California's Political Leaders Strike Deal on Rent Control

Rent increases could be capped at 5 percent plus inflation under a new agreement struck by Gov. Gavin Newsom and state legislative leaders.

California's governor and legislative leaders have come to an agreement on changes to a rent control bill that will likely see the Golden State become the second state in the union to adopt statewide regulation of rental prices.

AB 1482, first introduced in February by Assemblyman David Chiu (D–San Francisco), will be amended to cap rent increases at 5 percent plus inflation per year until 2030, Gov. Gavin Newsom's office told the Los Angeles Times on Friday.

"The high cost of housing and rising rents are preventing California families from getting ahead," said Newsom in a joint statement with Chiu, Senate Leader Toni Atkins (D–San Diego), and Assembly Speaker Anthony Rendon (D–Lakewood). "We are pleased to announce we have come to an agreement on a series of amendments to AB 1482 that would create strong renter protections."

These new amendments to the bill would essentially renege on concessions that were made in late May to get AB 1482 through the Assembly. Those included a 7 percent rent cap and having the bill expire in 2023.

The announced changes have shifted the state's Realtors Association from neutral to opposed, reports the Times. However, strengthening the bill has failed to appease critics on the left who want stricter limits on rent hikes, and who say they will continue with their efforts to put a rent control initiative on the 2020 state ballot.

The amended version of AB 1482 still needs to be approved by both chambers within the next two weeks—a tight but doable deadline.

Its passage would mark a major win for the country's ascendant rent control movement.

In February, Oregon passed the country's first statewide rent control measure, limiting price hikes to 7 percent per year plus inflation on buildings older than 15 years. In June, New York's legislature passed a bill strengthening existing rent control regulations in New York City and lifting a prohibition on other cities imposing their own rent control policies.

California has a similar prohibition on local rent control ordinances known as the Costa-Hawkins Act. Passed in 1994, the bill bans localities from imposing rent control on units built after 1995 and on single-family homes and condos.

That bill also grandfathered in rent control laws passed by cities like Los Angeles and San Francisco, meaning that major portions of both cities' rental housing stock are already subject to price regulations.

In 2017, local governments were also explicitly given the power to require developers to include rent-restricted units in new buildings.

Tenant advocates argue that rent control helps keep renters in their homes and protects them from opportunistic price hikes. Economists generally oppose rent control, arguing that it does little to help poor tenants and that it comes with a host of bad incentives.

Landlords of rent-controlled units are incentivized to not maintain their properties, they say. Others might redevelop their properties into condominiums that they can sell at market rates, while developers, looking at reduced returns from construction, can be dissuaded from building more units.

Empirical studies suggest both sides are right—to a degree.

A study of an expansion of rent control in San Francisco published in American Economic Review this month found that "while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law."

Another study from researchers at the Massachusetts Institute of Technology found that the elimination of rent control in Cambridge, Massachusetts resulted in higher rents and more tenant turnover but also a more-than-double increase in housing investment.

There's a growing consensus that California's high housing costs are the product of too little supply. Supply is in turn constrained by onerous zoning laws and lengthy permitting processes for new housing.

Ultimately, rent control is a poor way of dealing with the high rents that result from these limits on new housing development. Far from fixing the state's affordability problems, it could well make them worse.