California’s New Rent Control Law Alarms Industry

September 12, 2019

Lawmakers in California approved a measure on Wednesday that would cap rents throughout the state—a move that has drawn widespread concern from the real estate industry over the bill’s likely long-term impact.

Rent control measures have long been opposed by REALTORS®, as well as most economists, who say such measures discourage investment and reduce supply, hurting renters in the long run. The New York Times cites a study in San Francisco and other locations that showed price caps often prompted landlords to abandon the rental business and convert their units to owner-occupied homes.

The California Association of REALTORS® responded swiftly to passage of the bill. "Throughout the debate, REALTORS® advocated for a balanced solution that protected renters and respected the rights of property owners," Jared Martin, CAR president, said in a prepared statement. "While several of our recommendations were included in [Assembly Bill] 1482, including the exemption of single-family homes and condominiums, the final bill did not do enough to increase the supply of affordable rental housing. Even legislators who voted yes did so acknowledged its shortcomings."

The National Association of REALTORS®, which works at the federal level of government, has a policy on rent control as follows:

Rent control negatively affects the housing inventory by hastening the deterioration and loss of existing housing. By lowering the value of rental property, rent control affects a community’s tax base by causing a disproportionate shift of tax burden to other real estate and potentially curtails vital municipal services. The expense of complying with rent control laws and regulations inevitably increases the cost of housing to the consumer, and the expense of enforcing rent controls adds to the cost of local government. Communities which have discouraged investment in new rental housing because of rent control should not be eligible for federally-assisted or state-assisted rental housing programs.

Read NAR’s white paper report on rent control to learn more about the association's findings on the issue.

California Gov. Gavin Newsom has vowed to sign AB 1482, which would limit annual rent increases throughout the state to 5% after inflation. In a state of nearly 40 million people, California’s rent control measure could affect an estimated 8 million residents of rental homes and apartments.

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

Only a few states—California, Maryland, New Jersey, and New York—and the District of Columbia have some form of rent control protections, the Times article reports. Tenant groups are trying to expand efforts across the country, and about a dozen states reportedly are looking to get ballot measures to do so, such as in Washington, Colorado, and Nevada. In February, Oregon lawmakers passed a statewide rent control measure that would limit increases to 7% annually plus inflation.

The movement has been driven by an affordability squeeze that's particularly acute in California, where 55.3% of renters paid 30% or more of their income for housing in 2017, the latest year for which data is available, versus 49.5% nationally, according to the Census Bureau's 2017 American Community Survey. ​​Meanwhile California ​​​​had a rental vacancy rate of 3.2% in 2017, compared with 6.2% nationally. The state has a growing homeless population and poverty rate. Ironically, yesterday's action by the state legislature will do little to solve the problem and will hurt residents in the long run, NAR analysts say.

“Although we did not prevail,” said CAR’s Martin, “we remain steadfast in our commitment to overcome California’s historic housing supply and affordability crisis. Much more work remains ahead of us.”