RENT CONTROL: LANDLORD VS. TENANT

By: 
Al Jacobs

Here in late October of 2018, another California election is upon us. With the traditional new bond issues to be added to the state’s unfunded obligations as well as a run-of-the-mill slew of candidates, each vowing to represent all the people, you wonder if there’s a reason to go to the polls to cast a vote. Let me assure you there is. The Initiative measure, Proposition 10, a major change in a matter relating to rent control, qualified for the ballot. If approved by the voters, it can affect millions of persons to the tune of billions of dollars. At this moment pro seems to be running a dead heat with con.

The intent of Prop 10 is repeal of the Costa Hawkins legislation, enacted in 1995, under which the state set general requirements for all current and future rent control ordinances – at the time being administered in 15 cities. Specifically, it exempted single-family homes and condos from all restrictions, prohibited cities from establishing rent control – or capping rent – on units constructed after February 1995, and permitted a landlord to raise the rent on a unit to market rate once a tenant moved out.

Now the crucial question: What happens if the Initiative measure is successful? Actually, the immediate effect will be minimal. Repeal of Prop 10 won’t result in a single property being subjected to rent control, nor modify any rules in the municipalities which subscribe to it. However, with these new options available, it will offer every community in the state the ability to set rent control policies with far greater flexibility than in the past, should they choose to go through the process of instituting such action.

As to the advisability of a yes vote on this Initiative, proponents point out California is in the midst of a housing crisis. More than 54 percent of renters now spend more than 30 percent of their income on housing, a benchmark for unaffordability, with housing experts at UC Berkeley blaming the cost of housing for the state’s persistently high poverty and homelessness rates. Even many persons skeptical about rent control admit it’s good for people living in rent-controlled units. Specifically, Rebecca Diamond, Associate Professor of Economics at Stanford School of Business, whose current research studies relate to local housing markets across U.S. cities, and who examined the evolution of rent control in San Francisco from 1979 through the present, found the law helped to favorably stabilize the city by enabling a sizeable percentage of tenants to remain as residents who otherwise would have been driven out.

Those who favor the concept of rent control generally contend that making up for the severe housing shortage we now experience, caused by the past 40 years of insufficient rental housing production, and the immense hardship now faced by an increasing number of people, will require sacrifices – with rent control pretty much the only thing on the table which can be implemented quickly and at a cost the truly endangered portion of society can afford.

On the other side, as expected, there’s no shortage of those who oppose Prop 10, and some of the state’s more prominent newspapers spell out their objections in no uncertain terms. The following excerpts are a representative cross section of the arguments offered.

Los Angeles Daily News: "Taxpayers could take a hit: If apartment values decline, owners can obtain a lower property-tax assessment to reflect the reduced value. That will reduce revenue to local governments and create pressure for other tax increases to maintain services. Prop. 10 would also require taxpayers to foot the legal bills for defending the measure in court if it is challenged. Rent control creates shortages. California can’t afford a reckless initiative that repeals an important law that has been on the books for more than 20 years.”

The Fresno Bee: "There are better solutions. Cities that haven’t kept up with demand should accept the failure and offer building incentives – property tax rebates, discounted loans, and streamlined permitting.”

Marin Independent Journal: "Rent control is not the cure to California’s housing shortage that proponents promise. What’s needed is building more housing in the right places.”

The Mercury News: "Rents in California, especially the Bay Area, are soaring. Decent housing is unaffordable for far too many. But the solution is to build more housing, not restrict rents.”

The Desert Sun: "California already has a systemic housing shortage that is fueling its staggering poverty rate as more and more family income is dedicated to rising rents. The chilling possibility of rent control, even in areas that don’t rush to impose it, won’t be an incentive to increase such properties.”

The Modesto Bee: "This is economics 101: Short supply, high demand, higher prices. More units, low demand, lower prices. Tell a landlord she can’t raise the rent, and repairs will be delayed. With rents locked in place, upgrades never pencil out.”

The San Diego Union-Tribune: "The problem for advocates is that rent control has a long history that shows not only that it doesn’t work, but also that it makes housing problems worse. But adding considerable new housing is ultimately the most constructive, enduring way California can address its housing crisis. It’s the only way.”

Now that we’ve hashed over the views of others, I’ll offer my opinion of this rent control proposal. Let me state first, because of my status as a multifamily residential property owner, I have a personal stake in the contest. However, I’m not inclined to merely spew out the conventional pro-landlord talking points, if for no other reason than they’re not particularly convincing. In reality the regulatory limitation of an apartment owner’s ability to raise rents during a period of rental shortage, as we’re currently experiencing, can be justified. Many landlords are insensitive buffoons who take unwarranted advantage of tenants simply because they can get away with it. As a result of this they give reputable property owners a bad name and effectively instigate much of the existing anti-landlord bias.

And as for the actual effects of rent control, you can’t deny it enables many tenants to remain in units they couldn’t otherwise afford. In the short haul it’s benefited many low income individuals, thanks to a landlord subsidy … and the short haul is probably the best they can hope for.

Despite the relief rent control can offer some fortunate souls, I’m basically opposed to regulatory assignment of rental values. My reasoning is fundamental. When you choose in the long haul to ignore economic reality, perverse human nature invariably gets in the way. With government officials assigning values, those who feel short changed will do what they can to subvert the rulings. I recall during a Los Angeles housing shortage in 1947 – when federal rent stabilization was the law of the land – my mother was forced to rent a studio apartment at the low government-assigned rent by paying an under-the-table cash bribe of $650 to the apartment owner. ($650 was then equivalent to $8,600 today).

Once rent control becomes an established reality, all sorts of irregularities become a part of the mix. Landlords apply for and are granted exemptions under questionable circumstances; tenants, or their representatives, request compensation for violations by the landlord of obscure terms of the rental agreement; if, over time, the rental income of a property can no longer sustain the costs of its operation, deterioration of the property will be observed; tenants will be issued notices to vacate on the pretext the apartment owner intends to personally occupy the unit; and the owner will file for a condominium conversion permit, thereby removing the building from the rental market. These are only few of the devices which may be used; human ingenuity can be devious.

A final comment: Whether or not Proposition 10 is approved, it won’t resolve the housing affordability issue. California is politically incapable of housing the homeless, of substantially increasing the number of rental units, or of lowering home construction prices. All officials can do is express their indignation, pass bond measures pretending to address the problem, and castigate those with whom they disagree.

 

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com

al@beachcomber.news

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