What Does California’s New Rent Control Mean?

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California lawmakers passed a statewide rent control bill to address a worsening housing crisis in the state where millions of people are paying more than half their monthly income in rent.  The bill is meant to address rising costs in cities like San Francisco, where rent has risen steadily for years and peaked at 6% annual growth in 2015, according to CoStar Analytics.  The bill affects an estimated 8 million renters as it prohibits landlords from hiking rents more than 5% plus the cost of inflation and gives renters more protection from evictions.  The law extends for 10 years, and exempts housing built within the past 15 years, as well as single-family homes and condominiums

History has shown that rent control immediately leads to a shortage of apartments, as potential tenants who would love to move into a new place at the rent-controlled rate can’t find any vacancies. In an unhampered market, the equilibrium rental price occurs where supply equals demand, and the market rate for an apartment perfectly matches tenants with available units.

Rent control reduces the supply of rental units through two different mechanisms. In the short run, where the physical number of apartment units is fixed, the imposition of rent control will reduce the quantity of units offered on the market. The owners will hold back some of the potential units, using them for storage or keeping them available for out of town guests, kids returning from college, and vacation renters. In the long run, a permanent policy of rent control restricts the construction of new apartment buildings, because potential investors realize that their revenues on such projects will be artificially capped. Building other property types (like industrial and retail) now has more profit allure.

Additionally, with a long waiting list of potential tenants eager to move in at the official ceiling price, landlords do not have much incentive to maintain their buildings. Furthermore, if a tenant falls behind on the rent, there is less incentive for the landlord to give him any leeway, because she knows she can immediately replace him after eviction. In other words, rent control encourages the behavior typically associated with the term “slumlord.”

In summary, if the goal is to provide affordable housing to lower-income tenants, rent control has proven to be a counter-productive policy. Rent control makes apartments cheaper for some tenants but impossible for others who can no longer find a unit, even though they could pay the higher, free-market rate. Furthermore, the people who remain in apartments — enjoying the lower rent —receive a lower-quality product.  Now we can expect California’s housing crisis to worsen before it gets better.

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