Rent Control in California: A Critical Moment for Renters, Property Owners and Investors
By David Frosh, CEO & Managing Partner at Fidelity Bancorp Funding
With Proposition 33 on the November 2024 ballot, property owners and investors could face a significant shift in the rental housing market. The potential repeal of the Costa-Hawkins Rental Housing Act, a law that has protected certain properties from rent control for decades, poses substantial risks. While rent control may appear to address rising housing costs, it creates unintended consequences for both renters and real estate investors.
As California prepares to vote, it is crucial for renters and property owners alike to understand the far-reaching impacts of rent control and to consider steps to safeguard their interests.
Impact on Renters
Reduces Rental Housing Supply Rent control discourages developers from building new rental housing and landlords from maintaining existing properties. When landlords are unable to raise rents in line with rising costs such as property taxes, maintenance, and inflation, rental properties become less profitable. Some may even convert units to condos, reducing the overall rental supply. As a result, rents for units not under control could rise as competition for these properties intensifies.
Disincentivizes Maintenance and Upgrades Landlords under rent control are less motivated to invest in repairs or improvements, as they cannot recover these costs through higher rents. Over time, this neglect leads to deteriorating properties and lowers the quality of rental housing.
Favors Long-Term Tenants Over Newcomers Rent control benefits long-term tenants who enjoy below-market rates but newcomers, often young families or immigrants, are left to compete for a limited pool of non-controlled units where rents are significantly higher. This creates a two-tiered system that exacerbates housing scarcity for those entering the market.
Gentrifies and Creates Wealth Disparities Paradoxically, rent control can accelerate gentrification. Landlords may prioritize renting to higher-income tenants who pose less risk, further limiting access to affordable housing for lower-income renters. As a result, wealthier tenants disproportionately benefit from rent-controlled units, while lower-income renters face greater housing challenges.
Degrades Housing Stock Rent control has historically failed to improve housing conditions in cities that have implemented it. For example, Los Angeles has experienced a noticeable decline in its rental housing stock under long-term rent controls.
The broader lesson is clear: rent control leads to the deterioration of properties while worsening the overall housing environment.
The Costa-Hawkins Act: A Critical Safeguard for Property Owners
Enacted in 1995, the Costa-Hawkins Rental Housing Act has been a key stabilizer in California's real estate market. By exempting properties built after 1995 and single-family homes from rent control, it has encouraged ongoing investment in rental housing and provided landlords the flexibility to adjust rents when tenants vacate. This flexibility is vital for keeping pace with rising costs and inflation.
New Construction Protection: Costa-Hawkins has incentivized developers to continue building by shielding new construction from rent control. Without this protection, developers may be reluctant to invest in new projects thereby worsening California’s housing shortage.
Rent Adjustment Flexibility: By allowing landlords to adjust rents to market rates between tenancies, Costa-Hawkins helps property owners manage rising costs. Without the ability to reset rents, landlords might defer maintenance or even sell properties at a loss, leading to a degradation of the housing supply.
For nearly 30 years, Costa-Hawkins has maintained a balance between property owner interests and housing affordability. Repealing it would upend this balance and have far-reaching consequences for property values and rental availability.
WHAT DOES A VOTE FOR OR AGAINST PROP 33 MEAN?
Voting "Yes" on California Proposition 33 would repeal the Costa-Hawkins Rental Housing Act of 1995. This change would allow cities and counties to implement rent control measures on all types of housing, including single-family homes and newer apartments, and to regulate rent increases between tenancies. Additionally, it would prevent the state from imposing future limitations on local rent control policies. |
Voting "No" on California Proposition 33 means you want to maintain the current limitations on local rent control laws. Specifically, it would keep the Costa-Hawkins Rental Housing Act of 1995 in place, which restricts cities and counties from imposing rent control on single-family homes, condominiums, and housing built after 1995. Additionally, it ensures that landlords can set new rental rates when a tenant moves out. |
The Financial Impact of Repealing Costa-Hawkins
If Proposition 33 passes, the repeal of Costa-Hawkins would trigger a cascade of financial challenges for property owners. By capping rental income across a broad range of properties, rent control could stifle landlords' ability to reinvest in maintenance, improvements, and expand their portfolios. Less owner flexibility will likely diminish property values as rent-controlled properties become less attractive to investors.
Moreover, as operational costs continue to rise, property owners could face foreclosure if rent caps prevent them from covering mortgages, property taxes, and maintenance costs. Ultimately, the long-term decline in property standards would harm tenants and lower the overall value of real estate investments.
Proposition 33: A Threat to Property Owners and Investors
Proposition 33 represents a serious threat to the stability of California’s real estate market. If passed, it would enable local governments to impose rent control on nearly all types of housing, including single-family homes and newly built properties. Such a sweeping measure would significantly reduce property owners' ability to manage their investments, further exacerbating the state's housing crisis.
Decreased Property Values: Rent control limits rental income and reduces the future earning potential of properties. This diminishes their overall value, making real estate a less attractive investment. As property values drop, investors may look to other markets, leaving California with fewer development projects and an even more severe housing shortage.
Stifled New Development: Rent control discourages new construction, as developers are unlikely to build housing when rent caps restrict their ability to charge market rates. Without a steady supply of new units, California’s housing shortage will worsen, driving prices up in uncontrolled markets.
In the long run, rent control policies create a cycle of deferred maintenance and reduced housing quality, putting financial pressure on landlords while limiting affordable housing options for renters. The potential consequences of Proposition 33 are clear: declining property values, fewer new housing developments, and a less stable rental market.
Property owners and investors should strongly oppose Proposition 33 to protect their financial interests and ensure the viability of California's housing market.
Lessons from Around the World: The Argentina Case Study
Looking internationally, Argentina provides a valuable case study on the effects of rent control and its subsequent repeal. In 2023, Argentina’s government repealed its rent control laws, which had been in place for decades. The impact of this decision was immediate and overwhelmingly positive for both landlords and tenants.
A Surge in Housing Supply: After rent control was repealed, Buenos Aires experienced a 195% increase in available rental units. This increase in housing supply provided tenants with more options and reduced competition for rental units, which had previously driven prices up. Learn more about Argentina’s housing supply increase.
Lower Rental Prices: The increased supply of rental properties led to a significant drop in rental prices which provided much-needed relief for tenants seeking affordable housing. By allowing market forces to determine rental rates, the city was able to stabilize prices while preserving property owners' ability to generate fair returns. Read more about Argentina’s rent control repeal.
A Balanced Market: Argentina’s experience shows that when the government allows the market to operate without interference, both landlords and tenants benefit. Renters enjoy more housing options at competitive prices, while landlords can maintain their properties and cover operational costs. California could learn valuable lessons from Argentina’s success as it considers the future of rent control.
The lesson from Argentina is clear: rent control distorts the market, reduces housing supply, and ultimately harms tenants and property owners. By removing these restrictions, Argentina created a more dynamic and flexible housing market where supply and demand dictated rental rates. This led to a healthier and more sustainable housing ecosystem.
