Rent Control Expansion

Prop 21 largely repeals the Costa-Hawkins Act, a 1995 law that limits cities’ ability to enact rent control. Under Costa-Hawkins, rent control cannot apply to single-family homes, condos, and units built after the earlier of 1995 or the city’s passage of their rent control (for example, 1979 in San Francisco). Costa-Hawkins also prohibits cities from limiting rent increases after a tenant moves out of their unit (such rent increase limitations are known as vacancy control).

Prop 21 follows November 2018 Prop 10, which also repealed Costa-Hawkins. I was among the 60 percent of Californians who voted against Prop 10, for a few reasons:

1. Rent control’s savings for incumbents come at the expense of newcomers and others who have to move, who pay higher housing costs thanks to lower supply of rental housing, according to a 2017 Stanford study.
2. Other research shows that rent control reduces the quality of rental housing (especially vacancy control, which removes the incentive to improve units after a tenant moves out), increases homelessness, lengthens commutes, and keeps people from living where they want to live, and that its benefits accrue disproportionately to rich people.
3. Other policy tools are available to reduce displacement, such as housing vouchers and tax credits for low-income renters.

This explains the 95 percent of top economists who oppose rent control. All these reasons still apply: rent control continues to be a counterproductive, nativist transfer, that arguably crowds out the proven redistribution policies that would actually accomplish its goals.

Legislation from 2019 makes Prop 21 especially inappropriate: Assembly Bill 1482 created rent control statewide, limiting annual rent increases to 5 percent plus inflation. This was crafted with the involvement of tenants groups, labor unions, and developers from across the state. It avoids some of the most damaging forms of rent control that Costa-Hawkins would permit cities to enact, such as vacancy control on 15-year-old properties, set at 0 percent increases. This isn’t hypothetical; Berkeley had vacancy control prior to Costa-Hawkins, and had a 2018 ballot measure to extend its 65-percent-of-inflation rent control to properties 20 years old (nearly reducing the threshold to 15 years). As I wrote in 2018, this is no coincidence: “Despite the bay area’s economic growth, Berkeley has grown its population 40% slower than California, having done so by consistently blocking housing.”

Prop 21 improves upon 2018 Prop 10 by setting a minimum exemption of 15 years, such that brand-new buildings can increase rents up to AB 1482’s limits. While this prevents the worst potential excesses of rent control, of the form the Policy Directory for UC Berkeley’s Terner Center for Housing Innovation described as “a de facto ban on new housing,” it still permits rent control laws that would dramatically reduce the incentive to build. For example, I simulated the effect of rent control laws under conditions that are reasonable by historical standards, and found that a 15-year exemption window would still reduce the net present value of a housing development by over 30 percent. When the payoff is 30 percent less, many housing projects fail to pencil out, and California’s worst-in-the-nation housing shortage (producing worst-in-the-nation poverty) worsens.

The philosophical underpinning of Prop 21 is a conservative one: local control is best, especially to benefit incumbents. This ethos has been the status quo in California, enabling cities to repeatedly shirk responsibility to build badly-needed housing. More local control is not better, just as more states’ rights are not better; what matters is results. The state has already formed a rent control law that avoids exclusionary policies cities would double down on if given the chance. Costa-Hawkins prevents cities from depressing property values and lowering tax revenues by as much as hundreds of millions of dollars per year. Rather than repeal it, we should instead invest in aggressive redistributional policies that keep people in their homes without offloading the costs to newcomers.