Removes certain state restrictions on what buildings can be rent controlled and whether cities can control the rents charged to new tenants.
What the Measure Would Do
California Proposition 21 would substantially amend the 1995 Costa-Hawkins Rental Housing Act, a state law that currently restricts local rent control laws. Cities use rent control to regulate the rents, 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.
Prop. 21 would make a few significant changes to what local governments are allowed to manage in their rent control laws. It would:
- Increase the number of units that could be subject to local rent control laws. The measure would allow cities to impose rent control on all units built more than 15 years ago, rather than all those built before February 1995 (or a pre-existing exemption cutoff date, if a city has one). For example, under Prop. 21, a building that received its certificate of occupancy in 2010 would be exempt from local rent control until 2025. The measure would also allow cities to impose rent control on single-family homes and condominiums owned by corporations or by individuals who own three or more units. Single-family homes and condominium units owned by a “natural person” who owns no more than two residential units would remain exempt.
- Allows local rent control laws to limit how much a landlord can charge a new tenant. If a city decides to set limits, it must allow a landlord to increase the new rent by up to 15% (over the first three years) from the previous tenant’s rent, in addition to any locally allowed increases.
In order to comply with previous state court rulings, Prop. 21 contains language that says cities and counties could not limit a landlord’s right to a fair rate of return on property. What this would mean in practice is not clear.
The Legislative Analyst’s Office estimates the state and local fiscal impact of this measure to be a loss in the high tens of millions of dollars per year, though it depends on the number of cities that decide to implement more stringent rent control regulations.1 The impact would primarily result from reduced property taxes due to lowered property values.
This measure could be amended by the state legislature with a two-thirds vote if the amendments further the purposes of Prop 21. Reinstating any portion of Costa-Hawkins would require going back to the voters for a majority vote.
The Costa-Hawkins Rental Housing Act was 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 when renting to a new tenant.
The Costa-Hawkins Act limits local rent control 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.
- 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.
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. The most recent effort — 2018’s Prop. 10, which would have repealed Costa-Hawkins — failed, garnering 40.6% of the vote.
In 2019, as part of the Bay Area’s CASA Compact, a set of policy recommendations to address the housing crisis, Assemblymember David Chiu successfully passed AB 1482, emergency rent cap legislation that limits annual rent increases statewide (with some exceptions) through 2030.
This year’s Prop. 21, which amends rather than repeals Costa-Hawkins, was placed on the ballot by some of Prop. 10’s proponents, including the AIDS Healthcare Foundation, which paid for signature-gathering and has funded 99.8% of the campaign to date.
As an initiative statute, this measure needs a simple majority (50% plus one vote) to pass.
The equity impacts of rent control are complicated and unclear, since the benefits are not specifically targeted toward people of color or low-income households.
More than 60% of white California households and 58% of Asian California households own their homes, while only 33% of Black California households are homeowners.2 Some studies have shown that people of color disproportionately live in rent-controlled housing.3 The expansion of rent control could disproportionately benefit Black households, as they are a disproportionate share of renters.
However, the allocation of rent-controlled units to people of color is not at all guaranteed, given wealth and income inequality. Rent-controlled apartments are offered on the competitive market, and landlords are able to select residents with higher incomes and stronger credit, which may be a disadvantage to Black households and people of color.
Lastly, while rent control definitely benefits a household living in a rent-controlled unit, its negative impacts on new housing production, increases in rent for non-rent-controlled apartments and the loss of existing rental opportunities (caused by landlords converting rental apartments to condos or redeveloping properties) disproportionately hurts those with the least ability to compete in the broader housing market, as we have seen with outmigration of people of color from cities like San Francisco and Oakland in recent years.
- 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. 21 would allow more units to be rent-controlled, which could have immediate benefits for those tenants whose rents are rising with the market every year.
- Costa-Hawkins set an arbitrary and static threshold date for exemption from rent control. This means cities with rent control will likely see a reduction in rent-controlled units 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 single-family homes could protect a significant number of households in California, as they make up 37% of the rental housing stock.
- Allowing cities to apply rent control to newer buildings and limit the rent landlords could charge new tenants would likely lead to a significant reduction in the construction of new rental homes, as more rental housing projects would become unprofitable to build. Research from the Terner Center indicates that the 15-year rolling timeline is too short and would likely reduce housing production statewide.4
- Allowing vacancy control, even with limitations, would probably increase the number of rental units that are converted to condos. A 2017 study found that rent control caused San Francisco’s overall rents (including units not covered by rent control) to rise, 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 San Francisco market between 1994 and 2012.5 This reduction in the rental housing stock drove up competition, increasing rents overall.
- The “natural person” owner requirement means that single-family homes and condominiums owned by family trusts would not be exempt from local rent control laws.
- Rent control is an imperfect tool for stabilizing communities because it is not specifically targeted to help people of color, 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. Some studies show benefits actually accruing more to whiter, wealthier households in some cases.6 Restricting rents that new tenants pay (vacancy control) would also not necessarily support low-income households, as many new tenants would not be low-income. Supporting low- and moderate-income affordable housing programs, especially those with right-of-return preferences for previous tenants, better targets people of color and lower income individuals.
- If adopted by cities, the potential cost of vacancy control to landlords would be arbitrary and uneven. A unit that a new tenant occupied in 2020, for example, would forever after be rented out at a vastly higher rent than an identical unit where a tenant moved in in 1980.
- This measure does not need to be on the ballot. Amendments to Costa-Hawkins can and should be made through the legislative process, where the details can be better negotiated and policy changes can be made more easily in the future.
- The measure language that says cities and counties cannot limit a landlord’s right to a fair rate of return on property is ambiguous and would most likely lead to litigation and uncertainty.
California continues to deal with a housing affordability crisis that has plagued the state for many years. A shortage of housing has led to increased homelessness, displacement of low- and moderate-income people and a reduced quality of life for people who commute long distances or live in overcrowded living situations.
Rent control provides significant benefits to residents who live in rent-controlled units.4 Many current tenants in California would not be able to remain in their homes — or even in their cities — if their rents 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. We have seen firsthand how rent control has provided protections for many in San Francisco’s overheated housing market.
But the details of rent control policy matter. There is great risk in under-regulating rent control and depressing California’s already-inadequate production of rental housing. In a report issued this year, SPUR estimated that the Bay Area should have built 700,000 new homes over the past decade and needs to build over 2.3 million housing units over the coming 50 years to bend the curve on housing affordability. Local rent control laws could inadvertently (or intentionally) result in less housing production than the state needs to house the people who want to live here.
There are aspects of this measure that we appreciate. We support the idea of making single-family homes subject to local rent control laws when they are owned by corporate entities or owners with multiple units. Single-family homes are a large portion of the state’s housing stock and a growing portion of the rental housing stock, so there is a significant opportunity to expand protections by making some single-family homes subject to rent control.
While we are on record supporting the idea of a “rolling” date for housing to become subject to rent control (in localities that have rent control ordinances), we remain concerned about the 15-year term included in this measure. Such a short term would significantly reduce the profitability of rental housing, and thus likely significantly reduce the building of new rental homes. In 2018, the Terner Center released a policy brief suggesting that a term of 40 years would not significantly harm the market for investment in new housing development. A compromise effort could aim for 25 years, the age of housing currently affected by Costa-Hawkins, so as not to lose existing rent-controlled units.
Ultimately, our concerns about the details of this measure and their impacts on the new production of housing outweigh the potential benefits that we see. The state plays a key role in setting guardrails for local rent control policy, and these details are important. We urge the California State Legislature to work toward compromise legislation that can be negotiated through the legislative process.
1. California Legislative Analyst’s Office, November 3, 2020 Ballot, Proposition 21, https://lao.ca.gov/BallotAnalysis/Proposition?number=21&year=2020 (accessed September 25, 2020).
2. Matt Levin, “Black Californians’ housing crisis, by the numbers,” CalMatters, June 19, 2020. Accessed at https://calmatters.org/housing/2020/06/black-californians-housing-crisis-by-the-numbers/.
3. David Sims, “Rent Control Rationing and Community Composition: Evidence from Massachusetts,” The B.E. Journal of Economic Analysis & Policy, 11(1). Accessed at https://doi.org/10.2202/1935-1682.2613.
Rebecca Diamond, Tim McQuade and Franklin Qian. “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” Stanford University, 2019. Accessed at https://web.stanford.edu/~tmcquade/Rent_Control.pdf
4. 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
5. 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
6. Richard Ault and Richard Saba, “The economic effects of long-term rent control: The case of New York City,” The Journal of Real Estate Finance and Economics volume 3, 25–41 (1990). Accessed at https://doi.org/10.1007/BF00153704
7. SPUR, What It Will Really Take to Create an Affordable Bay Area, 2020, https://www.spur.org/publications/white-paper/2020-03-09/what-it-will-really-take-create-affordable-bay-area