Would Prop. 10 Reduce the California’s High Housing Costs?  Basic Economics Says No.

Kerry Jackson
Kerry Jackson is a senior fellow with the Center for California Reform at the Pacific Research Institute.

Californians will be faced with a dozen voter propositions on Election Day. None is more important than Proposition 10, which would allow local governments to enact rent control laws. The outcome will have a profound effect on California’s housing crisis.

Prop 10 would repeal the Costa-Hawkins Rental Housing Act of 1995, which bars local governments from imposing rent control on housing units that were first occupied after Feb. 1, 1995. Properties already exempt from local residential rent-control ordinances on or before that date are also protected.

Rent control has unsurprisingly become a heated issue in the state with the nation’s costliest housing. At times, the debate has turned angry. Prop 10 supporters have staged rallies and protests, some quite stormy. The fury has spilled over into the wider public. A UC Berkeley, Institute of Governmental Studies poll from last year found six in 10 likely voters favor rent control. No one would be stunned if the initiative passes.

Proponents argue in the state voter information guide that “rent is too damn high!” and enacting “Proposition 10 will free our local communities to decide what rent control protections are needed, if any, to tackle the housing crisis.” The argument also gets in obligatory digs at “Wall Street corporations” and “greedy Wall Street billionaires.”

These pirates, they say, are to blame for California’s steep housing costs, because they “have profited from the current system for decades.” “Greedy corporate landlords” cause suffering for those who can’t defend themselves while “big corporations” walk away with “HUGE PROFITS,” which are emphasized in all-caps in case someone didn’t get the point.

The proponents’ sophistry underlines the message that it’s time for voters to act. But their arguments lack economic facts. And that’s no oversight, because the facts tell us that rent-control laws keep rents high because they artificially depress the supply of housing.

Democratic powerhouse Steve Maviglio told PRI’s podcast that Prop. 10 “does the opposite of what it’s trying to achieve and essentially pours gasoline on the housing crisis fire in the state because it will freeze housing construction in the state.”

He’s right. As any high school student who’s paid even minimal attention in economics class knows, when supply is restricted, prices rise.

But that’s a classroom exercise. What of the real world? No surprise, it tells the same story. A trio of Stanford researchers who recently looked at rent control in San Francisco found that landlords who have operated under rent-control laws “reduced rental housing supply by 15 percent, causing a 5.1 percent city-wide rent increase.” Their National Bureau of Economic Research paper bluntly stated that “rental supply in San Francisco decreased by 6 percent” when rent control was expanded. It happened due to the “over-consumption of housing” by those living in rent-controlled apartments.

Economists have known about the negative effects of rent control for decades.  Peter A. Tatian, a senior fellow at the Urban Institute, says that “a scan of the research literature revealed very little evidence that rent control is a good policy.” An St. John & Associates analysis found that when owners were not allowed to set market rates on rental housing, the available stock fell 14 percent in Berkeley and 8 percent in Santa Monica.

Rent control also leads to the ruin of good homes. When owners are barred from raising rent, their incentive to make needed repairs disappears. A 2014 Massachusetts Institute of Technology study determined that after rent was decontrolled in Cambridge, housing investment increased there by roughly 20 percent over what it would have had rent control continued. The authors cited a 2007 paper which noted “that chronic maintenance problems – such as holes in walls or floors, chipped or peeling paint, and loose railings – were more prevalent in controlled than in noncontrolled units during the rent control era.”

Hopefully voters will do some homework when they go to the polls. If they do, they might be surprised to learn that rent control isn’t really the answer to California’s housing woes.

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