Repeal of Rent Control Rules
Expands Local Authority to Enact Rent Control
Repeals the 1995 Costa-Hawkins Rental Housing Act, which placed restrictions on how rent control ordinances can be enacted at the local level.
What the Measure Would Do
California Proposition 10 would repeal the 1995 Costa-Hawkins Rental Housing Act,1 a state law that restricts local rent control laws. Cities use rent control to regulate the rent, or the increases in rent, that landlords can charge. According to the Terner Center for Housing Innovation, 15 of California’s 482 jurisdictions currently have some form of rent control, which covers 25 percent of the state’s rental units.
California cities currently have the ability to pass rent control ordinances. The Costa-Hawkins Act restricts those laws in the following ways:
• Exempts from rent control all housing units built after February 1, 1995, as well as all single-family homes and all condominiums.
• For cities that had rent control ordinances when Costa-Hawkins passed, retains their existing exemption dates instead of 1995. For example, the only units in San Francisco and San Jose that can fall under rent control are those that were built prior to 1979, when those cities passed rent control ordinances; in Oakland, the threshold year is 1983.
• Prohibits cities from controlling rent levels upon turnover of a unit (known as “vacancy control”). When a tenant moves out of a rent-controlled unit, the city must allow the landlord to re-rent it at market rate.
Prop. 10 would remove these provisions from the state code and let cities impose any kind of rent control they choose.
In order to comply with previous state court rulings, Prop. 10 contains language that says cities and counties could not limit a landlord’s right to a fair rate of return on property. What exactly this would mean in practice is not yet clear.
This measure could be amended by the state legislature with a two-thirds vote if the amendments further the purposes of Prop. 10. Reinstating any portion of Costa-Hawkins would require going back to the voters for a majority vote.
The Costa-Hawkins Rental Housing Act was originally passed by the California State Legislature in 1995 in response to strong rent control ordinances that several cities (Berkeley, East Palo Alto, West Hollywood, Santa Monica and Cotati) passed in the 1980s. Municipalities can still pass local rent control laws under Costa-Hawkins; the 1995 law was intended to protect the production of housing by exempting new construction from rent control and to protect landlords' right to set rents upon the turnover of units. If not regulated, these factors can raise overall housing costs across a city. (See SPUR’s Recommendation, below, for more on the relationship between rent control and overall housing costs.)
Tenant activists have wanted to repeal the Costa-Hawkins Act since it passed. There have been many attempts through the state legislature to amend or repeal the law over the years. Most recently, legislators in 2017 introduced Assembly Bill 1506, which would have repealed Costa-Hawkins. AB 1506 was not heard in 2017. While it did get a hearing in 2018, it did not pass out of committee. Tenant activists collected nearly 600,000 signatures to qualify Prop. 10 for the ballot instead.
There were several last-ditch attempts to negotiate compromises that would amend, rather than repeal, Costa-Hawkins through the state legislative process, but no agreement was reached.2 Thus, Prop. 10 represents a full repeal.
This measure needs a simple majority (50 percent plus one vote) to pass.
• California’s affordable housing shortage is a pressing crisis and deserves immediate action. In cities that decide to impose or expand rent control ordinances, Prop. 10 would allow many more units to be rent-controlled, which could have immediate benefits for those tenants.
• Costa-Hawkins set an arbitrary and static threshold date for exemption from rent control. This means cities with rent control can only see their stock of rent-controlled units go down, never up, over time. Allowing cities to set rolling exemption dates could bring additional housing units under rent control after a carefully considered time past their construction.
• Allowing cities to apply rent control to new buildings could lead to a reduction in the amount of new rental housing produced in the future. Banks, pension funds and other sources of investment to build housing could face a climate of uncertainty about future rents and policies, making it unlikely that they would choose to invest significant capital in building rental housing in California. (See SPUR’s Recommendation, below, for more.) It is important for the state to provide some parameters so that cities do not — inadvertently or otherwise — inhibit the construction of new rental housing. Costa-Hawkins may be imperfect, but it provides a few safeguards.
• Allowing vacancy control could increase the number of rental units that are converted to condos. A recent study estimates that rent control caused San Francisco rents to rise by 5.1 percent because many landlords, when faced with the financial limitations of rent control, chose to convert rental units to condos or other owner-occupied housing. Collectively, these individual choices removed 15 percent of the rental stock from the market between 1994 and 2012.3 The reduction in the rental housing stock drove up competition, increasing rents overall.
California is experiencing an epic housing crisis, the likes of which the state has never seen. Particularly in coastal cities, we are seeing runaway rents and sale prices, more street homelessness and the displacement of low- and moderate-income people from their communities. Under these circumstances, measures that aim to stop the extraordinary run-up in rental housing prices are important ideas that deserve consideration. But unfortunately Prop. 10 has some very problematic unintended consequences that prevent SPUR from supporting it.
Rent control provides significant benefits to residents who live in rent-controlled units.4 In many cases, residents would not be able to remain in their home — or even in their city — if their rent went up to market-rate levels. In addition, by allowing households in rent-controlled units to remain in place, rent control provides greater community stability. However, rent control is an imperfect tool for stabilizing communities because it is not targeted to help low-income households or other disadvantaged populations; the people who benefit most are those who have been in their rental units the longest, not necessarily those who need the most help. Supporting means-based affordable housing programs would be more effective.
Beyond this concern, there are specific ways that Prop. 10 has the potential to exacerbate the very problem it seeks to solve:
Rent control makes housing cost more. Regulating it mitigates the problem.
Prop. 10 has widespread appeal because of its promise to stabilize rents. But unfortunately, removing all regulations on rent control is more likely in the long run to make housing more expensive than it already is.5
This is because:
1. With the exception of subsidized affordable housing, which relies on government funding and tax incentives, housing is developed in a market-economy environment. Housing production is highly dependent on capital financing because it costs so much to build, usually in the tens of millions of dollars for multi-unit projects. The institutions making decisions about whether or not to lend money to housing developers (banks, pension funds and other investors) consider whether they can reasonably expect to be paid back for their investment.
When housing units become rent-controlled, the amount of return that these investors can expect goes down because rents can’t go up along with operating costs and other factors over time. Depending on the state of each cost variable (construction costs, permits, public benefit fees, etc.), a fixed rate of return may make housing development infeasible. In other words, it will cost more to build a unit than the builder and investor can receive in return. When that happens, less new rental housing gets built.
Further, if certain aspects of rent control laws are not regulated and can be changed at any time, this creates uncertainty for lenders. As a result, those lenders will be even less likely to lend money, and if they do, they will probably charge higher interest rates to mitigate their risk. This has two implications: It can stop housing from being produced, and it can make the resulting housing unit more expensive, because the increased financing cost makes it more expensive to build.
2. Landlords expect to make a return on their rental properties. When new laws cause units to become rent-controlled or limit the rent increase allowed on vacant units, landlords can either choose to take a lower rate of return or take their units off of the rental market by selling them as condos, allowing family members to move in or redeveloping the property. When rental units are taken out of the market, the remaining rental units become more expensive because there are fewer of them relative to all the people who want to rent them.
Unregulated rent control can be used to stop rental housing production altogether.
Because rent control can have the effect of stopping the production of rental units, there is a real risk that some cities could implement it as a way to limit the amount of new housing that is developed. Some cities have seen a similar effect with inclusionary housing, the requirement that developers provide a certain percentage of affordable units within market-rate housing developments. In some cases, the percentage has been set so high that many proposed projects are no longer viable, effectively stopping production of market-rate housing. There is speculation that this is exactly the effect some supporters of the high percentages intended.
The state plays an important role in facilitating housing production.
Many cities don’t want to build housing because adding more residents leads to higher costs for providing services. One important revenue source for these services is property taxes, but Prop. 13, passed in 1978, caps property tax increases at 2 percent annually. Meanwhile, the cost to a city of providing services — police, fire, schools, libraries, streets, parks, social services, etc. — often increases at rates substantially above 2 percent per year. As a result, city officials, concerned that new residents can lead to budgetary strain, are sometimes disinclined to approve new housing. In addition, community pressure to keep cities looking and feeling the same as they do today leads some elected officials to oppose housing development that could result in changes to their communities.
Because of this dynamic at the local level, it’s important for the state to play a role in facilitating housing development. If cities don’t build housing, California’s affordability crisis will simply intensify. While imperfect, Costa-Hawkins sets reasonable safeguards to ensure that local rent control rules do not inhibit the creation of new housing.
We are already seeing evidence of how this could play out at the local level: The Berkeley City Council has placed a measure on the November ballot that — if passed along with Prop. 10 — would limit rent increases even when a unit turns over to a new tenant and would allow rent control to be imposed on buildings when they are 20 years old. This could inhibit new construction since it can take longer than 20 years for investors to see their expected returns. If cities all over the state make such decisions, there could be a significant slowing in new construction and even greater competition for the existing housing stock across California.
Addressing housing affordability for everyone requires a different solution.
Today, 30 percent of California households are paying more than 30 percent of their incomes on housing. Rates of homelessness are increasing, and communities are experiencing intense displacement pressure. This is a crisis of immense proportion. We must act to make housing affordable, stabilize our communities and open our cities to residents of all backgrounds and economic means.
SPUR believes that the solution to housing affordability and community stabilization lies in both building massive amounts of new housing for people at all income levels and protecting tenants as we dig ourselves out of our housing shortage.
Unfortunately, the wholesale repeal of Costa-Hawkins would not improve our prospects. While there would undoubtedly be people who would benefit from an expansion of rent control, there would be many more who would be hurt by it. The biggest impact of this measure in the long run would be to exacerbate the housing shortage in California.
1 Sections 1954.50, 1954.51, 1954.52 and 1954.53 of Chapter 2.7 of Title 5 of Part 4 of Division 3 of the Civil Code are known as the Costa-Hawkins Rental Housing Act.
2 For examples of potential compromise ideas, see: Terner Center for Housing Innovation “Finding Common Ground on Rent Control: A Terner Center Policy Brief,” 2018. Accessed at http://ternercenter.berkeley.edu/finding-common-ground-rent-control
3 Rebecca Diamond, Tim McQuade and Franklin Qian. “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” Stanford University, 2017. Accessed at https://www.gsb.stanford.edu/faculty-research/working-papers/effects-rent-control-expansion-tenants-landlords-inequality-evidence
4 Ibid, page 3.
5 Dirk W. Early, “Rent Control, Rental Housing Supply, and the Distribution of Tenant Benefits,” Journal of Urban Economics 48(2), 2000.
Dirk W. Early and Jon T. Phelps, “Rent Regulations’ Pricing Effect in the Uncontrolled Sector: An Empirical Investigation,” Journal of Housing Research 10 (2), 1999.
George Fallis and Lawrence B. Smith, “Uncontrolled Prices in a Controlled Market: The Case of Rent Controls,” American Economic Review 74(1), 1984.
Blair Jenkins, “Rent Control: Do Economists Agree?” Econ Journal Watch 6 (1), January 2009. Accessed at https://econjwatch.org/articles/rent-control-do-economists-agree