California has a housing crisis, one rooted in a demand for homes to rent and buy without enough supply to accommodate that demand. It’s a story you’ve seen reported in this paper many times over the past several years, and one that has consistently been tied to rising apartment rental rates and increasing single-family home prices. So, it should come as no surprise to readers of the Business Journal, as well as of many other publications throughout the state, that rent control is being put forward as a possible solution to deteriorating housing affordability. In Long Beach, a local housing advocacy organization has initiated the process to put a rent control measure on the November ballot.
To find out about the effectiveness of rent control in creating more affordable housing opportunities within communities, we began reaching out to economists, analysts and educators. More articles may follow this one, but for now we’re presenting recent research alongside the viewpoints of economists from Zillow, a national online real estate company with millions of sale and rental home listings, and Los Angeles-based research firm Beacon Economics, which among its many other endeavors has assisted the City of Long Beach with a variety of economic and demographic research in recent years.
Since its publication in November 2017, a research paper by three Stanford University professors about the effects of rent control in San Francisco has been widely cited in discussions about rent stabilization. The paper studied the impacts of rent control on tenants, landlords and the overall rental market in San Francisco, and produced a number of key findings. One finding was that landlords whose properties were covered by the policy chose to reduce their supply of rental housing by 15%, either by converting them to condos, selling them as owner-occupied units or redeveloping the buildings.
This reduction of rental housing stock caused a 5.1% increase in rental rates of non-rent-controlled properties at a loss of $2.9 billion to renters, according to the research paper. However, renters who benefited from rent control saved between $2,300 to $6,600 per year, with their benefits also totaling $2.9 billion. Effectively, this means that rental rates on non-rent-controlled properties were increased to make up for the loss of rent in controlled units.
Economists with both Zillow and Beacon Economics agreed that the issue of housing affordability in California is one driven by an inadequate housing stock – and that policies that discourage new housing or further reduce that stock exacerbate the problem.
“When you get down to the real nuts and bolts about how affordability works, housing is going to be more affordable if supply can keep up with demand,” Skylar Olsen, senior economist for Zillow, told the Business Journal. “What that’s going to do is it is going to keep prices growing at a steady pace that hopefully is commensurate with how quickly income is growing. When we look at different areas across the country and who really struggles to keep rents affordable, these are the areas that find it very difficult to build in pace with the demand that they see.”
Olsen said that a variety of factors can prevent supply from keeping up with demand. New construction can be discouraged if land or construction costs are too expensive, for example. “But what also matters are regulations,” she said. “Now, these can range themselves in a lot of different ways, from how long it takes to approve a process to who gets to approve a project. . . . That could really slow things down.”
Rent control discourages investors from providing funding to developers because increasing rental rates are a signal of demand – and by cutting off that signal, investors will choose to invest their dollars where they can get a better return on their money, Olsen explained. Once supply begins catching up with demand, rental rate appreciation organically slows down.
According to Robert Kleinhenz, economist and executive director of research for Beacon Economics, the Great Recession pushed many residents in California into rental units, and the rate of homeownership fell to its lowest point in decades. Increasing demand for apartments caused rents to rise, he explained.
“When a price goes up, the market response ought to be to supply more,” Kleinhenz said. “And that has never been the case when it comes to housing in California over the last several decades. So, sure enough, we had more renters, and we had rents go up. But there was no supply [built] in response.” According to representatives from the California Association of Realtors®, the state has been underbuilding by about 100,000 residential units per year to keep up with demand.
“There is a significant amount of research and literature that says that new construction is forced to halt . . . by virtue of the imposition of rent controls,” Kleinhenz said. While existing rent control ordinances often apply to buildings already constructed or built before a certain date, he said that they “can have a chilling effect on future development” due to the potential for the policy to be extended to more recently built housing.
“In my estimation, rent control is a Band-Aid on a much bigger problem, which is an undersupply of multi-family housing for rental purposes,” Kleinhenz said. He acknowledged that rent control is “a reasonable response” by elected officials in local governments with high rents, because their constituents are concerned. “This is a rational response. But we just have to be aware of the consequences that are going to be forthcoming,” he said.
Adam Fowler, research manager for Beacon Economics, said that rent control works – for those who are lucky enough to be covered by it. Typically rent control does not apply to every housing unit in a jurisdiction, but only to properties built before a certain time period, as denoted by the local legislation. And once a renter moves out of a unit or enters into a new lease, landlords are typically allowed to increase the rent by a certain percentage. As a result, renters often hang on to their leases as long as possible. In San Francisco, rent control increased the probability of a renter remaining at his or her address by nearly 20%, according to the Stanford report.
“There is a lot of competition for available units. And they are just not available, and that continues to put the pressure on market rate rents,” Olsen said. “So once I am in, it’s good for me. But it’s not good if I ever need to move, and it’s not good for people who are not yet in the door.”
Rent control has also been found to disincentivize property upkeep. “If I am a landlord and I can’t get what I need in order to maintain my building, I am going to perhaps do fewer repairs and not get so quickly to it when my tenants tell me that the water has turned orange,” Kleinhenz said. Olsen made a similar observation. “If I can’t increase your rent, I can’t recoup my own expenses to update those things. And so I won’t,” she said.
When asked if rent control is effective in creating affordable housing opportunities, Olsen point-blank responded, “No.”
“I understand why rent control policies come about, because rent does increase very quickly if we’re not building apace. And that’s very painful,” Olsen said. “I have to pay more out of my pocket for my house, which means I’m not saving for emergencies, I am not saving for my future, I am not saving for retirement, or I am cutting back on a lot of my other expenses, or I am being forced to move. Any one of those options is very painful. But if we’re talking about how do you get out of this problem in the long run, it’s not rent control.”
Olsen continued, “If your big problem is we’re not adding enough housing to keep housing affordable, then rent control is not going to help you add housing. It’s going to make it harder to add housing.” While Olsen views creating more housing as the solution, she noted that getting communities to accept greater density is a challenge.
Kleinhenz also pointed out that it is hard for local communities to accept the concept of increased density to solve the housing crisis. “I think we are looking at a very contentious issue at the local level where cities want to maintain control over their land use decisions. Elected officials want to do things right by their constituencies,” he observed.
Olsen pointed out that, in California, it is state law that cities cannot reject housing projects that comply with local code. “Well, that’s on paper. In practice . . . the city will reject these projects because there is so much neighborhood response,” she said. “Neighborhoods don’t want these projects. They don’t want this extra density. Understandable, because they want to keep the parking, they want to keep the character of the neighborhood, they don’t want a lot of congestion.”
While she acknowledged that these are valid concerns, ultimately, she pointed to NIMBYism (Not In My Backyard-ism) as the source of the supply problem. “California does a pretty bad job of adding housing units. I think even if everyone wants housing to be affordable, NIMBYism is very real and something that is very hard to fight against,” she said.
Rather than rent control being the solution to the housing crisis, Olsen said it would be “anything that lubricates the process of adding greater density and housing to an area.”
Kleinhenz said this is not the first time he has witnessed this cycle come to such a head.
“I have been through three housing cycles in my career and I have spent a lot of time talking about rent controls in all three of those cycles,” he said. “Unfortunately, we have not found the magic bullet that takes care of this problem.”
“If you think about the classic famous cities with rent control – if you think about L.A., San Francisco and New York – these are all places that struggle with the worst rental affordability of most places in the nation,” Olsen said. “Now, it’s hard to say that’s due to rent control because they are all so popular for so many reasons. But from a dynamic about how housing works and how affordability works, rent control will certainly exacerbate that problem for anyone who is not an incumbent [rent control beneficiary]. And that’s the big part about rent control: there are some real winners and losers.”