Statewide Rent Control: Solution or Distraction?

Welcome to the Strong Towns Slack Chat! In today’s chat, Chuck Marohn (Strong Towns Founder and President), Daniel Herriges (Strong Towns Senior Editor), and Seth Borman (a Strong Towns member, real estate investor and construction manager in California) discuss California’s new statewide rent control law. The transcript has been lightly edited.

We invite you to join in the conversation in the comments section below.

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daniel.herriges (Daniel Herriges, Strong Towns, Senior Editor): The big news last week was that California passed a statewide rent control bill, AB 1482. The bill limits yearly rent increases on apartments more than 15 years old to 5% plus inflation, or a maximum of 10%, whichever is lower.

CalMatters published a pretty good run-down of it which our readers might want to take a look at.

I’m curious to hear what you two have to say: reasonable compromise, deeply flawed good-faith policy, disastrous misstep, something else entirely? We’ve got me and Chuck here, and with us to provide a Californian’s perspective, Strong Towns member Seth Borman.

Chuck (Charles Marohn, Strong Towns President): I know I'm the cynic on these things— and I hope one of us makes the case to defend this—but it feels very #california to me. We've done these massive interventions that have helped induce a massive housing crisis, so how about another intervention? I don't want to go too Hayek right out the gate, but I don't see how this really is more than a short-term emergency measure.

Sethborman (Seth Borman, Strong Towns Member): It's important to note that AB 1482 is a very modest form of rent control, even by California standards. Millions of Californians already live in cities with much more stringent measures.

chuck: True, there are a LOT of exceptions written in. Here's the actual text of the bill: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB1482

sethborman: For instance, a landlord can pay a tenant a month's rent to terminate their tenancy, renovate the apartment, and rent it again at market rates.

chuck: If you own a duplex and rent out the other half, you are exempted, for example.

daniel.herriges: Yes, and single-family homes offered for rent are exempted.

Is the best defense of this policy to rent control skeptics that it really won’t do much at all?

sethborman: I agree with Chuck that it's more show than anything.

chuck: So where is this going to have an impact? Are we just talking slum apartments, because that is what it seems to be aimed at?

sethborman: It will impact tenants whose rent is already significantly under market, so it is targeted at people in gentrifying areas, who are an important constituency and very vocal about rent increases.

daniel.herriges: When I lived in San Francisco (2007-2010) I heard secondhand stories of people having their rent doubled practically overnight.

chuck: Given the renovation exception that Seth points out, I wonder if this would have the perverse incentive, if it would actually encourage owners of these places to bite the bullet and fix up their place so that they qualify for an exemption. Might this actually accelerate gentrification? I guess we'll find out, but that is a logical response.

sethborman: Unfortunately, this still impacts housing production, because it's chasing off investors that would like to produce housing. Even with this compromise, investors are wary of changes in state and local law that could cause them trouble in years to come.

chuck: I was wondering about that, Seth. You do this work. It has to have a chilling effect because of the unknowns involved in making investments that will have decades-long financing windows.

daniel.herriges: Seth, so it’s not even the consequences of this law so much as the uncertainty that it encourages? “What will they try next?”

sethborman: Daniel, that does happen quite a bit. The problem with rent control is that it provides a great deal of value to some of the tenants (that have a unit that suits their needs) and reduces value to landlords, investors, and even tax rolls.

daniel.herriges: Sure. For every anecdotal story about someone whose rent was doubled, you could also find an anecdotal story about a rent-controlled apartment whose tenant makes $200k and has lived there for 30 years.

I’m sympathetic to Chuck’s critique that this adds another layer of distortion and perverse incentives onto a housing market where that’s a huge part of the root problem already.

sethborman: That's what I've found in my conversations with investors. But look at it this way. My wife and recently renovated a home for our own use and we chose to add a fourth bedroom rather than a separate ADU because the ADU would probably fall under the City of Los Angeles' rent stabilization ordinance. That means if we chose a "bad" tenant (loud, messy, etc.) we could have a hard time getting them out.

daniel.herriges: Which, to tenants’ rights advocates, is sometimes a feature, not a bug.

“Bad” tenants need homes too.

sethborman: I view rent control as a way for politicians to placate voters that are rightly concerned about increasing rents with a measure that seems to be off their balance sheets. The only way to end the housing crisis in California is to build more houses.

chuck: I try to put myself in the shoes of people there who would benefit from this. I get the urgency, but is this going to help them? A 5% to 10% annual increase—with the threat of being kicked out for a total redevelopment—doesn't seem to ease things for those who are struggling. I think Seth makes the point: The lengths we seem to go to in order to avoid building are extraordinary.

daniel.herriges: I think that formulation obscures a bit who the “we” is that wants to avoid building. When I look at the politics of this, that’s where I become a bit more sympathetic to it than if I analyze it purely as policy.

sethborman: It's important to note that in most places the tenant is what provides a building with value, because an investor who buys the building is buying an income stream that is created by their rent. In a rent-controlled market, a tenant is the greatest impediment to value creation, because the landlord can't increase that income stream. And so you see people being offered large sums of money to leave so the apartment can be let at a much higher rate. My previous employer would make decisions (like bedrooms that are too small or not installing AC, dishwashers or in unit laundries) that were designed to increase turnover and keep the units near market rate rents.

chuck: Wow! Yeah, that's insightful. We're flipping the market to where the good tenant is a burden, the churn more of a strategy for maximizing value. That seems backward in a pernicious kind of way.

daniel.herriges: How realistic is it that the cap on the income stream is severe enough to create that incentive in a large way?

I’ve actually seen it suggested that this could induce landlords to raise rents MORE than they otherwise would.

“I’d better take my full 5% plus inflation, lest I not be able to keep up with the market or my maintenance costs in some future year.”

sethborman: Last night I modeled a $100/mo difference in rent between two units. If a landlord holds out for a few months to get a $1,100 instead of $1,000 the difference over 10 years is $130/mo. That doesn’t sound like much, but it is a $23,500 difference in building value, which is a $294/yr difference in property taxes.

That's using the City of Los Angeles 3% cap. It matters much less under the new state law, but anecdotal evidence seems to be pointing to landlords increasing rent as much as possible to stay ahead of new legislation.

chuck: Seth, I do sense this is another example of Sacramento pairing with a local constituency in a way that ignores the stress created on local governments. By not allowing revenues to balance with expenses, the feedback loop winds up choking city hall even more.

Is anyone prepared to really defend this, or is the best we can say that it might not do too much harm?

daniel.herriges: I’m ambivalent but I can defend the notion of the policy on two levels, if not all of the particulars (and would love to hear ideas about what alternative policies could achieve the intent of this one without such pernicious distortions).

sethborman: As someone that moved into a $2,000/mo studio apartment I sympathize with tenants, but I think it's much more important to get on with adding more housing to alleviate the housing crisis.

Also, speaking to Chuck's point about the effect on tax rolls, I will point out that Massachusetts eliminated rent control because it was strangling school funding, and in California, where property taxes can only go up 2% per year, getting people to sell to developers resets tax rates to market levels. In fact, I think we would have a lot more success here by using housing vouchers funded by taxes on land...but that is not something that is politically achievable.

daniel.herriges: I think there is a political context in which it makes sense to do this, even if it’s ineffectual (ineffectual might actually be better if that ends up meaning mostly harmless) as a coalition-building exercise.

California’s YIMBY movement infamously kind of got off on the wrong foot with tenants’ rights and anti-gentrification activists. Compared to places like the Pacific Northwest and Minneapolis where you see a lot of collaboration there, there’s been a huge amount of mistrust and recrimination in CA between political constituencies that should favor more housing construction.

daniel.herriges: And that ends up empowering the neighborhood-NIMBY types who aren’t at all conflicted about what they would like to see happen: their neighborhoods placed under glass.

So if something like a statewide rent control proposal is a necessary trust- and coalition-building exercise, the payoff for those who want more systemic fixes could be real.

My other defense here, and more of the intent than the execution of this policy, would be that people in rapidly-gentrifying neighborhoods actually DO need a band-aid policy. Badly.

“Build more housing,” the systemic, via negativa fix, is something that will help over decades, not months or a couple years.

sethborman: Rent control and Prop 13 establish huge financial benefits for incumbency. If someone has to move, they lose the benefits. So it adds a layer of complexity that other states don't have.

chuck: So, will the systematic changes that need to happen to alleviate this emergency be in place and functionally working by 2030 when this rent control is scheduled to expire? Can we take bets on that?

sethborman: California is making some important steps with shortening project approval times and limited public hearings. I don't think it will be enough, but it seems that the YIMBYs are making real progress so there is some reason for optimism.

daniel.herriges: My money’s cynically on “California is broken and things could still get a lot worse” but who knows? The Overton Window tends to lurch, not inch. I think things that were political third-rails five years ago, like single-family zoning, simply aren’t anymore, and it’ll be interesting to see what happens.

But I do agree with a sentiment you’ve often expressed, Chuck: The California way is to add layer upon layer of new distortions to attempt to mitigate the side effects of the last round of distortions.

I have a lot of faith in California’s ability to keep doing that until things really fall apart—I just have no idea what “fall apart” looks like.

chuck: I love visiting California—we'll be there in December for our next Regional Gathering in Santa Ana—but as a pragmatic Minnesotan, it's always seemed to be a dumpster fire of public policy. Will that change? I would not bet a Mountain Dew on it.

That seems like a good place to end. This was helpful—I learned something. Seth, those were GREAT examples. Really powerful.

sethborman: Thanks, Chuck.

daniel.herriges: Agreed; this convo was much better having someone in it who can say, “I talk to people who actually have skin in this game, and here’s what they’re doing.”

So thanks, Seth.

sethborman: Anytime!

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About the Authors

Seth Borman is a real estate investor and construction manager. He lives in Southern California.

Daniel Herriges (Twitter: @DanielStrTowns) serves as Senior Editor for Strong Towns, and has been a regular contributor since 2015. He lives in Sarasota, Florida.

Charles Marohn, Jr. (Twitter: @clmarohn) is the Founder and President of Strong Towns. He lives in Brainerd, Minnesota. He is the author of the forthcoming Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity.