California Proposition 21: Local Rent Control Initiative
Summary
California’s Proposition 21 would give local governments the authority to impose rent control on housing units first occupied more than 15 years ago. It would exempt from potential rent regulation any individual owner who rents no more than two units.
Fiscal Impact
The Legislative Analyst’s Office states Proposition 21 presents potential revenue losses in the high tens of millions of dollars per year mostly due to lower local government property tax receipts as a result of lower assessed values of rental properties. The revenue loss would vary depending on actions by local communities.
Proponents’ Argument For
California’s housing crisis is severe. In 2019, homelessness grew by 16.4 percent across the state while year after year rents have increased astronomically and wages have remained stagnant. Supporters argue that Proposition 21 will help keep housing affordable for everyone, allowing residents to live and thrive in California. Half of all renters statewide—more than three million households—spend more than 30 percent of their income on rent, meeting the federal government’s definition of “rent-burdened,” proponents point out.
Low and stable rent increases, leave tenants with more disposable income to put back into the community while skyrocketing rents leave renters with less to spend locally. Additionally increasing homelessness cost all residents billions in taxpayer dollars. Proposition 21 is aimed at corporate landlord billionaires, not mom and pop landlords who are a staple of our communities, they say. Studies show that while small landlords build relationships with their tenants and keep rents low, corporate landlords evict their tenants and increase rents at far higher rates. Prop. 21 helps stop corporate landlords from competing against smaller landlords by stopping corporate landlords’ most egregious behavior. But it does not stop small landlords from making a profit on their property. Rather, it codifies the right of landlords to make a fair return on their investment.
Opponents’ Argument Against
Opponents argue that Proposition 21 is nearly identical to Prop. 10 of 2018, which was defeated by nearly 60 percent of voters. It opens the floodgate for local rent control measures that could make California’s housing crisis much worse and result in less affordable housing, opponents say. The current recession has lead to many renters being unable to pay their rent and is putting many small landlords into bankruptcy. This means a rental market crash could be coming and Prop. 21 would make it so much worse as rental housing goes off the market, new rental housing is no longer built, and state and local property taxes fall an estimated $500 million each year.
Independent research from Stanford and UC Berkeley has shown that rent control discourages new construction and reduces the availability of affordable and middle-class housing, driving up rents. In cities that would impose extreme rent regulations under Proposition 21, home values could fall up to 20 percent, causing a much larger property tax revenue decline than the Legislative Analyst Office’s fiscal impact statement suggests, opponents claim. Meanwhile, Prop. 21 contains no funding for affordable housing or a requirement that it be built, no specific provisions to reduce rent, and no specific protections for seniors, veterans, or the disabled.
Discussion
Having failed in 2018 to repeal California’s statewide restriction on local rent controls, another rent control proposition is on the 2020 ballot. The big picture economic case against rent control is well known and broadly endorsed across the economics profession. When a diverse panel of economists was surveyed by the University of Chicago in 2012, 81 percent agreed that local rent control ordinances have not had a positive impact on the amount and quality of rental housing. What causes rents to increase faster than wages are local government restrictions on the supply of housing that drive up costs.
Rent control destroys incentives to build and maintain rental properties. The inevitable results include housing shortages and a decline in housing quality. An analysis of the 2018 California rent control ballot measure—Proposition 10—discussed how rent control was associated with the destruction of large swathes of New York City’s housing stock in the 1960s and 1970s. The Brookings Institution concluded, “Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.”
Proposition 21 has somewhat watered down the changes proposed in 2018, but, meanwhile, state law and the state rental market have seen important changes.
Proposition 10 which failed in 2018 would have repealed the Contra-Hawkins Rental Housing Act, which prohibited local rent control on any rental units first occupied after February 1, 1995 and allowed vacancy decontrol for regulated units occupied earlier, meaning that once a tenant has left the unit, the landlord could charge a market rent to the next tenant.
Proposition 21, by contrast, only allows new local rent control on units first occupied at least 15 years ago, exempts owners of one or two residential dwellings from rent control and allows post-vacancy rent increases, but limits them to 15 percent over a three-year period.
Compared to its 2018 predecessor, the new rent control measure would have less of a negative impact on certain categories of rental property owners. But the overall message to developers and owners is essentially the same: rents will be partially determined by political considerations rather than by supply and demand. That is not a world in which owners will be excited about adding and improving rental housing, and years of data and research have shown its effect in reducing housing supply and affordability.
Since 2018, there have been two important developments that voters might consider when weighing the necessity of a local rent control ballot measure: the adoption of statewide rent regulation and the impact of the COVID-19 pandemic and recession on real estate markets.
Last year, California Gov. Gavin Newsom signed the Tenant Protection Act, which limits annual rent increases to the lesser of 10 percent or the change in the local cost of living plus 5 percent. Like Proposition 21, the new law applies to units occupied at least 15 years ago. Thus, units targeted by Prop. 21 already have some degree of rent control.
This year, the coronavirus pandemic and related shutdowns have disrupted both urban residential rental markets and commercial real estate. Recently, the rental marketplace Zumper reported steep year-on-year drops in median rents in Los Angeles, Anaheim, San Francisco and San José. Rents in Oakland, San Diego, Long Beach and Santa Ana were relatively flat. Statewide, only Sacramento saw sharp rent increases, possibly due to tenants from more-expensive Bay Area cities moving inland while not having to commute to work. So even before the current recession the “crisis” of escalating rents that apparently drove support for Proposition 21 no longer prevailed.
Second, multiple categories of commercial real estate are now underutilized and could be ripe for conversion to residential uses. Hotels, retail stores, and shopping malls are all suffering during the COVID-19 crisis and recession, and occupancy will likely be reduced over the long-term due to less travel and widespread bankruptcies among brick-and-mortar retailers. Local governments could take advantage of this trend by rezoning commercial properties to allow residential use, allowing new housing stock to be added without the cost of ground-up construction. The resulting supply could push down rents in many parts of the state without rent regulation. In many ways, the goals of Prop. 21 have been overcome by the events of 2020.