To begin to cure the state’s stubborn housing crisis, 2018 gubernatorial candidate Gavin Newsom recently called for nearly quadrupling California’s annual housing production, so that by 2025 the state would add 3.5 million to its inventory.

That same day, a group called the Alliance of Californians for Community Empowerment (ACCE) filed for a ballot measure to repeal the suddenly controversial anti-rent control law Costa-Hawkins.  To put it mildly, something doesn’t quite fit.

Hooray that someone in Sacramento appears to get it (the state’s housing crisis).  Newsom’s message is that California suffers not from a lack of regulation on housing, like rent control, but a profoundly substandard production.  Indeed, Newsom’s call for more housing was later echoed by fellow competitor Antonio Villaraigosa.  The two candidates have apparently been paying attention.

Newsom goes on to specifically advocate for more federal subsidies for low-income housing and for local tax-increment financing – aka a return to redevelopment – as ways to incentivize production.

But, the sponsors of the Costa-Hawkins initiative – said to be made up of statewide rental housing activists – see things differently.  They don’t trust the market to build the housing that’s needed.  Arguably, they think we already have enough housing in California and it’s just that rents and prices are out of whack.

That can be the only justification for any kind of rent control – that we have ample housing, but rents are just too high.

Well, that’s not the case and ACCE knows it.  California hasn’t met its annual housing need since 1987 – and that, by most accounts, was an anomaly.  In fact, since the late ‘80’s the state has fallen more than 100,000 units short annually of its need, based on population growth and new household formation.  If anything, California is in desperate need for some kind of construction stimulus.

Statewide rent control is not it.  Rent control was just a passing fancy in the ‘70’s when it was first adopted locally.  In fact, it began as a political movement in Santa Monica but only stuck in a few places.  ACCE’s initiative is, likewise, purely political.

Where rent control did stick, though – in communities like San Francisco, Berkeley, Oakland, Los Angeles, West Hollywood and, of course, Santa Monica – its impacts have been devastating.  In these largely coastal areas, job growth has significantly outpaced housing production.  In some areas of the Bay Area, more than five times as many jobs have been created for each new housing unit built over the past ten years.  As a result, cities like San Francisco, which has rent control, has over time fallen well short of producing the housing it needs.

Rent control is the most insidious, hostile housing policies prevailing in California today.  It has the potential to bankrupt small property owners – Moms and Pops – and to radically discourage new housing production. Costa-Hawkins, which doesn’t ban but mildly restricts rent control, was enacted by the state legislature over two decades ago to establish that California was for housing markets deciding rents, not local bureaucrats with their politically charged formulas.

Around the same time, left-leaning economist Anthony Downs of the Brookings Institute (whose views on the policy are shared by reliably liberal economic theorist and commentator Paul Krugman) argued against rent control in housing markets:

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.

Downs went on to say: 

Stringent rent controls inhibit the development of the additional new rental units needed to remedy the problem that led to the adoption ofcontrols. This self­ defeating aspect of stringent rent controls is theirmost serious long-run drawback. The rapid increases in rents that usually stimulate adoption of any rent controls are invariably causedby an excess of demand in relation to the existing supply. The onlylong-run cure for that imbalance, other than cutting back on demand itself, is expanding the supply of available rental units.  Expansion ofthe supply requires building new housing units (or converting otherproperties to use as rental housing).  But stringent rent controls weaken or even destroy the incentives for developers to build newunits by limiting the potential profitability of undertakingdevelopment.

By adopting Costa-Hawkins in 1995, the California legislature agreed that housing markets aren’t supposed to work that way.

Proponents of the Costsa-Hawkins repeal initiative will likely get the 300,000 voter signatures they need to qualify for next year’s ballot.  Let’s hope Newsom and Villaraigosa stick to their guns and urge the measure’s rejection.