Berkeley property owners are glad for vacancy decontrol. It has saved us from the truly unworkable situation that prevailed from 1980 through 1998 – old-style, restrictive rent control that caused not a few owners to lose their properties and that prevented a fair return for us all. Happily, our legislators in Sacramento could see that old-style rent control as practiced in Berkeley, Santa Monica, West Hollywood and East Palo Alto was distorting the rental housing market unreasonably, so they abolished it, replacing it with vacancy decontrol.
The new law – the Rent Housing Act of 1995 – is commonly known as “Costa-Hawkins”. We are so glad that old-style, restrictive rent control is a thing of the past that we don’t often evaluate the impact of the vacancy decontrol (or “decontrol-recontrol”) system we have now. But now that 16 years have passed since decontrol was enacted – almost as long as the 18 years of old-style, restrictive rent control – it is time to evaluate the distortions that the decontrol system itself causes.
Decontrol-recontrol means that rents increase to market when there is a vacancy, not otherwise. Market rents have increased a lot over the past 16 years. Berkeley Rent Board statistics say that the average initial two bedroom rent has increased in this time period from $1,300 in 1999 to $2,250 in 2014 – by 73%. In just the past eight years the average initial two-bedroom rent has increased 41%, from $1,600 to $2,250. These increases – 73% in 16 years, 41% in 8 years – influence owner and tenant behaviors significantly.
Meanwhile, controlled rents increase in Berkeley at 65% of the consumer price index (the CPI). It should be understood that indexing rents at anything less than 100% of the CPI makes no sense whatsoever. Partial indexing is a purely political adjustment intended to favor tenants over property owners. There is no economic or financial rationale that justifies this discount.
These two facts – the increase in market rents for new tenancies and the unnatural suppression of controlled rents for continuing tenancies – means that the gap between controlled rents and market rents has been increasing steadily throughout the Costa-Hawkins decontrol era, now 16 years old. Berkeley Rent Board statistics indicate that the average 2-bedroom rent established under Costa-Hawkins in 1999 was $1,300. The average 2-bedroom rent established under Costa-Hawkins in 2014 was $2,250, an increase of 73%. But if tenants who arrived in 1999 paying $1,300 remained in the apartment until the present, their rent would have increased under rent control by just 30%, to $1,689. If rent control allowed rents to increase by 100% of the consumer price index (CPI), the 1999 rent of $1,300 would be $1,900 today – not as high as market, but a lot closer than $1,689.
So rent control in its current form inevitably creates a growing gap between the rent a sitting tenant is asked to pay and the rent he or she would pay if he or she were to move to a comparable unit. Tenants therefore tend to stay in their rent-controlled apartments longer than they otherwise would. And as for property owners, they become restive after more than a few years have passed because they see the rents they receive slipping further and further below market.
It is now common for adjacent units in multiple-unit buildings to rent for widely differing amounts. A newly rented unit may rent for two, three, or even four times the continuously-controlled rent of tenants who have been there a long time. There are examples in Berkeley of two-bedroom apartments renting today for under $1,000 while the unit next door rents to new tenants for more than $3,000.
This creates unnatural tension between owners and tenants. Tenants distort their life choices to remain whenever possible in their rent-controlled units, even when those units no longer serve them well. Tenants whose families are growing, for example, tend to stay put in units that are too small. Tenants whose job locations suggest that moving would make sense tend to remain where they are, enduring a longer commute in order to preserve the rent discount. Tenants whose family size has declined tend to stay put because their 2-bedroom rent is scarcely higher than 1-bedroom market rent at another location. Owners, for their part, select tenants who they think will stay only a few years and look forward to the day that their decontrolled tenants will move on, allowing them to catch up with the market.
These distortions are inevitable under the decontrol-recontrol system, but they are greater than they would be if Berkeley allowed controlled rents to increase at the CPI. If controlled rents increased at the CPI there would still be a gap between controlled and market rents, but the gap would be far smaller. Tensions between owners and tenants might remain to some extent, but these tensions would be more moderate. If rents were allowed to increase at the CPI the decontrol-recontrol system would work far more reasonably. Allowing rents to increase at the inflation rate is an adjustment that is now long overdue.
Michael St. John is a property management consultant who has assisted Berkeley property owners with tenant and rent control problems for 34 years. A Rent Board Commissioner at the beginning of rent control in 1981-83, Michael has championed property owners ever since, attempting to bring balance to a fundamentally biased system of control. Michael recently completed two years of mediation training and is now certified as a mediator under both the NVC-based Mediate Your Life program and the Recourse mediation program. He can be reached at email@example.com 707-937-3711, or 510-845-8928.