Rent Control is Not the Answer

Timothy L. Coyle
Consultant specializing in housing issues

State housing activists recently came to Sacramento to celebrate a special achievement of theirs.  They gathered on the steps of the Capitol to announce they had a solution to high housing costs in California:  a repeal of the law which prevents statewide rent control.  With the blessing of voters this Fall, they expressed the hope that a just-qualified initiative would deliver on that promise.

The group was particularly combative as it listed one complaint after another – ranging from chronically neglected maladies in their apartments to homelessness caused by sky-high rents – which it said the repeal of the Costa-Hawkins law would put an end to.  They proclaimed that rent control was the answer to their housing afflictions and predicted a majority of statewide voters would agree.

Their demonstration at the Capitol came less than a week after a Senate committee acted to kill a piece of legislation that would have eased the plight of renters, somewhat.  That’s right – the same body that laments about California’s dire housing situation can’t muster the courage to do something about it.

Through the action taken by the Senate Transportation and Housing Committee on SB 827, by freshman Democrat Scott Wiener, it punted the state’s housing problem  and effectively turned policy-making over to initiative sponsors and the people.  Voting to defeat the bill were Senators Ben Allen (D-Santa Monica), Jim Beall (D-San Jose), Anthony Cannella (R-Ceres), Bill Dodd (D-Napa), Cathleen Galgiani (D-Stockton), Mike McGuire (D-Healdsburg), Richard Roth (D-Riverside), Anthony Vidak (R-Bakersfield) and Bob Wiecowski (D-Fremont).

Hypocrites.  They’d all sounded off previously, one way or another, about the seriousness of California’s housing crisis – some even evoking feelings of sadness.  But, on this day politics, not housing, was the order.  Opponents of the bill argued for project labor agreements (labor), against gentrifying existing neighborhoods (tenant groups) and for the NIMBYs (environmentalists) – and thus, against poor people.  But, the strongest opposition came from local government which refuses to give up an ounce of its precious “local control”.

So, what might we get instead in 2018?  Rent control; clearly more hurt than help – no matter what the sponsors of the initiative say.  Says economist Anthony Downs of the liberal Brookings Institute says about rent control:

By preventing rents from rising to their short-term market-clearing level, stringent rent controls distort the resource-allocation signaling function of the price system. Specifically, stringent controls prevent owners from reaping the profits that would trigger the development of additional new rental units.  Instead, owners often receive below-normal profits because controlled rents lag behind true total operating costs, including debt service.  As a result, developers and investors are discouraged from building new rental units. This prevents the expansion of the overall rental housing supply needed to cope with the higher demand that stimulated rising rents. 

A Sacramento State University study in 1994 validated that observation.  The study also showed other impacts of long-standing, stringent rent control:

  • Both the rent-contolled communities of Berkeley and Santa Monica lost rental units between 1980 and 1990;
  • Both Berkeley and Santa Monica lost to neighboring counties without rent control families with children and elderly population during that period;
  • Both Berkeley and Santa Monica lost total renter households during that period; and
  • In both communities lower-income renters were replaced by wealthier, higher-income households.

That last finding is the dirtiest of rent control’s dirty little secrets:  rent control is not means-tested.  So, accordingly, almost anyone qualifies to rent at controlled, below-market rates – not just poor people.  That’s why the real beneficiaries of rent control in Manhattan, San Francisco and Santa Monica, for example, are rich people who are lucky enough to rent at a discount.

And, as previously reported, rent control profoundly shrinks the overall supply of housing.  Here’s what the state’s non-partisan Legislative Analyst said recently about rent control:

Proposals to expand rent control often focus on two broad changes: (1) expanding the number of housing units covered—by applying controls to newer properties or enacting controls in locations that currently lack them—and (2) prohibiting landlords from resetting rents to market rates for new tenants. Neither of these changes would increase the supply of housing and, in fact, likely would discourage new construction. Households looking to move to California or within California would therefore continue to face stiff competition for limited housing, making it difficult for them to secure housing that they can afford. Requiring landlords to charge new tenants below–market rents would not eliminate this competition.

Think rent control will solve the state’s housing problems?  Far from it.  Rent control will only make the problems worse.

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