There has been much talk in the news of the tenant advocate groups receiving enough signatures to add a measure in this November’s ballot to repeal Costa-Hawkins. The Costa-Hawkins Rental Housing Act is a California state law enacted in 1995 that placed limits on local rent control ordinances. Costa-Hawkins did not outlaw rent control, but instead placed two main limits to municipalities that had/have rent control: 1) It exempted certain types of buildings from rent control (Single Family Residences, Condominiums and new construction), and 2) it instituted vacancy decontrol (whereby the rents of a unit subject to rent control could be brought up to market rate upon a resident moving out.
Citing that Costa-Hawkins is responsible for high rents in California is the mantra of the tenant advocate groups. Unfortunately, this is not the case. High rents boil down to one simple economic fact… supply and demand. When supply outweighs demand we see a decrease in prices, conversely when demand outweighs supply prices will increase. Currently demand for housing outweighs the critical supply, causing a dramatic increase in rents. Repealing Costa-Hawkins may have a short term effect of slowing rent growth, but ultimately will cause higher rents and less options for tenants.
Why is this? Well, if developers cannot get market rate rents on new developments, or on properties that are repositioned, then they are disincentivized to build new developments or put in capital improvements in older properties. This will cause a supply issue where demand is continuing to grow. Also, investors/landlords will likely not want to invest in a market where the free trade is limited, nor will they want to invest in capital improvements in their buildings. Lastly, in a strict rent control market, tenants will have less options to move, especially to newer construction.
So, what is the answer to this? There are several ways cities can help the housing crisis. Instead of penalizing and/or placing restrictions on developments and investors, municipalities must look for ways to incentivize them to build lower income housing. Perhaps additional tax credits, streamlining the approval process for low-moderate income housing, or offering surplus government land at a discount for properties that can be designated as low-moderate income housing. Cities should consider this in that new development would potentially create additional income in the form of property taxes and business taxes (for rent collected). In this way, developers will have incentives to build additional housing, which will in turn help everyone out, a rare win-win situation.
