Rent Controls in California

October 31, 2019

Rent Control’s Sad Legacy Claiming More Victims

Author Opinion: While few may sympathize with the plight of property investors, the implementation of rent controls quickly degenerates the market for everyone. The long term consequences may be severe for California.

The matter of rent controls will be even more contentious in 2020. I thought I’d take a sensible position on the issue.

News sources are reporting a new wave of homeless tenants. This might actually be just the leading edge of the outcome of California’s use of rent control laws. Evictions are growing fast as some landlords take advantage of legal loopholes. Yet when the loophole is closed on Jan 1st, you may see a selloff of rentable properties, meaning they’re taken off the market. That creates more demand for rentals thus raising price pressures.

Rent Control Protest. Photo courtesy of Alex Garland, via Flickr. Copyright Alex Garland

In a previous post on rent controls, I showed how they harm landlords, investors, builders, property managers and ultimately tenants themselves. Rent controls are like refined sugar giving poor renters and tenant associations a quick high. Yes, rents are high consistent with high property values, yet rent controls undermine the long term health of the rental ecosystem.

What Happens When Property Investors Leave California?

As discussed in our California housing report, there is big demand for rentals, and it won’t go away, even if demand shrunk a little. This summer’s lacklustre market did nothing to bring rent prices down.

Rent controls are often placed by politicians pandering for visibility and votes rather than as a viable pro-housing strategy. And they often go beyond price suppression to make it impossible for landlords to deal with bad tenants.

The best housing strategy is a pro-construction and pro-investment strategy, especially in a severe shortage situation, as exists in California.

Building incentives are the route to go, rather than punishing landlords. The problem with California in particular is that with property prices and taxes so high in California cities and upkeep so expensive, rental landlords find it more difficult to turn a profit.

That’s why investment in California’s rental property stock is at an historic low.

California to Enforce Rent Controls within 2 Months

When California legalizes rent controls on January 1st, 2020, investment in residential multifamily properties will surely fall. It’s a sad moment for landlords and investors who may withdraw their rental properties from the market. Given apartment renters can’t afford to buy them, many more people will become homeless.

Sadly the response from some landlords is to evict tenants right away, either to sell or as a way to raise rents later.

Orange County Register Reports Evictions

A “rising tide” of California tenants have been getting preemptive, 60-day “notices to vacate” their apartments in advance of AB 1482, the state’s new rent cap law, as landlords take advantage of a window that closes Thursday to raise rents before the law kicks in on Jan. 1 — from a news release from the Orange County Register.

In the report, San Francisco-based Tenants Together, a statewide tenant’s rights group, stated there’s been a bump of 20% to 30% since last summer when the statewide rent-cap measure was under review. And prominent eviction attorney Dennis Block was quoted as saying, “We’ve been serving these up like hotcakes.”

For California landlords charging below-market rents to get around AB 1482’s rent cap of 5% plus inflation, this may work. Once the old tenant is out of the rental, landlords can raise rents to market rate before a new tenant moves in.

Below Market Rentals Hard Hit

It’s a less than desirable practice, however, to below market rent landlords, the new rent controls are more like a death sentence. If they had any hopes of keeping up, the new law seriously deflates them.

Tenant rights associations believe landlords should consider tenant’s needs first and foremost. But none of them speak of landlords huge mortgage payments, rising cost of doing business, and lower margins. Rent controls could result in bankruptcy and homelessness for some landlords themselves.

For many landlords, their property holdings represent their hard earned life savings.

To presume all landlords are rich and greedy is a generalization not proven by the California government. Although rent gouging is likely happening throughout California, rent controls will do nothing to solve the original issue — a lack of supply created by property investors. Incentives for new construction is the way to go.