Vinay Pimplé: Rent Control is Not What it Appears to Be


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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%.

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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.

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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.

Wikipedia: https://en.wikipedia.org/wiki/Costa-Hawkins_Rental_Housing_Act


Photo courtesy Contra Costa Times

Showing 5 reactions

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  • commented 2015-07-23 22:46:39 -0700
    To Mr.Arreguin, as a resident of the City of Richmond, we have heard all the rhetoric. I find it very interesting that there is no data available regarding Berkeley’s program which has been in existence since the 70’s. Also we are very much aware that it has not curbed raises in Berkeley rents as Richmond’s remained below market value for years without these programs. It has been my experience when programs are successful you can always find great data and evidence to support them. But to date we have found nothing. Therefore if you could provide Mr. Pimple with actual facts, data (# and types of properties affected, # of tenant turnovers, # of evictions vs those averted by just cause etc.), and evidence of success, perhaps it would change some minds. It would also be good to put the information in the public domain where we can all see it, and come to our own conclusions. Growth and progress is a natural process and raising rents are part of that process for Richmond now. Our problem is supply and demand, that will not be fixed with bad policy. Therefore, our council should not interfere with the natural order, because when they do they cause more damage.
  • commented 2015-07-21 20:12:15 -0700
    Darned auto correct! I mean “applicants” not “Pelicans”! Pretty funny, and for the record I was not taking applications from Pelicans.
  • commented 2015-07-21 19:59:06 -0700
    The RPA wants Richmond to be like the People’s Republic of Berkeley. I lived in and managed a rent controlled duplex in Berkeley while there in school. The distortion of the market caused by extreme rent control were unbelievable. I was offered (but did not accept) sex, drugs, etc. to rent to people. There were hundreds of Pelicans for the severely below market apartment. Yes, I know that vacancy decontrol ameliorates that, but just cause eviction makes every rental not rolled tenant the owner of essentially a life estates the property. It was impossible to justify any investment in property because going before the rent board would be like going before the Chinese communist party asking to open a private business. It is fantasy to argue that you can impose extreme price controls and grant lifetime tenancies in rental property and still attract investment. These arguments are made by people who don’t have to earn a return on their investments. Investment property is a fairly high risk proposition compared to other income producing investments, and requires significant management attention. When you cap the upside at 60% of CPI, which is a very low number today, you further disincentive investment, no matter what the socialist talking heads try to tell you. I suppose Berkeley is a lost cause on this topic, but Richmond isn’t (yet) and I hope it doesn’t become one . . .
  • commented 2015-07-21 16:04:57 -0700
    Mr. Pimple, as a City Councilmember in Berkeley and a former member of its Rent Board, I fundamentally disagree with your analysis. While it is true that Costa Hawkins undermined Berkeley’s system of strong rent control, and rents have increased significantly over the last 16 years, the reality is that rent controlled rents are still more affordable than newly constructed housing. A recent nexus study conducted by Bay Area Economics to inform the Berkeley Council on adjustments to its Affordable Housing Mitigation Fee clearly confirmed this fact with newly constructed units being close to $1,000 more than a rent controlled unit. In addition, rent control provides stability throughout a tenancy to protect renters from dramatic and sudden rent increases, similar to the level of stability homeowners benefit from. Without it, tenants can and have received rent increases of several hundred if not 1,000 making it difficult for people to continue to afford their housing. Given the deregulated environment of Costa Hawkins and the Bay Area’s hot real estate market, which is even reportedly trickling into Richmond, there is a huge incentive for landlords to kick of longer term renters to charge higher rents. While free market principles work philosophically, the reality of the Bay Area’s hot real estate market is that they have not trickled down to lowering rents. Even if you build a huge amount of housing, the net effect of it on lowering rents would not be realized for years to come. That is not to say that we should not increase supply, but supply side economics failed in the 80s as a solution and clearly are not a solution to the housing challenges the entire Bay Area is facing including your city of Richmond. I strongly encourage you to reconsider your position, and to support a strong rent control ordinance. Looking at Berkeley’s market, it has had a positive demonstrable effect on preserving diversity and housing affordability even under Costa Hawkins. The fact that owners dont fix up their properties is not a cause of rent control but rather greed. A recent study by the Rent Board found that owners under vacancy decontrol are making more than a sufficient amount of profit even after making a fair return to reinvest in property improvements.

    Jesse Arreguin
    Berkeley City Councilmember
  • commented 2015-07-20 12:17:12 -0700
    Councilman Pimple’ – I wish you luck in your endeavors to try and explain the above to the other members of your council, unfortunately you are dealing with people that cannot manage their own personal finances, let alone those of a city with millions in the budget.
    Alas, the RPA members on your council will not allow common sense to get in the way of their agenda, or their now, personal issues with the mayor.
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