The Seen & The Unseen

Written by: 
Aubrey Freedman

Do you ever wonder why The Golden State is no longer golden?  Just one look at a state initiative that is circulating for signatures for the November election might give you a clue.  The desire to “do something” quickly to fix a serious problem might make sense at first thought, but not considering the long-term effects of more government laws can (and usually does) lead to worse problems.  It’s what Frederick Bastiat, the French classical liberal economist, referred to as the “seen” and the “unseen.” In this case it’s the repeal of the Costa-Hawkins Rental Housing Act, or as more commonly referred to as Costa-Hawkins, passed in the state legislature in 1995.  A spokesman for the Alliance of Californians for Community Empowerment, which supports the repeal, noted, “People are excited. This is the easiest signature-gathering we’ve ever done. It’s telling…People are hungry for rent control and…to see solutions to the housing crisis that can provide immediate relief to themselves and their neighbors.”

“Immediate” is the key word here.  California’s housing market has people in the rest of the country rolling their eyes at the eye-popping prices people here pay for rent and home ownership.  There’s no question that the repeal of Costa-Hawkins would lead to stability in the ever-escalating rental market. So, what’s not to like?

Plenty, but first a little background on Costa-Hawkins.  In the 1970’s and 1980’s most of the major California cities passed rent control laws.  While they varied from city to city, in general the laws limited the amount housing providers could increase the rent from year to year; this was usually tied to an official measure of inflation.  The California courts have generally upheld the principle that local rent control laws cannot prevent housing providers from receiving a “fair” rate of return on their investment. Good luck on getting bureaucrats in local rent control boards to figure out what “fair” should be.  Costa-Hawkins put up some definite roadblocks to local rent control laws: no rent control for housing occupied after February 1, 1995; no rent control for housing exempt from local rent control laws in effect on February 1, 1995; and no vacancy decontrol. Vacancy decontrol is probably the most hotly contested part of Costa-Hawkins because it allows housing providers to raise the rent to market rates when a tenant moves out.  Tenant activists point to vacancy decontrol as the real problem because it leads to evictions and displacement as housing providers do anything the can to oust current tenants to jack up the rents. Expect a ton of political advertising and propaganda as both sides fight over the laws governing the rental market. On the one side it’s Michael Weinstein (of condom ballot measure fame in 2016) as President of AIDS Healthcare Foundation and tenant groups against the California Apartment Association, the California Chamber of Commerce, and the California Building Industry Association.

So, what will happen if Costa-Hawkins is repealed?  According to Assemblyman Richard Bloom, who introduced the repeal bill, not much because it only gives cities more flexibility regarding their rent control policies.  That’s nonsense—loud-mouth tenant activists in all the major cities will immediately be pressuring their local politicians for rent control on all housing—including single-family homes—regardless of the year built and to get rid of vacancy decontrol completely.  The renters must be protected at all costs, so expect a flurry of local laws statewide to be enacted if the repeal of Costa-Hawkins is approved by the voters. Perfect price control.

Well, not exactly.  The most obvious side effect of increased rent control will be housing providers going out of the business and selling their buildings.  With the devaluing of their properties by more bureaucratic control, there will be a shift of units from the rental market to the ownership market.  The irony here is that increased rent control would make the state more attractive to folks who are able to buy a home—typically the more affluent and not renters who tend to be lower income.  How all this helps renters in the long run is anyone’s guess since less apartments or houses available is no help to anyone needing a place to live who doesn’t want or cannot afford to buy.

Then there’s the double whammy of reduced construction of new rental housing.  Even a report from the Legislative Analyst’s Office—not a libertarian think tank—concluded that expanding rent control would likely lead to “significant reductions in construction of new housing” by limiting the profitability of new rental housing.  Even backers of the repeal concede that building more housing is essential, but they say that will take decades, and tenants facing big rent increases need “help” now. The director of the AIDS Healthcare Foundation’s “Housing is a Human Right” campaign declared, “There’s no building our way out of this crisis.”  Their solution: pass laws to discourage more building. But don’t worry—when there are zero apartments available to rent, they’ll be back with more laws to fix that crisis.

A third consequence of repealing Costa-Hawkins is stricter rent control would encourage more discriminatory behavior by housing providers when selecting tenants.  Obviously with less rental stock, it will become even more of a “seller’s market.” If a housing provider gets 25 applicants for the rare vacancy that occurs, do you think it’s going to be the more affluent or the financially struggling renter who’s going to be selected for that apartment?  Especially if the housing provider can never get the renter out—and why would they move if they’re protected by rent control forever—why would the housing provider pick the poorer tenant when the more financially able tenant looks to be a better investment? As always, we say these laws to “help” the poor hurt them the most.

Yet more unpleasant consequences of more rent control are reduced maintenance of rent controlled properties and increased rents for properties not covered by rent control.  It only makes sense that if your costs go up but your revenue doesn’t, you have to cut corners somewhere if you are to stay in business. Yes, the repeal of Costa-Hawkins would require allowing housing providers a “fair” rate of return for maintenance and other costs, but “fair” is in the eye of the beholder, and we wouldn’t count on government bureaucrats to be supportive of property rights or “fairness.”  In crowded coastal cities overrun with tenants, the rent boards will bow to the tenant activists and maintenance will tend to be deferred. That’s how slum landlords are born. We point out also that nothing exists in a vacuum, so if rent-controlled properties are kept artificially low, if there are any properties left that are not rent-controlled if Costa-Hawkins is repealed, they are bound to go for a premium.  Just as we’ve seen with “affordable” housing, when some units are kept below market due to government intervention, correspondingly other units become priced higher. Not only new homes built, but even used homes too. The politicians can pass laws until they’re blue (no pun intended) in the face but cannot repeal the economic laws of supply and demand.

For those concerned about “revenue stream,” the repeal of Costa-Hawkins doesn’t bode well for either state or local governments.  For the state, the reduction in income of housing providers due to stricter rent control is likely to reduce extractions for state income tax due to devalued properties and less capital gains when housing providers sell their properties.  On the other hand, more affluent folks buying homes in California could increase income tax payments. The Legislative Analyst is predicting “that the measure would result in a decrease in personal income tax revenues of an unknown—but potentially significant—magnitude.”  As for local governments that are always in need of more money due to the ever-increasing cost of pensions (yet another crisis on the horizon), the decline in property values would result in lower assessments over time as they are sold and reassessed to their market values.  These property tax losses could range from a few million dollars to the low hundreds of millions of dollars per year. The Analyst adds that sales tax revenue will likely increase due to renters having more disposable income due to lower rents, but the offset will not be enough to balance the loss of personal income tax revenue.  He predicts a “net decrease more likely than net increase.”

Another part of this issue that you’re likely to hear about is local control.  Michael Weinstein says that communities should be able to address the issue of rent control themselves, “The fundamental question here isn’t even the merits of rent control.  The real question is why shouldn’t cities be deciding this? Why is the legislature taking away all the authority over land use from cities?” Indeed the issue of local versus centralized control is a thorny issue.  The tyranny of government overreach isn’t just limited to centralized governmental power, as “local control” can also lead to a tyranny of its own. The government-sanctioned racial discrimination laws of segregation were all examples of “local control” until the federal government stepped in.  Similarly it was the California courts that have come to the rescue of property owners facing outrageous local laws that infringe on their property rights. The tyranny of unlimited government is a double-edged sword that can (and often does) apply to both local and centralized powers. In the end, there’s nothing particularly sacred about “local control,” but it is preferable to centralized concentration of government because people are free to move away from local tyranny to a community that fits their needs better.  When government’s tentacles are so overreaching as they are under centralized power, there’s no way to escape them.

Our last thought on the Costa-Hawkins repeal effort is the stagnation it would bring.  For all the problems in the US, why do immigrants still line up at the borders to come here (often at great personal expense and heartache)?  The chance for a better life—and certainly economic opportunity is a huge part of the reason. Contrary to what the statists claim, the old Horatio Alger dream is not dead.  A vibrant constantly changing society which encourages and rewards upward mobility is still what beckons foreigners to America, and California in particular. Repealing Costa-Hawkins would encourage just the opposite.  I know renters who have stayed in their rent-controlled apartments for decades. They probably would have preferred to move somewhere else at some point, but the security of having a stable rent was more important than taking a chance and moving.  I have a friend from Europe who always says that the constant changing of jobs and moving she sees in America—that’s unheard of in Europe, where you’re lucky to find a place to live and work, and people never give them up because you might not find another one.  You know something is amiss in California when even the Legislative Analyst mentions reduced turnover among renters and moving in general as likely consequences of the repeal. Aside from making it harder for renters—especially lower-income ones—to find a suitable or any place to rent in California if the repeal passes, perhaps the stagnation of “stability” would be the cruelest consequence of all.