Richmond is on the cusp of rent control regulation. Last week, Council asked staff to prepare two alternative ordinances on July 21st:
- A rent mediation ordinance, allowing renters to appeal rent hikes greater than 7% per year to an appointed rent mediation board for non-binding mediation.
- A very strict version of the rent control ordinances found in cities like SF, Berkeley, East Palo Alto, and Oakland.
Against this backdrop, I will discuss both how California’s Costa-Hawkins law* fundamentally reverses the intended effects of rent control laws, and some unfortunate provisions of Richmond’s rent control ordinance proposal.
Costa-Hawkins: Key Provisions
- Single family residences, condos, and units constructed after 1995 are exempt from rent control. Thus, in Richmond, rent control will apply to 40% of rental units.
- Landlords can set the rent of rent control units to the market rate when leasing to a new tenant (vacancy decontrol).
Effect of Costa-Hawkins
Conventional wisdom assumes that rent control laws limit rent increases. Instead, Costa-Hawkins Rent Control has increased rents dramatically faster in rent controlled cities than in free market cities. Here is why:
Because most rent controlled units are not on the market, the excess demand can’t be spread over the entire market. It gets focused on a smaller section of the market. This sharply increases the percentage of excess demand compared to the available supply, and artificially worsens the housing shortage. Furthermore, in a free market, excess demand is lower to begin with. Part of the excess demand is satisfied by units occupied by renters who live in the cheapest rent control units and would not live in the city if there was no rent control.
Both the artificial housing shortage, and the artificial inflation of excess demand, benefit the seller (landlord) at the expense of the buyer (tenant). This is why the chart shows the rents in strict rent control cities like San Francisco, Berkeley, East Palo Alto, and Oakland, increasing much faster than in free market cities like Richmond. While Richmond’s rents increased 60% in the last 17 years (CPI rate), Oakland’s rents increased 240%.
Free markets deliver quality products because sellers want to keep customers. But with Costa-Hawkins Rent Control, landlords increase profits when they can replace existing customers (tenants) rather than by retaining tenants. Even with expensive rentals, landlords profit by not maintaining facilities to a high standard for existing tenants. This is because under Costa-Hawkins Rent Control, replacing an existing tenant with a new tenant allows landlords to set the rent to the market rate.
Landlords of rent controlled apartments that have been vacated have their pick of tenants. They may pick from groups they consider “desirable.” This accelerates gentrification in “desirable” areas, and increases residential segregation. This is why the chart shows that all the strict rent control cities (San Francisco, Oakland, Berkeley, and East Palo Alto) are among the most segregated cities in the Bay Area.
Other Problems with Richmond’s Rent Control Ordinance Proposal
In a move understood to prevent Mayor Butt from making appointments to the rent board, the City Council majority voted to make itself the rent board. Landlord tenant rent mediation disputes will oftentimes involve personal and/or private issues between the landlord and tenant. Will these matters be discussed in an open meeting or in closed session? More important, either option will substantially reduce the time available to handle City business.
The City Council majority, unlike most just cause cities, voted to subject Section 8 housing to just cause regulations. Section 8 landlords already must comply with California landlord/tenant laws regarding evictions. Section 8 landlords have various rules to prevent illegal activities. The just cause regulations will increase the cost and time associated with the eviction of bad actors. In a hot rental market, landlords will simply withdraw from the Section 8 Housing Program, and convert their properties to market-rate rentals. This will displace hundreds, if not thousands, of our most vulnerable families.
The City Council majority voted to impose the maximum legal penalty, specified as six months in prison, on landlords for “any” ordinance violation.
Rent Mediation Board
Because under the free market, Richmond has experienced only CPI level rent increases, and because Costa-Hawkins Rent Control virtually guarantees rent spikes, I support an appointed rent mediation board. Renters can appeal rent increases greater than 7% per year. San Leandro’s similar board is very effective in preventing rent spikes even though its decisions are not binding. It prevents landlords from taking advantage of the fact that it is much harder for a renter to move than it is for a landlord to find a new tenant in a hot market. If the threshold for appeal is lower than 7%, we create the same artificial housing shortage and rent spikes, as with rent control.
On July 21st, the City Council will adopt one of these two ordinances.
*The Costa-Hawkins Rental Housing Act ("Costa-Hawkins") is the California State law that prohibits municipal rent increase limitations on certain kinds of exempted dwelling units, allows rent increases on subtenants following departure by tenants of rent-controlled tenancies, and prohibits "vacancy control" - the regulation of rental rates on units that have been voluntarily vacated by the previous renters at an amount other (presumably lower) than what the open market would bear.
Photo courtesy Contra Costa Times