The following is an excerpt from a position paper by C.A.R.’s Center for California Real Estate.  It details the consequences of rent control policies, which have been used in certain California jurisdictions to attempt to increase access to rental housing.  The complete position paper can be downloaded at http://centerforcaliforniarealestate.org/publications/CCRE_Rent_Control_report.pdf.

Rent Control (N)regulation by law of the rent a landlord can charge for domestic accommodation and of his right to evict tenants.

In California, only 32 percent of families can afford a median-priced home.   In Santa Clara, Santa Barbara and San Francisco, prices have increased to the point that fewer than 20 percent of buyers seeking to purchase a home as their residence can afford to do so. It’s fair to say that California is the most challenging place in America to buy or rent a home.

Soaring home prices have increased demand for rental housing, but California’s rental housing market is also experiencing a severe lack of supply. California currently has a 30-year low rental vacancy rate of 3.6 percent and, as a result, California’s average rent is approximately 50 percent higher than the rest of the country. The lowest income renters across the state are spending approximately 68 percent of their income on rent.  For context, renters paying more than 30 percent of their income on housing are considered to be “cost-burdened.”

The overarching problem is rooted in the simple economics of supply and demand. California does not have an adequate supply of housing, which drives home prices and rents beyond people’s reach.

Rent Control is a Mirage

The housing supply crisis has fueled calls for stronger protections for low-income renters, including rent control policies.  The problem is that research consistently demonstrates that mandating artificial prices for rental units reduces the supply of rental properties and creates an economic disadvantage for low-income families most in need of an affordable home.  These are among the reasons why rent control has been outlawed in 27 states across America. Despite the risks, more than a dozen California cities currently have rent control policies in place.  However, the policy has not had a positive impact on housing affordability.

While these policies may provide some relief for a small number of renters, research has demonstrated that rent control impacts the quality of life for families longer-term in the following ways:

  • Reduces existing supply of rental housing
  • Hurts low-income households
  • Deteriorates quality of rental housing
  • Increases costs for all renters
  • Reduces supply of rental housing

When they can’t earn a fair market value price, investors have greater incentive to put their money in other types of property, which reduces the supply of rental properties.  Investors who already own rental property are also likely to respond by converting buildings from residential to nonresidential use to ear fair market.

Supply is also impacted due to low turnover.  Rent controlled units are attractive to tenants, so, once they get into a control property, they are less likely to move regardless of whether they can afford to rent or buy a market rate property.  This lowers turnover and limits the supply of affordable rental housing for the most in need.

Discriminates Against Low-Income Families

The negative effects of rent control are felt disproportionately by low-income people.  First, not all rent-controlled units are preserved for low-income tenants for “means tested.”  Second, in an impacted market, the Legislative Analyst’s Office points out that landlords are likely to exert more discretion to whom they rent and factors including income and credit history can become even greater decision factors which can bias the selection process against low-income families.

Quality of Rental Properties Deteriorates

When rents are capped, landlords are less likely to maintain rental properties.  When landlords have to subsidize their tenants’ rents, maintenance declines and has a spiraling effect on the entire community by lowering values, which, in turn, lowers tax revenue to local government.  Less tax revenue undermines government maintenance and services, and the cycle continues.

Higher Costs for All Renters

Rent control also contributes to escalating costs of market-rate rental properties and new construction not subjected to rent control laws.  Rent control discourages investment in new construction, limiting supply and driving costs higher for the units that are built. Further, rent control increases costs for any renter entering a market in the form of higher taxes to cover government programs that implement rent control policies.

Average Monthly

Location                                    Median Home Price*                 Apartment Rent**

Berkeley $ 1,290,000 $ 3,179
Beverly Hills $ 3,885,000 $ 3,213
East Palo Alto $    917,500 $ 2,058
Hayward $    650,000 $ 2,226
Los Angeles $    899,000 $ 2,964
Los Gatos $ 1,900,000 $ 2,686
Oakland $    785,000 $ 2,790
San Francisco $ 1,463,977 $ 3,803
San Jose $    998,000 $ 2,853
Santa Monica $ 2,510,000 $ 3,276
Thousand Oaks $    795,000 $ 2,289
West Hollywood $ 1,825,000 $ 2,677

*Source:  Clarus Marketmetrics   **RentJungle.com

Conclusion

Instead of government intervention in the form of artificial market mandates like rent control, Californians will benefit from lawmaker action that encourages housing development to boost supply throughout the state.  Greater supply will increase affordability.  Enacting policies that better match housing development with cities’ population growth, instead of failed rent control schemes, will help California return to its status as a great state in which to live, work and raise a family.

“Reprinted with permission from California Real Estate magazine, copyright 2018 by the CALIFORNIA ASSOCIATION OF REALTORS®, all rights reserved.”