California, long known for its high housing costs, is at the center of a heated debate surrounding rent control. Proposition 33, set to be voted on in the upcoming November 2024 election, has reignited discussions about rent control laws across the state, specifically the limits imposed by the Costa-Hawkins Rental Housing Act.

Understanding Proposition 33 and Costa-Hawkins

At the heart of the debate is Costa-Hawkins, a 1995 law that established key restrictions on local rent control ordinances. It prevents rent control from applying to:

●       Single-family homes

●       Housing built after 1995

●       New renters when they first move in, with only current tenants benefiting from rent increase limitations.

Proposition 33 seeks to repeal Costa-Hawkins, effectively removing these restrictions. If passed, it would give local governments the authority to expand rent control to more housing units, including newer developments and single-family homes. In addition, the state would be restricted from imposing any future bans on rent control.

The Impact of Proposition 33

The Legislative Analyst’s Office (LAO) has provided insight into the potential consequences of Proposition 33. They predict a mixed bag of outcomes, including:

●       Expanded Rent Control: More cities and localities may choose to impose or expand rent control, which could help lower rents for certain groups of renters, especially long-term tenants.

●       Market Consequences: However, expanding rent control could result in fewer homes available for rent, as some landlords may opt to sell their properties or convert them to other uses. Additionally, rental housing values could decline, potentially reducing property tax revenues by tens of millions of dollars annually.

●       Affordable Housing Goals: Some California mayors, like San Jose's Matt Mahan, argue that repealing Costa-Hawkins could hinder the state's ability to meet affordable housing goals. They fear it could discourage new construction and exacerbate the existing housing shortage.

California's Housing Crisis

Rent in California is notoriously expensive. The LAO reports that rents in the state are about 50% higher than the national average, with some areas experiencing double the average rent costs. This affordability crisis is driven by a severe shortage of housing. Many cities, such as Los Angeles, San Francisco, and San Jose, already have local rent control laws in place, but the high demand for housing has kept rents high despite these measures.

Adding to the pressure is a separate state law, effective until 2030, which limits rent increases to 5% plus inflation, capped at 10% annually. This measure is aimed at preventing excessive rent hikes but does not solve the underlying issue of insufficient housing supply.

The Broader Debate on Rent Control

Arguments for Rent Control

●       Tenant Protection: Rent control is seen as a way to protect tenants from sudden and unaffordable rent increases, especially in high-demand markets. For long-term residents, rent control can offer stability and security, allowing families to remain in their homes even as the broader market becomes more expensive.

●       Preventing Displacement: In rapidly gentrifying areas, rent control can help prevent the displacement of lower-income residents, allowing communities to remain intact and diverse.

Arguments Against Rent Control

●       Supply Constraints: Critics of rent control, including the National Multifamily Housing Council, argue that limiting the ability of landlords to raise rents can discourage investment in new housing construction. If investors believe their returns will be capped by rent control, they may choose to build elsewhere, further constraining the supply of housing.

●       Deterioration of Housing Stock: Without the financial incentive to maintain and improve their properties, landlords may allow rental units to deteriorate over time, leading to lower-quality housing options for tenants.

●       Market Imbalance: Opponents also argue that rent control creates a market imbalance by distorting rental prices. Rent-controlled units can become highly sought after, leading to long waitlists and making it difficult for new renters to find affordable housing.

With Proposition 33 on the horizon, Californians are faced with a critical choice. Repealing Costa-Hawkins could pave the way for expanded rent control, offering relief to some renters but potentially worsening the state's housing supply challenges. As the debate unfolds, it highlights the difficult balance between protecting tenants and encouraging the development of new housing.

Rent control remains a contentious issue, not just in California but across the nation. Investors, tenants, and policymakers must navigate this complex landscape, weighing the benefits of tenant protections against the long-term health of the housing market.