Thursday, 12 September 2019

California Passes Statewide Rent Control, but Will It Backfire?

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The California legislature this week passed a statewide rent cap that will affect millions of tenants, as part of the Golden State’s attempt to address a surging deficiency of affordable housing.

Governor Gavin Newsom, a Democrat, indicated that he would sign the bill, which was approved quickly during the last week of the legislative session. Newson has made tenant protection one of his top priorities and led negotiations on the legislation.

The bill limits yearly rent increases to five percent after inflation and imposes new barriers to eviction. Proponents see it as a way of dealing with the exploding homeless population and soaring housing prices — the highest prices in the nation. 

An estimated eight million residents of rental homes and apartments will be impacted. The bill was heavily pushed by tenants’ groups, the California Business Roundtable, and the state’s biggest landlord group.

The move represented an important shift. California policy has long curbed localities’ ability to impose rent control policies. Now the state itself is implementing rent control.

“The housing crisis is reaching every corner of America, where you’re seeing high home prices, high rents, evictions and homelessness that we’re all struggling to grapple with,” said Assemblyman David Chiu, a San Francisco Democrat who authored the bill. “Protecting tenants is a critical and obvious component of any strategy to address this.”

California follows in the steps of Oregon, which in February became the first to pass statewide rent control with a law that limits rent increases to seven percent annually plus inflation.

New York strengthened its rent control regulations this year. The Housing Stability and Tenant Protection Act lowers the rent increase cap from six percent to two percent in New York City and from 15 percent to two percent in other counties.

New Jersey, Maryland, and the District of Columbia also have localities that practice some form of rent control. Thirty-seven states ban it, while nine allow their cities to enact it, but have no cities that have chosen to do so.

But there’s a growing movement to change that. Rent control proposals have arisen as legislation or ballot initiatives in about a dozen states since 2017, including in Washington, Colorado, and Nevada.

California has been a hotbed for the housing issue. After adjusting for housing costs, it has the highest state poverty rate: 18.2 percent — five points above the national average.

As homelessness continues to grow, California has approved several multibillion-dollar programs for shelters and subsidized housing.

In San Francisco, which has long had rent control policies in place and is plagued by a shortage of affordable housing, the homeless population has grown by 17 percent since 2017. California alone accounts for roughly half of the country’s unsheltered homeless population.

Is rent control the answer the California’s woes. Not everyone is convinced.

“Rent control is definitely having a moment across the country,” said Jim Lapides of the National Multifamily Housing Council. “But we’re seeing folks turn to really shortsighted policy that will end up making the very problem worse.”

Many economists understand the futility of the types of policies currently being pursued in California. History has shown that rent control ultimately hurts tenants instead of helping them.

In his book Economic Facts and Fallacies, Stanford economist Thomas Sowell explains that by lowering the profitability of apartments, rent control disincentivizes the building of these dwellings — reducing the supply and thereby raising the price:

Meanwhile, the lower rate of return on investments in new apartment buildings, because of rent control, cause fewer of them to be built. Where rent control laws are especially stringent, no new apartment buildings at all may be built to replace those that are wearing out. Not a single apartment building was built in Melbourne for years after World War II because of rent control laws. In a number of Massachusetts communities, no rental housing was built for a quarter of a century, until the state banned local rent control laws, after which building resumed.

Moreover, as landlords make less money from rentals, they start cutting corners on maintenance, leading to worse living conditions for tenants.

The true cause of affordable housing shortages is insufficient development. When developers are allowed to build residences freely, the law of supply and demand balances prices out. But many communities, including places such as San Francisco, have strict zoning laws and ordinances that greatly restrict the number of building permits that can be issued.

Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, made this case in regard to Oregon’s far-reaching rent control law.

Now, there is something that legislators in Oregon can do if they truly want to slow down the growth of rents.… First, they could eliminate — or, at the very least, reform — the zoning laws that restrain development in the state. There’s a bill going through the state legislature that would take a stab at terminating zoning restrictions that allow only single-family homes in many neighborhoods.

Second, they must reform the state growth boundary requirement, which creates boundaries around urban regions outside of which no development can take place. That reduces the supply of development and, in turn, jacks up the rents. Making matters worse, the regulation has formulas that allow the boundaries to grow only slowly.

As with most crises, California’s latest action on the housing issue is a case of government intervention being used as a solution to a problem caused by government intervention — a remedy that will ultimately prove worse than the illness. 

Photo: ejs9 / E+ / Getty Images Plus

Luis Miguel is a writer whose journalistic endeavors shed light on the Deep State, the immigration crisis, and the enemies of freedom. Follow his exploits on FacebookTwitterBitchute, and at luisantoniomiguel.com.

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