Small house with rental label over a wooden background with space

Right Problem, Wrong Solution–Rent Control

 

In 1995, the California State Legislature enacted the Costa-Hawkins Rental Housing Act, preventing local governments from enacting rent controls on single-family homes and on housing built after 1995. Rent controls limit how much landlords can charge their tenants.

Proposition 10 would repeal the Costa-Hawkins legislation, thereby allowing local governments to adopt rent control ordinances without restriction. Before I tell you why this is a terrible idea, let me fully disclose that I personally own rentals and my company has clients who own rentals. We also sell properties used as rentals and we manage rentals. None of these things change the basic laws of supply and demand—and it is the laws of supply and demand that make Proposition 10 such a wrong-headed approach.

Prop. 10 proponents are big on emotional messaging and short on factual information. They share pictures of low-income seniors and disabled veterans with stories of them getting evicted next to slogans like, “The rent is too damn high.”

Rent control is price control. Does anyone remember trying to get gas during the 1970s? When President Nixon (and then Presidents Ford and Carter) artificially suppressed gas prices, they caused a huge mess and massive inflation. Stations ran out of gasoline and consumers could only buy gas on certain days. The artificial price caps prevented market forces from restoring balance.

Rent control will have a similar effect. The current waiting lists for rentals will get even longer. When vacancies appear, the people rent control is intended to help will be the first to suffer. Why would a landlord accept a prospective tenant with a monthly income of $3,000 when they have another applicant for that same unit who makes $7,000 per month?

On the supply side, if rent is capped at $1,000/month, but the cost of construction is $200,000/unit, no one is going to build. That’s the primary problem with any kind of price control. Rents go up because demand is up. If you eliminate the profit motive for building new units, you’ll eliminate the supply of new units. The only exception is when the government steps in and says, “Gee, there isn’t enough housing. We’ll build some.”

The most recent government-sponsored housing in Ukiah can be found next to the Sun House Museum. According to the City of Ukiah, a finished unit cost $382,000, including the land and construction. No developer in his right mind would build units at $382,000 with an artificially low rent schedule of $1,000-1,500 per unit. (That means that those of us who pay state and/or federal taxes have just seen an increase in our tax bill.)

The true solution to the housing shortage, especially the shortage of rental properties, is not rent control, which will inevitably lead to further shortages. Instead, the answer is to increase supply. The way to increase supply is to reduce the cost of development. To reduce the cost of development, we need to make more land available—zone more land for residential use. We also need to streamline the permit process, which the county has promised to do for 30+ years. And we need to cut building costs by reducing onerous and unnecessary building regulations.

Perhaps the single easiest and most effective way to increase the local housing supply is to dramatically reduce or eliminate the uncertainty surrounding the approval of new building projects. Right now, developers must invest tens or even hundreds of thousands of dollars prior to final approval. Uncertainty leads to risk which leads to higher costs. Each time a developer starts a project that doesn’t receive final approval, the cost of that failed investment must be made up in the next project.

California definitely has a housing affordability crisis, but the problem is driven by a housing shortage that is driven by high development costs. Instead of rent control, let’s address the root of the problem—let’s reduce development costs.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.