SKY Properties, Inc.

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6711 Forest Lawn Dr., Suite 107
Los Angeles, CA 90068

(323) 882-6606

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Rent Control: a Bad Idea for Our Economy

A GOOD IDEA FOR POLITICIANS WHO WANT VOTES

In Los Angeles, San Francisco and several other cities, escalating rents, a dearth of vacancies and slow development have created a housing crisis. Besides exacerbating homelessness, the situation has increased the clamor for changes to existing rent controls and the creation of new ones. However, unlike new construction, which would add to the housing supply, putting additional controls on rent can be counterproductive and cause long-term economic disaster in the housing market.

The numbers are alarming: Median apartment rents have risen 26 percent in California and 23 percent in Los Angeles County over the past three years, according to Zillow. An estimated 2 million households spend at least 30 percent of their income on housing. The homeless population in the area has grown by 23 percent. Yet rent control has decidedly not provided an answer to housing shortages anywhere, and it even generally makes it more difficult to find affordable rentals.

Rent control economics

Rent control restricts property owners from raising rent by more than a set amount (such as 3 percent a year).

Demand for controls has historically been driven by stories of exorbitant increases forcing lower- and middleincome people from homes.

However, the imposed price cap creates an artificial shortage of available units, as people in those apartments choose to stay put. They continue paying lower rates than the market can support. This can easily lead to wealthy people paying unbelievably low rents.

If a tenant does vacate a rent-controlled unit, the property owner can usually increase the rent to reflect the marketplace. However, owners often have trouble filling these vacancies because the previously depressed property income makes building maintenance unaffordable.

Current political climate

The tension between property rights and affordable housing is driving political debate. Legislation was introduced in Sacramento earlier this year that would repeal the 1995 Costa-Hawkins Act, a move that has drawn considerable opposition from apartment owners. While shelved for now since the current legislative session ends soon, a repeal would have a tremendous impact.

Costa-Hawkins allowed landlords statewide to raise rents as high as they wish if a tenant voluntarily vacated or was evicted - even in cities that had passed rent controls. The act banned single-family homes from rent caps. The measure also exempted rental housing built after 1995 from rent control. When Costa-Hawkins was enacted, it eliminated tougher rent control ordinances in many cities, including Santa Monica and West Hollywood.

In Los Angeles, however, the city recently stiffened restrictions around the demolition of rent-controlled units. If property owners tear down rent-controlled apartments and replace them with new units within five years, those new units fall under L.A. rent control regulations. An exemption is granted if 20 percent of the new units are “affordable housing.”

About 15 California cities have some form of rent control in place. These efforts are escalating, though voters in some California cities (Alameda, Burlingame and San Mateo) turned down rent control measures in the last election. This past November, voters in Mountain View and Richmond approved new rent increase limits. Beverly Hills recently reduced its maximum annual rent increase to 3 percent. Rent-control campaigns are reportedly beginning in Glendale, Pasadena, Santa Barbara, San Diego and unincorporated portions of Los Angeles County

Keeping up to date

Property owners need to be cognizant of the changes being debated or currently underway. For example, the L.A. tear-down/affordable housing rule passed in April could affect plans for their buildings. Landlord groups in California are working to fight other grassroots rent control efforts. They are also advocating for more statewide housing development efforts. However, the housing shortage and new developments entering the market that are exempt from rent control combined will keep the issue in the forefront.

Keep an eye on the effort to repeal Costa-Hawkins resurfacing in the next legislative session. It would undoubtedly encourage local officials to craft new laws throughout the state and apply them to far more rental units. That could, however, further worsen the housing shortage and have economic consequences.