California’s lengthy November ballot brings once again the question of rent control to the state’s electorate in the form of the controversial Proposition 10 initiative, which poses the repeal of the statewide Costa–Hawkins Rental Housing Act.

The debate over Proposition 10 mirrors the recent discussions of other subjects that are extremely polarizing and often reduced to conclusory platitudes. This initiative pits housing advocates seeking to control rampant increases in housing costs against real estate development and management constituencies worried that localized price control will suppress development and investment in housing amid a market that’s already severely undersupplied.

Policy arguments on both sides have been documented in many arenas, including this publication. Here, I examine the target of the proposed initiative, Costa–Hawkins, and suggest other tools for responding to a critical shortage of housing at all levels of affordability.

The Nuts and Bolts of Costa–Hawkins
Enacted as a legislative compromise in 1995 against a backdrop of similar policy arguments about rent control, Costa–Hawkins contains three legislative components:

  1. An assurance that landlords can freely raise rents to market rates when a tenant vacates a rental unit, a practice called “vacancy decontrol”;
  2. A prohibition against local rent-control limitations on new housing units created after 1995; and
  3. A proviso that single-family homes and condominium units can’t be affected by local rent-control laws.

Costa–Hawkins sought to deploy a legislative response to the harmful impact of restrictive rent-control ordinances in several cities with critical housing shortages—Santa Monica, Berkeley, and West Hollywood, among others—where rent-control laws had imposed “vacancy control,” a requirement that prevented landlords from bringing rents to market when a tenant moved out of the rental unit.

Under vacancy control, owners of rental housing remain subject to the rent limits imposed by local ordinance (usually expressed as a percentage of the prior year’s rent), even if inflation, upkeep costs, and prevailing market rates outpace those limits. The experience of vacancy control in jurisdictions across California and throughout the U.S. left landlords disincentivized to maintain or upgrade their rental units and tenants unmotivated to vacate rent-controlled units. As a result, the quality of rental housing stock declined and rental markets suffered.

California’s legislative leaders hoped Costa–Hawkins would address some of the failings of strict rent control by preserving rent limitations on older housing, exempting single-family and owner-managed individual units from rent control, and permitting rent increases when individual tenancies terminated. By partially disabling local rent controls, Costa–Hawkins attempted a policy compromise.

Proposition 10: 23 Years Later
Nearly 25 years after the enactment of Costa–Hawkins, Proposition 10 qualified for the November 2018 ballot due largely to the financial backing and signature-collecting efforts of antidevelopment constituencies that previously supported “Measure S,” a failed 2017 Los Angeles voter initiative that threatened a moratorium on development projects seeking variances or plan changes.

When Proposition 10 qualified for the ballot, arguments in support of the initiative emphasized the severe housing shortage statewide and relied upon simplistic truisms like, “The rent is too damn high” in statewide advertising media. In response, opponents of the measure pointed to incontrovertible economic data that underscore the ineffectiveness of price controls in alleviating severe shortages in housing supply and inflated housing prices.

Most developers, operators, and owners of rental housing in California fear that a return to strong locally imposed rent controls will revive a climate in which constraints on rent increases, especially with vacancy control, will deny owners the ability to generate sufficient returns on their investments and thereby discourage investment and development.

A new era of rent controls threatens to curtail housing development, as investors divert their attention to products that generate greater revenue potential. In this way, rent control regimes sacrifice a climate in which incentives exist for invigorated housing production in favor of artificially suppressed prices on an aging and insufficient housing stock. This trade-off is ill-conceived and ill-advised, as nearly all economic experts who have examined the issue agree, noting that strict rent controls simply won’t lead to increased affordable housing.

There can be no denying, however, that California is facing the most severe housing crisis in the U.S., with affordability and supply at near catastrophic levels. Most of the state’s major municipal areas rank among the least-affordable housing markets in the country and have seen monumental increases in rental rates since the Great Recession.

If, as most multifamily operators agree, strict rent control will do little to increase supply or promote wider affordability, what measures might effectively address these critical needs?

A Reasoned Legislative Response
At its core, Proposition 10 presents a policy-making quandary: whether local or statewide control is best equipped to solve a crisis of fundamental need. Proposition 10 supporters argue that repealing Costa–Hawkins will afford municipalities the flexibility to respond to housing availability and affordability. Price controls alone, however, won’t address the need for greater housing in general and more affordable housing especially. Statewide attention to obstacles to new housing production—from the legislature rather than the ballot box—is best to effectively respond to all aspects of this issue.

Costa–Hawkins has distinct limitations that a reasoned legislative response might address. For example, the “bright line” age limitation after which local controls can’t curtail housing price is antiquated nearly 25 years after the act’s passage.

The original legislative compromise sought to exempt new housing while subjecting older rental housing to rent restrictions. After a quarter century, much of that older housing has been replaced by new development, reducing the amount of rent-restricted product.

This challenge is even more exacerbated in metropolitan areas that had local rent restrictions in place at the time of Costa–Hawkins’ enactment. In Los Angeles, for example, the city’s rent-stabilization ordinance preserved vacancy decontrol but imposed rent-increase limitations on housing constructed before 1978. Costa–Hawkins extends relief from rent controls like Los Angeles’s to the earlier date, and Los Angeles landlords consequently are free from rent restrictions on all housing units less than 40 years old.

A legislative adjustment of this construct of new housing, while still preserving vacancy decontrol to allow housing to react to market changes, wouldn’t catastrophically impact housing markets or suppress investment. For example, if new construction were exempt from local restrictions for 12 years following construction but thereafter was subject to rent stabilization, an investor could generate the return relative to its construction and initial investment, and thereafter would recognize stabilized increases during a single tenant’s occupancy. Such a policy would preserve the ability to yield a return from investment and revive the compromising aspect of Costa–Hawkins’s original passage.

Vacancy decontrol should remain a component of any statewide legislative response, because to do otherwise would abdicate reasoned and rational policy-making in favor of arbitrary price controls targeting a single industry. Statewide control of rent increases within a tenancy (or state action enabling local restrictions of these increases) should also come with efforts to promote new housing construction, especially with affordable elements, because the shortage of housing throughout California remains critical.

Recent legislation has attempted to encourage development in infill locations, along transit lines, and where local and regional policies have already identified areas for new housing by increasing the incentives for such development. But local constituencies remain obstructionist toward some of these efforts to increase density, and some state officials have attempted to break this impasse by interposing statewide authority.

To date, these efforts at legislative primacy have failed and legislators will need to refine their arguments—especially in Southern California—to generate traction.

The question of the appropriateness of market-driven housing price increases is distinct from the policy-making imperative of providing incentives for the creation of more housing at all levels of affordability. To effectively gain inroads against the shortage of housing, especially affordable and workforce product, legislators should attempt to deploy bond proceeds and other revenues recently approved by voters for affordable housing and apply them directly to specific projects.

Moreover, state legislation could streamline the permitting and approval processes for affordable, transit-oriented, and infill housing projects by limiting discretionary reviews, providing CEQA (California Environmental Quality Act) exemptions, and limiting administrative and judicial challenges to these projects. If the legislature meaningfully and materially shortens the time line and removes the uncertainty behind affordable housing development, greater predictability of the yield potential for housing could make more palatable another Costa–Hawkins-like compromise.

Whatever the result of the Nov. 6 election, all stakeholders and constituencies should commit to a reasoned legislative reaction, rather than imposing a response favored by any specific interests from either the ballot or the state house.