Written by Michael Palomba
On September 11, California’s State Assembly passed AB 1428 with a 48-26 vote. The previous day, the State Senate passed the bill 25-10. Governor Newsom has indicated he will sign AB 1428, which restricts landlords from raising rents more than five percent—plus inflation—per year. The change will go into effect on January 1, 2020.
On the surface, this may sound like a good idea. After all, California has the highest poverty rate in the country, so preventing rent increases might keep people out of poverty and improve the economy, right? Wrong.
While lower rents may sound like a good thing, rent control comes with a plethora of economic pitfalls, as well as disadvantages to current tenants.
One of the biggest issues with rent control is that it reduces the availability of housing. This happens because rent costs are typically proportional to the demand for housing in the area. But if prices can’t increase to account for new demand, there will not be enough housing available for the number of people looking.
Rent control policies also harm investors. The reason for this is rent ceilings stop gentrification, defined as the process of repairing and rebuilding homes and businesses in a deteriorating area (such as an urban neighborhood) accompanied by an influx of middle-class or affluent people. So, in the event an investor wants to purchase property and renovate in hopes of attracting wealthier clientele, they can not because those renovations would require a significant rent increase—and that would violate the rent control policy. This not only deters investors, but stunts economic growth and allows neighborhoods to continue to diminish.
Tenants will also suffer from this new rent control policy. When something in a rental property breaks or becomes obsolete, money is required to fix or renovate it, which requires financial investment from the property owner. However, if they are prohibited from raising rent to a level that benefits them financially, the investment is not worth it. This leads to cost-cutting and sometimes even property abandonment by the landlord, both of which cause a decrease in the quality of living for tenants.
The way to address the housing crisis in California is not to impose rent control on current properties, but to incentivize new construction of truly affordable housing—not expensive apartments that are subsidized. How can this be done? Well, a start would be rolling back some of the hurdles that developers must overcome to build affordable housing.
One example would be the California Environmental Quality Act, which is a commonly abused law that can be used to prevent new developments. “Not In My Backyard,” a factor in the review process that allows locals to express their opposition to officials, also makes the process of getting new developments more difficult. Many people oppose new construction simply because they worry it will change the character of their neighborhoods. This puts city councilmen in a tough spot because if they vote for new housing that is opposed by the community, regardless of the reason, they will anger their constituents.
Unfortunately, we will all have to be the lab rats in this situation and allow the Democrats’ new economic experiment to run its course. One can only hope that they realize this new bill is the wrong approach and reverse course before too many people have to suffer from the negative effects it will cause.
