FROM OUR COMPANY CHIEF ECONOMIST, SELMA HEPP
What is Proposition 10?
Proposition 10 is a statewide ballot initiative in the November 2018 election that aims to repeal the Costa-Hawkins Housing Act. While Proposition 10 has become a polarizing issue, it is critically important to understand what it does and does not do.
What is the Costa-Hawkins Rental Housing Act?
The Costa-Hawkins Rental Housing Act was passed by the California legislature in 1995 and places limits on municipal rent-control ordinances.
The act limits municipal laws in the following ways:
- In cities that already have rent-control policies, it freezes the eligibility of units that can come under rent control at the age threshold that was in place when the ordinances were adopted. For example, units in San Francisco that fall under rent control are those built prior to June 13, 1979.
- It prohibits “strict” rent control (for instance, vacancy control), which requires rents to remain controlled even after a tenant moves out. Since Costa-Hawkins passed, owners may still increase the rent equivalent to the change in the cost of living as measured by the Consumer Price Index (averaging about 5 percent). Prior to the enactment of Costa–Hawkins, such strict vacancy controls existed in five California cities: Berkeley, Santa Monica, Cotati, East Palo Alto, and West Hollywood.
- It exempts all single-family homes, condominiums, and units built after Feb. 1, 1995.
In California, 15 jurisdictions have passed some form of rent control, including “legacy” rent control, meaning cities with ordinances dating back to the late 1970s and early 1980s, such as San Francisco, Los Angeles, Berkeley, and Santa Monica. Bay Area cities such as Mountain View and Richmond have only recently enacted such ordinances. Cities listed as rent controlled by the state of California: Alameda, Berkeley, Beverly Hills, East Palo Alto, Hayward, Los Angeles, Los Gatos, Oakland, Palm Springs, San Francisco, San Jose, Santa Monica, West Hollywood, Mountain View, and Richmond.
The major purposes of the Costa-Hawkins act are to eliminate vacancy control and thereby allow property owners to adjust the rent to market price and to exempt certain categories of rental units from rent control — new construction, single-family homes, and condominiums.
The act leaves the power to determine most other elements of rent control to the cities. Cities remain in control of determining any changes to the rental amount of a tenancy and possess a substantive jurisdiction to regulate evictions and an owner’s ability to otherwise end a tenancy. Accordingly, cities could prohibit an owner from terminating a tenant without “just cause.” Each California city has its own independently enacted rent-control ordinances, which vary widely.
What Would the Repeal of Costa-Hawkins Mean?
Advocates of expanding rent-control policies gathered enough votes to put a bill on the November 2018 ballot. Assembly Bill 1506, also called the Affordable Housing Act, calls for the repeal of Costa-Hawkins. If approved, in addition to repealing Costa-Hawkins, any subsequent amendments to the Affordable Housing Act would require a two-thirds majority vote by the state legislature. However, even if Proposition 10 passes, each city would need to go through the process of passing new legislation before the repeal would have any effect. At that point, it would be up to cities to decide if they want to expand their rent-control regulations or leave the current laws intact.
It is an undeniable fact that the cost of housing in major California metropolitan areas has grown far out of reach for many residents. The housing-cost burden has become the Achilles’ heel of California’s economic future. Proponents of rent control generally believe that price protections are the most effective ways to help tenants avoid displacement, which disproportionately affects seniors, lower-income tenants, and renters of color. Nevertheless, California’s affordability crisis is a direct result of an undersupply of housing built over the last decade.
According to a recent Department of Housing and Community Development (HCD) report, “California’s Housing Future: Challenges and Opportunities,” housing production has averaged less than 80,000 new homes annually over the last 10 years, and ongoing production continues to fall far below the projected need of 180,000 additional homes annually. With now an almost 2 million housing-unit deficit, there is a need for an additional 1.8 million units to be built by 2025 to meet the state’s projected population and household growth.
If these units are not built, housing will become even less affordable.
Nevertheless, as research on the impact of rent control across the state and the country has shown, expanding rent control will further exacerbate affordability by adding an additional disincentive to constructing new units and supply of rental units in the market. Specifically, research cited in a recent analysis from University of California, Berkeley shows that rent control reduces the supply of rental housing in the following ways:
- Rent control incentivizes property owners to sell or convert them to nonresidential units.
- Rent control reduces the efficient allocation of housing by disincentivizing current tenants to move even when they don’t need all the space or their financial means have improved beyond the need for rent-controlled housing.
- And critically important now, rent control discourages new development of rental supply by removing developers’ certainty that they will be able to repay their loans and their investors, significantly impacting the feasibility of many construction projects.
For example, a recent study of San Francisco’s 1994 Proposition I, which extended the original rent-control ordinance to include smaller buildings of four units or less, found that these properties were 8 percent more likely to convert to owner-occupied housing. San Francisco consequently faced a notable loss in rental housing, as well as higher prices, due to reduced supply. The offsets amounted to $5 billion of welfare losses to all renters.
Similarly, in West Hollywood, rent control led to the loss of 764 units between 1986 to 2016, with only 10 percent returning to the market as new apartment units. In Santa Monica, out of 3,042 units withdrawn from the market between 1986 and 2017, only one-third were replaced with new rental units (and not necessarily rent-controlled ones). In fact, as a result of the Proposition 10 ballot initiative, some new multifamily projects across the state have already been placed on hold as developers face uncertainty over projects’ feasibility.
Furthermore, some Proposition 10 proponents have argued that the issue is about local government control and allowing jurisdictions that better understand their housing problems to deal with them. Nevertheless, while local jurisdictions are best informed about their own local imbalances — such as homelessness, displacement, and gentrification — a serious lack of local government willingness, and more importantly local residents, to allow low-to-moderate-income development projects has led to California’s 2017 Housing Package.
The package has several regulations that are specifically aimed at holding cities and counties accountable for addressing their housing needs. Over the years, communities have either adopted a noncompliant housing element or failed to submit their housing element to the HCD for timely review.
The package provides greater accountability by:
- Increasing enforcement of state housing-planning (“housing element”) law and enabling the HCD to refer violations to the Attorney General
- Strengthening housing-planning laws to ensure that appropriate land is available for new development and increasing transparency on local governments’ progress on meeting legally mandated housing targets
- Creating a $10,000 per-unit penalty on cities and counties that deny (for unjustified reasons) approval of new homes that are affordable to low- or moderate-income Californians.
In addition, there are a number of chronic local government problems that are driving the current housing crisis, such as strong local community opposition; outdated zoning laws that limit residential density and land-use efficiency; caps on population, housing-growth, or building-height limits; onerous parking- or transportation-improvement requirements; and excessive design review, development fees, and the “fiscalization of land use,” which lead local jurisdictions to favor commercial growth as opposed to residential. Passing Proposition 10 in no way addresses any of these issues.
What are Proposed Alternatives for Tenant Protections?
The main objective going forward is to ensure meaningful protections to renters without constraining the supply of new housing. Without new housing supply, costs will become even more prohibitive, and rent controls will further incentivize property owners to remove their units from the market.
To that end, there have been numerous suggestions proposed by local and state leaders from real estate, finance, academic, public-policy, and government agencies.
Specifically, the Terner Center from University of California, Berkeley proposes that the state should adopt:
- A broad “anti-gouging” rent cap applied to all rental units statewide that would make it illegal to raise rents above a specific amount, determined annually by a formula
- An incentive to developers of new and rehabilitated rental buildings to include on-site, below-market rate units in exchange for property-tax relief
- Creating a central registry of rent-controlled housing to ensure equity among tenants
In addition, there is broad agreement among leaders that greater efforts should be placed on:
- Adoption of inclusionary zoning policies combined with density bonuses
- Development of housing trust funds and other programs for local funding of affordable housing
- Exemptions from parking and traffic limitations for low-income housing developments
- Funding for the rehabilitation of older commercial and publicly used property to affordable units
- Broadening legalization of accessory dwelling units (in-law suites) without additional parking requirements or excessive permitting costs
- Broadening of zoning ordinances to more readily accommodate quality manufactured housing as an alternative to more expensive conventional housing
- Mixed-use zoning: inclusion of housing in commercial areas by adding new and existing or redeveloping vacant or underused retail, office, and industrial areas
Lastly, in January 2018, state Senator Scott Wiener introduced Senate Bill 827 in an attempt to increase new high-density housing near transit. While the bill failed to clear its first policy committee in the Senate, the proposal would have considerably increased zoning densities near major transit stops. With some amendments, it could have been a large step in improving the current crisis.
If California cities such as Los Angeles and San Francisco want to compete on a global stage and remain economic and innovation powerhouses both in the U.S. and globally and ensure that children who are born here can remain to live here in the future, preserving Costa-Hawkins and refocusing attention on the above proposed alternatives will be more productive.