Statewide Rent Control Will Make California’s Housing Crisis Even Worse

Tuesday, September 24, 2019

One of Governor Gavin Newsom’s major campaign promises was to build 3.5 million new homes in California by 2025. But new building permits this year are 80% below Newsom’s annualized target and are even below last year’s extremely low level. California’s economic policies, which raise the cost of building and which can even block development, are the reason why California’s housing crisis is so severe.  

And things just got worse. Earlier this month, Governor Newsom coordinated a new rent control bill with the state legislature that creates even more disincentives to building new housing in the state. This bill, which is called the “Anti-Rent Gouging Bill,” will limit rent increases to 5% annually, plus inflation, on buildings that are at least 15 years old.

The bill will also penalize landlords who choose to use their properties for something other than rental housing. The bill requires landlords to provide existing tenants with one month of rent if the building is taken off the rental market and the tenants must move.

If this bill becomes law, it will unintentionally make future rental housing even more expensive than it is now. The bill could affect more than 1 million properties. The bill would be in effect until 2030 and is now on Newsom’s desk.

Politicians and other supporters of the bill argue that it will provide renters with stability and prevent landlords from “rent gouging.”

But political proponents of rent control rarely, if ever, discuss the potential negatives of rent control policies. State Assemblyman David Chiu, the author of the bill, said, “Our anti-rent-gouging bill is a critical protection that will help renters while still allowing landlords to make a healthy return.”

If only this were true. Unfortunately, any policy that affects how prices are determined within a market impedes the normal competitive forces of supply and demand and distorts market outcomes. There is simply no way to implement rent control—or any other control on prices—without damaging economic performance and making some consumers much worse off.

The simple economics of rent control tells a very different story from that of Assemblyman Chiu. The bill will take rental units off the market, reduce new housing construction, and raise current and future rents. Rent control doubles down on the factors that have conspired to make California housing costs so high and that have kept construction of new housing so low.

Rent control benefits those who are presently renting and who expect to remain living in the same rental housing into the future, as this group pays lower future rents than they otherwise would. But rents rise for almost everyone else, including young people who have yet to move into their own housing.

One reason rents rise is that rent control leads landlords to pull property off the rental market and convert it into condominiums or townhouses that become owner-occupied homes. Moreover, controlled properties tend to receive much less timely maintenance, repair, and renovations as rent control reduces the return to investment.

Some have argued that the bill will not depress new housing construction because it is temporary and is being advertised as a stop-gap measure to stabilize rents while lawmakers fix the current crisis.

But developers and builders know that this bill will keep the door open for future rent control policies, and with perhaps even stricter controls. Anyone who has observed California’s housing market knows that the crisis reflects decades of badly designed housing policies, and they also know that California lawmakers have done nothing to resolve this issue, despite promises every year to do just that.

There is no reason to believe that the needle will move anytime soon on the state’s housing crisis, which means that temporary statewide rent control will be expected to morph into permanent statewide rent control in the future. Developers and builders will be extremely cautious in building new units, because they know that once new housing is built, it is a sitting duck for the imposition of additional rent controls or other policies that lower future returns on their investments.

Ironically, the problems that rent control is advertised to solve become worse after rent control is adopted. A very recent study of rent control shows that rents in San Francisco skyrocketed after rent control was adopted in some neighborhoods in the city. Presently, the average rent for a one-bedroom San Francisco apartment is about $3,700 per month, which in turn requires qualifying income of roughly $125,000 per year.  

The authors of the study found that rent control limited renters' mobility by 20%, as residents remained in controlled units for a significantly longer time than residents in uncontrolled units. Longer tenure in controlled units reduced turnover in the rental market, which makes it difficult for new renters to find homes.

They also found that landlords in rent-controlled neighborhoods reduced the rental housing stock by 15% by selling to owner-occupants and by redeveloping buildings. The authors concluded, “Reduced rental housing supply increases rents, ultimately undermining the goals of the law.” They also found that young people and low-income households were most negatively affected by rent control.

While California is on the verge of expanding rent control, Toronto is moving in the opposite direction by eliminating some rent control. Since this change, new building in Toronto has increased substantially, vacancy rates are rising, and rent increases have declined.  The number of new completed units this year hit a 25-year high, and there is a record number of buildings under permit.  

Toronto is going in the right direction by removing regulations that depress housing supply. Deregulation means more housing and lower rents. California is going in the absolute opposite direction, and you can guess what is going to happen to California’s housing market.