A chorus of opponents of Proposition 10, the statewide rent-control initiative on this year’s November ballot, is growing louder and eminently more boisterous. It isn’t your traditional business groups, either.
As you might guess, the Cal Chamber, REALTORS®, builders and apartment owners were early joiners to the long list of opposing groups and, thus far, they’ve supplied the lion’s share of campaign funding. But, recently organizations representing labor, affordable housing, ethnic and civil rights groups and a long list of state and local elected officials have joined on.
Now, academia is speaking out. In a recently published piece on the rent-regulation initiative, UC Berkeley’s Ken Rosen argues rent control policies, which are often touted as an affordability solution, will significantly reduce the supply of rental housing – something California, with rising demand, can ill afford.
Rosen cites precisely the condition we’ve adopted in the state, how we got there and where we’re headed under rent control:
Following decades of strong population growth and persistent under-building, California is in the midst of a housing crisis: A statewide failure to keep up with new demand for housing, even through the recent period of rapid economic growth, which resulted in a shortage of available housing and rapidly rising housing costs. The resulting low levels of construction reflect a wide range of factors including a combination of high construction costs, restrictive land use zoning, community obstruction and prohibitive or costly regulatory hurdles.
He goes on to say how rent control works against establishing a healthy supply of rental housing:
Incentivizes property owners to convert rental units to other uses, such as for-sale housing units or non-residential buildings; reduces the effective supply of available rental units through an inefficient allocation of housing; limits the creation of new rental supply by discouraging development activity. [Under Proposition 10] this would occur without guaranteed exemptions for new properties and assurances that property owners can adjust rents to market level upon tenant vacancies. All of these factors combine to decrease the supply of rental housing in markets with rent control, which ultimately lowers apartment availability and raises rents.
Rosen concentrates his findings on what current owners – particularly Moms and Pops – are likely to do in a strict rent-control environment. He cites much academic research supporting a trend whereby a multitude of property conversions would likely occur in these markets. He refers to a study in 1994 by Stanford University which looked at a San Francisco initiative that doubled down on the City’s rent control ordinance – applying its restrictions on what owners could charge to multifamily buildings of four units or less. The study found that property owners converted rental units into single-family housing, condominiums or renovations not subject to rent control.
Similar reductions in rental housing occurred around the country. A 2006 Brigham Young University study found that rent control in the Greater Boston area led to an increased number of units converting from rental to for-sale. A reduction also took place in New York City, Berkeley and Santa Monica, to name a few, following the introduction in those cities of stricter rent control.
In addition to conversions, Rosen says rent control creates unintended consequences that further reduce supply. He shows that in an environment of scarcity, it is difficult for residents to find new housing and many existing tenants may feel stuck in their units, unable to move or downsize as their housing needs change along with their stage in life. A 1990 study by Auburn University of conditions under New York City’s rent control law, for example, revealed that a quarter of Big Apple residents consumed over 25 percent more housing than they needed. Meanwhile, a similar study of behavior in the Bay Area found the vast majority of residents in rent-controlled San Francisco remained in place for over 20 years. Long stays like these mean rental markets aren’t working.
Rosen says, though, rent control reserves its most punishing impacts for new multifamily construction. He points out that while California’s chronically low levels of construction reflect the wide range of constraints previously mentioned, rent control flatly discourages new production. It essentially says to developers “don’t build here.”
Importantly, developers do not build apartment units in a vacuum, they are responsible to their investors to make a reasonable profit, and they are responsible to their lenders to repay development loans. Without sufficient potential for rent and income growth from a property, investors will be hesitant to invest, lenders will be unwilling to lend and developers will be unable to finance new construction projects.
Rosen cites a 1988 study from the University of Toronto which analyzed the rental market in Ontario, Canada which adopted rent control starting in 1975.
During the four-year period preceding the adoption of rent control, multifamily starts averaged more than 36,800 units. In contrast, rental starts dwindled to an average of approximately 14,500 units during the five years that followed. Moreover, starts remained depressed, averaging nearly 13,400 units annually from 1980 through 1986.
Rosen concludes soberly, but hopefully:
The current pace of new construction continues to fall far short of the statewide housing needs, and the last thing California needs is another barrier to building new rental housing. Instead, the best model for the California housing market would be to reduce barriers to construction in order to incentivize new supply and alleviate the perpetual cycle of housing scarcity. Preserving Costa-Hawkins is a critical first step to achieving this goal.