unlikely to adopt it after Prop 33 passes."

Nevertheless, lots of cities do already have rent control. Many municipal officials have expressed interest in expanding those policies.

Last week, the Los Angeles City Council voted 8–3 to endorse Prop. 33, setting the stage for rent control expansion in that city should the proposition pass.

San Francisco has been even more aggressive. Earlier this month, the city's Board of Supervisors voted to expand rent control to 16,000 units built between 1979 (when the city first passed its rent stabilization ordinance) and 1994.

Currently, Costa-Hawkins prevents the city from doing this. If Prop. 33 passes, that expansion will automatically go into effect.

Defanging YIMBY Successes?

California housing law features a "builder's remedy" which allows developers to build housing developments that are larger than what local zoning codes allow if a locality a) hasn't adopted a state-required housing plan, and b) the proposed "builder's remedy" project contains the requisite number of below-market-rate (rent-controlled) units.

A major focus of California's YIMBY reformers this past legislative session was to make the builder's remedy law easier for builders to use by reducing the required percentage of rent-controlled units.

But if Prop. 33 passes, localities that are dedicated to not allowing new housing would be free to impose whatever local affordability requirements they wanted on new projects. That would include builder's remedy projects.

The higher the percentage of (usually money-losing) below-market-rate units that a city requires a developer to provide, the less financially feasible new projects become.

A city councilmember in Huntington Beach, California, (which is constantly fighting state requirements to plan for more housing) has suggested that if Prop. 33 should pass, the city could jack up these affordability mandates with the explicit goal of stymieing new housing construction.

Prop. 33 would provide NIMBY (not in my backyard) cities with the perfect opportunity of planning for more housing in theory while blocking it in reality.

Back in April, Louis Mirante of the Bay Area Council (a business association) told Politico "On paper, it would be legal to build new homes. But it would be illegal, largely speaking, to make money doing so."

The Rent Control Ratchet

In assessing the likely results of Prop. 33, the California Legislative Analyst's Office succinctly laid out the tradeoffs (well established in the academic literature) of rent control.

Tenants in rent-controlled units would benefit from lower rents and stay in the same unit for longer. On the flipside, more rental units would be taken off the rental market. The reduction in rental supply would increase costs for tenants at non-rent-controlled buildings. The property values of rent-controlled buildings would fall, and with it, the property taxes their owners paid.

The more thoughtful advocates of rent control recognize these tradeoffs while arguing that a well-designed rent control policy can create an appropriate balance: a little more stability for existing tenants in exchange for a little less supply overall.

California's perennial battles over rent control show just how unstable any allegedly well-designed rent control regime will always be.

Arguably, the Golden State already has a well-calibrated, well-designed rent control regime. The newest housing is exempt from rent control entirely, slightly newer housing is subject to the relatively modest controls on prices established by state's 2019 law, and the oldest rental housing (which is most likely to host lower-income tenants) can be subjected to stiffer rent caps still.

Statewide vacancy decontrol ensures that landlords can still make a healthy return on older housing that is even more strictly rent-controlled.

Despite these features, the state's rent control activists have enough support to keep pushing for ever-stricter rent control policies. If the polls are to be believed, their arguments are winning over more and more voters. Prop. 33 could well pass.

The fact is that rent control cannot solve a housing affordability crisis caused by decades of underbuilding. Only significant liberalization of land use regulation will do that.

The short-term stability purchased by modest rent control policies does not appear to be satiating activists' demands for tougher policies. The stricter rent control policies become, the harder it will be to create needed housing supply.

Even if Prop. 33 doesn't pass this year, the possibility that something equally radical will pass in a future election cycle exists.

States like Texas that prohibit rent control in all its forms are doing a much better job of adding new housing supply to keep up with demand.

Instead of trying to figure out what a thoughtful rent control policy might look like, California policymakers and voters would do well to abandon the policy entirely.

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Quick Links

• A judge has stopped Louisiana police from sweeping a homeless encampment near New Orleans' Superdome, where Taylor Swift is scheduled to perform. I've argued before that Swifties (for all their flaws) shouldn't be blamed for exacerbating homelessness whenever they pour into town to see their idol.
• Last week's third-party presidential debate featured an extended discussion of housing policy. Green Party candidate Jill Stein argued for a string of terrible policies, including emergency rent control and vacancy taxes. Libertarian Chase Oliver said we should par back zoning and zero out property taxes. The Constitution Party's Randal Terry railed against property taxes too and exploitative financial institutions.
• New Jersey lawmakers have found their latest scapegoat for high housing costs. Last week, the state Legislature advanced a measure that would prohibit landlords from using rent-recommendation software to help set prices. Read Rent Free's past coverage of the unconvincing claims that this software is allowing landlords to raise prices above market rates.
• New York City's proposed City of Yes for Housing Opportunity (which promises to add "a little more housing in every neighborhood") received some critical vetting from the City Council last week. A vote on the proposal, which in its current form would upzone areas near transit, allow accessory dwelling units, and eliminate parking minimums, is expected later this year.
• Pew Charitable Trusts has a new policy brief on office-to-residential conversions. To summarize, office buildings are hard to turn into standard apartments, but can more easily be converted into dorm-style micro apartments. But even these types of conversions would likely require public subsidies.
• Come election day, the residents of Harbor Springs, Michigan, will vote on whether to repeal recent zoning code changes that allow duplexes and accessory dwelling units in the small resort town's existing neighborhoods. City planning officials argued the reforms would help attract workers to the town. But not everyone is on board with that goal. Said one antireform resident to the local public radio outlet: "Growing up, I may work in a community outside of where I live for a reason. I go work there for a reason. But my expectation is not necessarily for that community to provide me a house."
• A Biden administration initiative to use existing transportation programs to provide low-cost financing to housing projects being built near transit has yet to close on a single project, reports The New York Times. Read Rent Free's past coverage on past federal housing reform flops.
• Another day, another court strikes down modest local "missing middle" reforms. As if we needed more evidence that America's courts have a NIMBY problem.