Is Proposition 10 a Good Thing or a Bad Idea?

In November, voters in California are being asked to decide whether the state should repeal the Costa-Hawkins Act and allow cities to enact their own rent-control laws or to keep it in place. While it might sound like a great idea as many cities are already rushing to put together rent control ordinances that will go into effect if Prop 10 goes into effect, this might not be the golden egg it is being advertised as. However, many believe that the idea of reinstating rent control laws would not only be disastrous for the rental industry, but also to the supply of affordable rental housing throughout California.

How Rent Controls Might Affect the Property Owner

Should Prop 10 pass, any city in which you have property is likely to put some form of rent cap in place covering how much you will be permitted to raise the rents on your properties. Unless your city already has a cap in place, you are going to have to wait until after the ballot passes (if it does) to see what type of cap is going to be put in place. Worse yet, the current proposition allows cities to create their own caps, and the bill includes extra tenant protections, including “just cause” evictions.

It also possible that in the future, legislation may be passed to regulate your vacancies. At the same time, no property owner ever wants someone else telling them what to do. The idea that this proposition might pass is already starting to have an impact on investment in new housing within the state and should it pass, is expected to impact future investment heavily. Some property owners are already liquidating their assets and moving to other areas of the country. However, many property owners in areas such as San Francisco have found that rent control has increased tenant retention rates by as much as 20%. Keep in mind the rent controls don’t mean you can’t raise the rent; it just means that as long as you keep the increase within your city’s cap, you can do so at the end of the annual lease.

How Rent Controls Might Affect Renters

Many renters seem to be operating under the misconception that putting rent controls in place will lead to lower rents. According to a report issued by the National Bureau of Economic Research, rent controls can have mixed effects. While rent controls might create a 20% higher retention rate, they could also lead to a reduction in the overall supply of rental properties by up to 15% and a 5.1% increase in rent. These figures were taken from a study of the City of San Francisco after the enactment of city-wide rent controls.

Another study conducted by Stanford University shows that rent controls are likely to make finding rental properties harder rather than easier. Rent controls may also lead to people no longer being willing to move around as much as they once did; unless it is to move out to outlying areas where the rents are lower.

No matter which ends of the problem you are looking at Proposition 10, it would seem that it might not truly benefit anyone. While this proposition has been developed with best of intentions (creating a growing affordable rental housing market), the reality is that it is likely to have the opposite effect and needs a lot more work before it is ready to be passed.