COSTA HAWKINS: TO REPEAL OR NOT TO REPEAL?
A renter recently came up to me and asked me what “the deal” was with the Costa Hawkins act. He was genuinely interested to know both sides of the argument. His landlord had recently told him that his rent in his non-rent controlled unit would increase if Costa Hawkins was repealed. And that made him wonder if he should be for or against the repeal.
A ballot that may appeal to all renters, does not necessarily benefit all renters. That is because not all renters are in the same boat, and not all renters are alike.
Having been in the rental business for 17 years, one of my biggest beefs is with social perceptions of my industry. Most of us group all renters together and all landlords together, and then pin them against each other. Our dialogue, our filters, the words we use, especially in the media, all contribute to this polarization.
Being in an industry that has worked so hard in realizing equality and fairness in its operations and practices, this perception of “landlord verses renter” is hard to digest.
I was happy to meet this renter and to see his openness to hearing both sides of the Costa Hawkins Repeal issue. He was not just opposed to it because it was a seemingly “renter versus landlord” issue, and that was refreshing.
Now, normally rent control is a topic of concern only for renters and landlords, specifically landlords of properties built before 1978. This is because Costa Hawkins puts limits on properties that fall under rent control. For example, because of the Costa Hawkins Act all single-family homes, and apartments and condos built after 1978, do not fall under rent control. But if Costa Hawkins is repealed, all properties (single family, condos, apartments – built at any point) could fall under rent control.
For these reasons, we should all be looking at this ballot without prejudice and understand its implications, prior to casting our votes.
What exactly is Costa Hawkins, and what are the politics behind its repeal?
Costa Hawkins is a California state law, enacted in 1995, that puts limits on rent control.
This November, there is a ballot measure to “repeal” the Costa Hawkins act. Striking this law would have significant impact on us all – renters, landlords, property owners – including single family and condo homeowners.
Those who are for the repeal, believe repealing the Act will help keep rentals affordable. Those who are against the repeal, believe there will be a negative impact on the economy, and will contribute to the shortage of housing.
At the heart of this ballot is a concern of affordable housing.
Who in California, especially Los Angeles does not feel the economic strain of an increasingly unaffordable housing market? It is affecting us all. At first glance, a ballot that proposes a solution to unaffordable housing seems like a ballot that everyone would get behind – who would be for unaffordable housing? But there are a lot of people against the repeal, and for good reasons. So before jumping to conclusions, let’s look at what we would be repealing.
There are three main provisions of Costa Hawkins:
- It protects a landlord’s right to raise the rent to market rate on a unit once a tenant moves out. All rent control laws must include “vacancy decontrol,” meaning property owners can raise rents to whatever price they want once a tenant moves out of a rent-controlled unit.
- It exempts single-family homes and condos from rent control restrictions. Single-family homes cannot be covered by rent control.
- It prevents cities from establishing rent control—or capping rent—on units constructed after February 1995. Buildings built after 1995 cannot be covered by rent control, and cities that already had rent control at the time of Costa-Hawkins’ passage are prevented from expanding it. (Los Angeles, for example, cannot expand rent control to units built after 1978.)
What are the implications if these provisions are repealed?
Once a renter moves out of a rental unit (single family home, condo, or apartment), the landlord may not be able to raise the rent to market rent if Costa Hawkins is repealed.
The negative impact of this:
Once a renter voluntarily moves out, the rent that tenant was paying becomes the “base rent” for that unit. The landlord will not be able to charge more than the base rent plus the allowable city increase to the next tenant who moves in. As costs of improvements, repairs, tax, maintenance rise, a landlord may not be able to offset these costs by increasing rents. This could be detrimental for mom-and-pop type landlords. The negative impact this could have is mom-and-pop landlords may be forced to sell to investors and large developers. The quality of rentals will decrease. Young buyers who are interested in investing in real estate, wanting to buy a duplex or triplex, live in one unit and rent out the others – these small mom-and-pop type landlords will have an even more difficult time entering the market. The freedom for renters to choose to pay more or less rent for properties with amenities they need or want will decrease, as rentals become more sterile due to lack of rent de-control.
The positive impact of this:
The inbound renter will be offered the same rent the previous tenant was paying, plus allowable increases (currently 3% a year). If the outbound tenant was paying 1970’s rent, the new tenant would benefit greatly. A San Francisco study shows that that currently, only tenants who have low rents under rent control are benefiting from rent control, and new tenants to the rental market (inbound tenants) pay 5.1% higher rent because of rent control. The inbound renter will spend less on rent, making housing more affordable.Once a renter moves out of a rental unit (single family home, condo, or apartment), the landlord may not be able to raise the rent to market rent if Costa Hawkins is repealed.
If Costa-Hawkins is repealed, single family homes and condominiums will be subject to rent control laws.
The negative impact of this:
This will impact those I refer to as “accidental landlords.” Folks who buy a home or condo and then later find out they have to move out-of-state for a job. Or, a single person who buys a home and then later moves in with a partner and choses to rent one of their homes out. Or, someone who buys a home and later loses a job, can’t afford the mortgage but can’t sell due to the market and is forced to rent the home. Or, seniors who often wish to downsize or move into assisted living facilities, and their families choose to rent their family home rather than sell and pay large capital gains. These clients would be affected by the repeal as their homes which currently would not be affected by rent control could fall under rent control if Costa Hawkins is repealed.
The positive impact of this:
On the other side, repealing Costa Hawkins would make all housing fall under rent control. This would provide more affordable housing.
All rental units built after 1978 could be subject to rent control laws if Costa-Hawkins is repealed.
The negative impact of this
:
Currently apartments and condos built after 1978 are not subject to rent control. The argument for keeping this, is it allows developers to use capital to build more units and get a return on their investment. If this law is repealed, developers would have less incentive to build new apartment units. Additionally, landlords who own non-rent controlled apartments would now be subject to rent control and this could negatively affect their bottom-line, forcing them to sell. And again, this would limit the pool of investors who can afford to be in the rental market.
The positive impact of this:
Same as above, the renter will spend less on rent, making housing more affordable.
As you can see, the heart of Costa Hawkins Repeal is to increase the powers of rent control. Therefore, one must ask is rent control the solution? Has rent control helped keep housing affordable? And does it make sense to increase the powers of rent control as a method to increase affordable housing?
More reading on the subject:
http://www.nber.org/papers/w24181
https://fee.org/articles/three-fallacies-of-rent-control/
https://fee.org/articles/the-case-against-rent-control/
https://www.nmhc.org/news/articles/the-high-cost-of-rent-control/
https://www.bloomberg.com/view/articles/2018-01-18/yup-rent-control-does-more-harm-than-good
https://www.gsb.stanford.edu/insights/rent-controls-winners-losers
https://www.economist.com/the-economist-explains/2015/08/30/do-rent-controls-work
https://mises.org/wire/rent-control-makes-good-politics-and-bad-economics
*NOTE:
If and once Costa Hawkins is repealed on the state level, there will be a lapse of time before we feel the impact on a city level. After a repeal, California cities will still have to amend local ordinances, if they choose to do so.
