Costa-Hawkins Repeal on November Ballot - It's Complicated!

California voters will see Proposition 10 on their ballots on November 6, 2018.  Proposition 10, The Affordable Housing Act of 2018, a voters’ initiative, aims to repeal the Costa-Hawkins Rental Housing Act of 1995.  Costa-Hawkins was sponsored by Senator Jim Costa (D-Fresno) and Assembly Member Phil Hawkins (R-Bellflower), became Assembly Bill 1164 which passed both chambers of the California Legislature, and was signed into law by then California Governor Pete Wilson.

Proposition 10 is the latest battle in the ongoing war between California renters and landlords.  The 1970s were plagued with “stagflagtion,” stagnant wages in the midst of inflation.  In response, cities passed rental controls in an attempt to keep housing prices down.  Then came Proposition 13 in 1978, and the hope that landlords would share their property tax savings with renters thus significantly lowering rents.  When that did not happen, renters started to organize in earnest. But so did landlords, and the result was Costa-Hawkins, which prohibits imposing rent controls on new construction, single-family homes, condominiums, and vacant housing units.  Controls were thus limited by Costa-Hawkins to rental buildings in existence at the time cities passed their rent control ordinances, and limited to the period of time each tenant occupies each unit.

The animosity between renters and landlords over rent control is especially remarkable because at present there are only 15 municipalities (cities and towns) out of California’s 482 with some form of rent control.

Immediate Benefits and Long-Term Costs

Both sides of the rent control debate have plenty of arguments.  Here are a few.

As an immediate stop-gap solution, rent control benefits current renters who cannot afford to pay market prices for their homes.  

Leveraging new data tracking individuals’ migration, we find rent control increased renters’ probabilities of staying at their addresses by nearly 20%. Landlords treated by rent control reduced rental housing supply by 15%, causing a 5.1% city-wide rent increase.”  The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, January 2018.

In other words, the imposition and expansion of rent control does provide immediate benefits to current renters whose landlords stay in the market by preventing significant and sudden rent increases that lead to unpredictability, and could lead to displacement or homelessness.

But, landlords may not want to stay in a rent-controlled market, thus over the long term rent control makes housing less affordable by discouraging the supply of rental units.  Unable to charge what the market will bear, existing landlords will leave the rental market and potential landlords will find investments other than rental property.  

Rent control is a form of price ceiling, and price ceilings lead to scarcity and misallocation.  Milton Friedman said,

We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage.

Here is an example of misallocation.  A young couple with young children moves to a large rent-controlled apartment with plenty of space for the kids.  Years later, the kids are grown and on their own, but the couple is still living in the same now oversized apartment.  It is cheaper for them to stay put in an apartment too big for their needs than to move and pay market price for their dwelling.  The new families with young children that need space for their kids are not in the older couple’s sphere of interest.

Incentives and Punishments

Human nature tends toward the seeking of benefits (and yes, benefits include spiritual and emotional benefits sought by some, but not others).  The track record shows that in the case of renters, they will seek immediate lower rents for the kind of dwelling they want, and in the case of landlords, they will seek the highest return on their investment.

Under the rent control scenario pictured in the section above, landlords would need either incentives or punishments to stay in the market.  Incentives could come in the form of tax breaks, zoning alterations, or “affordable housing bonus plans” (a form of zoning alteration).  Punishments could come in legal costs to prove “just evictions.”

It would follow that rent control expansion, likely to occur in the populous progressive areas of the state should Costa-Hawkins be repealed by voters, would necessitate greater incentives and/or greater punishments to maintain landlords in the rental market.

Politicians might opt for incentives so as not to alienate landlords that are willing to work within the bounds of controls, or that might be a positive presence in re-election campaigns.  Renters’ advocates might have a more jaundiced view of landlords and prefer punishments.

This image from the MTC website shows number of permitted housing units declining since the 1970s.  Incentives or punishments are necessary with each new regulation.

This image from the MTC website shows number of permitted housing units declining since the 1970s.  Incentives or punishments are necessary with each new regulation.

Proponents and Opponents

California is full of renters, especially in the more populous coastal cities where home prices can easily top $1 million.  46% of households rent statewide.  Several cities have more renters than home owners.  RentCafe provides these 2016 percentages of households renting in California cities:  Los Angeles 61%, Oakland 58.9%, San Francisco 56%, Stockton 54%, San Diego 53%, Fresno 52%, Sacramento 50%.

Therefore, California has powerful renters’ advocacy organizations that lobby for implementation and expansion of renters’ protections.  For example, Tenants Together is working hard to repeal Costa-Hawkins.

Obviously, landlords of all types, as well as the real estate industry, including developers and construction unions, are opposed to the repeal of Costa-Hawkins.  Those are the folks who have made or are thinking of making investments in rental property, and prefer, 1) a return on their investment such as the market would bear, and 2) a market less fraught with risks of sudden legislation unfavorable to their investments and their livelihood.  

California politicians and policy makers facing disgruntled renters in their cities might feel they have no choice but to take action on immediate relief.  

For example, Eric Garcetti, Los Angeles mayor and hopeful presidential candidate, supports the repeal of Costa Hawkins on the grounds repeal would restore cities’ authority to address their housing crisis. Given the generally progressive nature of the state, as well the state’s high percentage of renters, it is likely that a number of cities will choose to expand rent control.

On the other hand, California Lt. Governor and aspiring Governor Gavin Newsom opposes the repeal indicating repeal “may have unintended consequences on housing production that could be profoundly problematic.”  

California U.S. Senator Kamala Harris prefers tax credits for renters, and introduced on July 19, 2018, Senate Bill 3250 Rent Relief Act of 2018, which would give tax credits to anybody who spends more than 30% of income on rent and utilities (House companion bill is HR 3670 introduced in September 2017 by Congressman Joseph Crowley D-NY).

So What To Do?

We recommend that voters consider who really wins or loses with the repeal of Costa-Hawkins, because the campaign will surely be laden with extreme rhetoric from both sides.

For example, as of March 2018, according to figures quoted in the Mercury News, 78% of landlords renting single-family homes owned only one or two properties, 12% owned 3 – 10 units, and 9% owned 11 or more units.  Yet Tenants Together chooses to focus on the institutional investors:

Since the 2008 crisis, Wall Street has snapped up tens of thousands of single-family home rentals across the state and nationwide. Thanks to Costa-Hawkins, Wall Street landlords can hike rents by thousands of dollars overnight.  

Opponents of Costa-Hawkins repeal can be equally hyperbolic.  Understandably, the California Apartment Association and its members are concerned about taking a hit should Costa-Hawkins be repealed and cities expand rent control.

In reality, returning extreme forms of rent control to California would bring construction of rental housing to a halt while driving many existing landlords out of the rental housing market.

Although the populous progressive coastal cities in California will likely expand rent control should the repeal of Costa-Hawkins occur, they could also provide sufficient incentives to avoid bringing construction of rental housing “to a halt.” Dialing down the current focus on construction might actually be helpful to residents not happy with all the stacking & packing going on. Hopefully, city leaders will comment between now and November.

Voters opposed to state-wide mandates such as the recently demised Senate Bill 828, could consider capitalizing on all the talk about repealing Costa-Hawkins in order to bring decisions on rent control back to the cities.  The downside of that approach is that if those same voters are also opposed to expansion of rent control, it will take some effort to prevent expansion in their cities.