November 8, 2018 update — Voters rejected Proposition 10 at the ballot box, though local efforts to rollback Costa Hawkins continue.
November is swiftly approaching, bringing with it some tough decisions voters will need to make at the ballot.
In particular, in November 2018 voters will vote yes or no on Proposition (Prop) 10. The text voters will vote on states:
A YES vote on this measure means: State law would not limit the kinds of rent control laws cities and counties could have.
A NO vote on this measure means: State law would continue to limit the kinds of rent control laws cities and counties could have.
The question may seem simple enough at first glance — but what are the impacts of a yes or no decision on the housing market and the broader economy? To answer this question, a deeper look at the issue of rent control in California is needed.
Current statewide rent control laws
Rent control is meant to keep rents on certain units from rising beyond the financial abilities of long-term tenants. This is especially important here in California, where housing cost increases regularly exceed income increases. In theory, this creates more stable neighborhoods since tenants won’t be forced out in the face of gentrification.
However, there are several disadvantages to rent control. This system gives less incentive to landlords to maintain and improve properties. It also encourages landlords to push out tenants whenever possible, since they are able to collect higher rents whenever a new tenant moves in due to a controversial workaround produced by Costa Hawkins.
If passed, Prop 10 will repeal Costa Hawkins, the controversial law which resets rent-controlled apartments to market rate whenever a tenant moves out. It also institutes a ban on rent control measures for new construction units and single family residences (SFRs). [Calif. Civil Code §§1954.50-535]
Since Costa Hawkins was enacted in 1995, rent control units have been limited to old apartments built prior to 1995. Thus, as multi-family units continue to be constructed across California (even at their current slow pace), the number of rent-controlled units remains flat, meaning the share of rent-controlled units has fallen, even as the need for these units has soared in the face of today’s housing shortage.
Court rulings require a fair rate of return for landlords, enabling landlords to increase rents to receive at least some profit off of rent-controlled units. Prop 10 would not change this rule, and in fact would codify this measure, so that while local governments may pass their own rent control laws, they may not be so strict as to remove landlords’ fair rate of return.
Rent control laws under Prop 10
If Prop 10 passes, instead of the sweeping state laws on rent control to which cities adapt their local laws, each locale will be able to fully design its own rent control system. What will these new systems look like?
The anticipated impact of passing Prop 10 is that most cities and counties will enact stricter rent control laws, in favor of lower long-term rents for tenants.
This is because Costa Hawkins currently resets rent-controlled units to market rate whenever a tenant vacates the premises. However, under vacancy control laws repealed by Costa Hawkins, the rent-controlled units would remain at their same lower level (plus an inflation factor), regardless of whether it was vacated and passed on to the next tenant.
The result of removing vacancy controls has been significantly higher rents on rent-controlled units. For example, at the end of 2017 the average rent-controlled, one-bedroom apartment was just over $1,900 a month in Santa Monica. If the same vacancy controls had remained in place before Costa Hawkins went into effect, the average rent-controlled one-bedroom apartment would be renting for closer to $1,000 a month, according to an analysis by Mercury News.
Clearly, allowing cities to reinstate vacancy controls will have a positive impact on renters. But what about landlords?
Landlords of rent-controlled units will ultimately suffer, with many who claim they will simply sell and look for more profitable investments.
For instance, if the old vacancy controls had remained in place, landlords in Berkeley would be collecting one-third less rent than they currently charge, according to the same Mercury News analysis.
Prop 10 was put on the ballot via a joint effort by the:
- AIDS Healthcare Foundation;
- Alliance of Californians for Community Empowerment Action; and
- Eviction Defense Network.
When Costa Hawkins was enacted back in 1995, it was endorsed by California’s landlord lobby.
The impacts to keep in mind when voting on Prop 10
Besides the blatant pro-tenant (yes) vote versus pro-landlord (no) vote, what other impacts will ripple throughout the state if Prop 10 passes?
California’s Legislative Analysts’ Office claims Prop 10 will result in reduced government revenue, ranging from very little to tens of millions of dollars per year — depending on how local governments choose to implement their rent control laws. Revenue will fall due to an expected decrease in property taxes as rent-controlled property values fall. Property values will decline since landlord profits will fall, making this type of property less valuable.
However, reduced government revenue from lower property taxes may be offset by more sales taxes collected through increased economic activity from tenants, who will be spending less on rent. Tenants in California regularly pay half or more of their income on rent.
Lower rents are all very well and good for tenants. But the decline in rent-controlled property values, along with the new potential for rent controls on new construction, may discourage new rental construction. Less construction would be hugely negative for California’s housing shortage. There are already 1.5 million fewer homes than needed to keep up with the population of low-income residents in the affordable housing inventory, according to the Low Income Housing Coalition.
Real estate professionals: How are you voting on Prop 10 in November? Share your thoughts with other readers in the comments!