Opening the Door for Rent Control

Part Two: The Need for Rent Control in Achieving Housing for All

Part Two: The Need for Rent Control in Achieving Housing for All

The Public Response: Government’s Role and Responsibility

The numerous, far-reaching impacts of the housing affordability crisis, and the inability of the current market and government policies to resolve them, signify the need for policy change. The essential role of government is to protect the public interest, and to ensure that all members of the community are treated fairly and with equal dignity.81 To fulfill that role, government must periodically adjust the rules governing markets so they meet people’s needs as opposed to causing them harm. The rental housing market in California is currently in a moment that requires policy intervention. Rent controls are part of a needed adjustment to the rules of the market to ensure Californians’ access to housing. The current structure has resulted in a broken market and housing price increases. Its actions to improve neighborhoods also result in housing price increases, and it has a responsibility to limit the passing on of these costs to tenants. It also has a responsibility to fix broken housing markets to advance public well-being.

The Public’s Role in Creating Land Value

As anyone who has looked for housing knows, neighborhood conditions around a home are often as much a factor as the building itself.82 When the public schools,83 air quality,84 neighborhood safety,85 or public infrastructure like parks86 and public transit improve in a neighborhood, the prices of homes in that neighborhood tend to rise. Yet these improvements are largely a result of public action, such as increased public funding, new regulations, smart planning. Furthermore, public improvements as well as maintenance of public goods and services are made possible through the taxes paid by the general public, homeowners and tenants alike.87 Because land value tends to increase when public investments are made,88 regulation of land value simply recaptures value created by the public. As economic development expert Richard Rybeck writes, "Most members of the public end up paying twice for infrastructure. First, they pay taxes to create or improve infrastructure. Second, if they want to locate their home or business nearby, they must pay a landowner a premium rent or price to get access to the infrastructure that their taxes created."89

In sum, government action, which is supported by the collective contributions of all citizens, is responsible for a portion of increased property values, no matter what property owners do.90 In addition to government action, the public also creates tremendous value through myriad private interactions. California’s diverse peoples generate a creative culture that leads to technical and artistic innovation and a thriving economy, which in turn generates increased demand for access to the new jobs and the cities in which they are located. 

Economists often mistakenly treat rental housing as a simple consumer good. In fact, rental housing involves two separable aspects: the building, and the land or location, as Adam Smith pointed out in The Wealth of Nations more than two centuries ago. The “building rent” is the amount actually necessary to pay for the operation and maintenance of a home and to provide a normal profit to the landlord on their invested capital. The “land rent” is an extra payment for access to a desirable location. For tenants in coastal California a substantial part of the rent is really just an admission charge for the privilege of living here.91 As Smith wrote in his seminal book on market economics, the land rent is “a species of revenue which the owner, in many cases, enjoys without any care or attention of his own.”92 Professor Lee Friedman points out that since the actions of the landlord determine the building rent but not the land rent, reductions in unearned land rent have no effects on the production and maintenance of housing.93 94

Requirements established in the California constitution ensure that rent controls will only limit increases in land or locational rent and will not limit necessary increases in building rent. That is because landlords are entitled to rent increases necessary to provide them with a “fair return” on their investment. These rent increases must be sufficient to compensate for any increases in the cost of operation and maintenance of the buildings they own, and ensure that their cash flow increases keep up with inflation. But rent control will limit the increases landlords can impose that go beyond what is needed for a fair return, increases that are an admission charge for access to locations in California.

We all, homeowners and tenants alike, contribute to making California a desirable place to live in. Our rental housing market is structured so that private landlords take this publicly-created value for private profit, charging tenants higher rent for their contribution. This allows real estate investors to exact an enormous transfer of wealth from people who do not own real estate to people who do. It disrupts the lives of individuals, families, and communities. Rent control policies can correct this by rebalancing fairness between tenants and landlords. 

The Public’s Responsibility to Fix Broken Markets

Housing markets always depend on the rules that government enforces. It is not a question of whether there are rules, but what rules there will be, and what values and priorities those rules reflect. The debate over rent control is too often dominated by a false dichotomy in which government and the market are opposed to each other. In fact, government makes markets possible. Government establishes the detailed structure of law and regulation that defines the rights and obligations of the parties involved, and government provides essential public investments and services such as transportation, public safety, and education. Without these no market can function effectively in a modern society. Markets require appropriate public investments and regulatory oversight in order to deliver goods and services that are safe, fairly priced, produced by methods that do not damage the environment, and pay workers a living wage. Determining how government can best shape a particular market requires careful analysis, rather than an assumption that markets are inherently self-regulating. 

When markets and the rules governing them work poorly, the owners who control production and allocation of necessary goods and services have disproportionate power and the market norm of maximizing profit leads to consequences such as extracting unnecessarily high prices from consumers, depressing wages, and damaging the environment. The rental housing market in California is an example of a market that is not working well. Windfall profits are being made in large part due to forces that have nothing to do with the investments or actions of property owners. When the housing market is as dysfunctional as it is in many parts of California, tenants are effectively subsidizing landlords with rent payments above what a fully competitive market would allow landlords to charge. 

As previously noted, the US Supreme Court and California courts have consistently ruled that owners of rent-regulated properties have a constitutional right to a fair return on investment, so no rent control policy will eliminate the right of a landlord to turn a reasonable profit.95 But at various moments in history and in various areas of life, the state has intervened to limit profits to something closer to what would be charged in a fully competitive market while still ensuring a fair return on investment. For instance, public utility regulation allows the investor-owned companies that provide public necessities such as gas, electricity, and water to charge prices that provide a fair return on their investment. It does not allow companies to take advantage of the lack of sufficient competition in their market to charge consumers more than the price they would charge in a fully competitive market. 

The public has both a legal and a moral right to make changes in law and regulation to ensure that investors cannot take advantage of markets that fail to protect the public interest. Housing is a basic human need, and in other markets when this happens, the state intervenes and protects the public from harm while still allowing for a fair return on investment. 

Rent Control Policy Benefits and Limits

As described in Part I, data on rent burden clearly shows a crisis in housing affordability that is especially harmful for renters in California. While California is faced with a range of housing issues that require us to pursue various policy goals, the goal of addressing the housing affordability and displacement crises facing overburdened renters must be prioritized. Rent control is a key policy for meeting this goal, but restrictive state legislation and narrow policy debates have severely limited the ability of local governments to consider rent control policies and decide for themselves how to respond to their citizens’ housing needs.

Frequently the debate around rent control engages a divisive framework: we can stabilize rent for existing tenants, as studies have found the policy does,96 97 but some researchers and advocates contend that by doing so, we may slow the production of new housing supply. This flawed dichotomy undermines the overall goal of providing affordable housing for all, both now and in the future. In this framework, stabilizing rent for existing tenants is often considered just one of several policy goals. Instead, we argue for making an intentional choice to center the needs of existing renters in defining the policy objective at hand. Focusing entirely on other housing policy goals means ignoring the urgent and immediate needs of millions of overburdened renters across the state. 

We argue for making an intentional choice to center the needs of existing renters in defining the policy objective at hand. Focusing entirely on other housing policy goals means ignoring the urgent and immediate needs of millions of overburdened renters across the state. 

The Unique Benefits and Possibilities of Rent Control

  • A cost-effective and responsive policy approach: Where most other programs require tremendous financial resources and take a great deal of time, renter protections can be established as a matter of law and the administration of rent control is typically paid for through modest per-unit fees. For example, rent board programs in Santa Monica and Berkeley are cost-neutral, with fees collected sufficiently covering all operating costs.98 Renter protections immediately advance the goal of stabilizing rents for historically marginalized residents who have built their communities and contributed to the value of their neighborhoods long before the present wave of economic development.99 As these places experience increased public investments in infrastructure and services, as well as new economic development and job growth, rent control helps to ensure that existing residents can benefit from the improvements that they helped create. 
  • Housing stability for existing tenants: Rent control is, first and foremost, an antidisplacement tool. The vast majority of academic studies on rent stabilization find that it increases renters’ ability to choose to remain in their homes.100 A recent study of the effects of rent control in San Francisco found that it increased tenants’ probability of staying in their homes by nearly 20 percent, and that without the financial savings that rent control provided, they would otherwise have left the city.101 The literature also shows that these effects of stability are greatest for older tenants and long-term tenants,102 thereby supporting aging in place and the preservation of community connections.
  • Improved affordability: Several studies have shown that rent control provides financial benefits to current tenants. Research by UCLA professors William Clark and Allan Heskin on the early impacts of rent regulations in Los Angeles (prior to the enactment of Costa-Hawkins in 1995) determined that after living in rent-stabilized homes for three to five years, tenants’ rents were between 26.5 to 30.9 percent lower than market rent, and for those with tenure between five and ten years, this discount was as high as 36.8 percent.103 Although the evidence is mixed, some studies have found that in cities with rent regulations, even non-controlled units actually had slightly more affordable rents compared with units in cities without rent control.104 105 A recent study of the effects of rent control in San Francisco found that benefits to tenants averaged “between $2300 and $6600 per person each year, with aggregate benefits totaling over $214 million annually.”106 The financial benefits of rent control can help renters to not only meet their basic needs, but open up opportunities for individual advancement and well-being. 
  • Preservation of economic diversity: Egregious rent increases continue to place more of the existing housing stock out of reach for lower-income tenants, thus increasing California’s already overwhelming affordability gap. Rent control, particularly when combined with regulations related to condominium conversions and other renter protections such as “just cause for eviction” ordinances, can help prevent the expansion of California’s existing shortfall of housing for lower-income renters.107 In doing so, it can help to maintain economic diversity and integration. A study of the effects of lifting rent control in Cambridge, Massachusetts found that after the policy’s repeal, not only did the value of formerly stabilized properties increase by 18 to 25 percent in ten years, but the value of non-controlled units increased by 12 percent. The researchers suggested that wealthier households moved into the city after lower-income tenants had been displaced by unregulated rent increases, while they may not have been willing to move in prior to decontrol.108 This suggests that rent control can contribute to preventing displacement that would ultimately lead to more exclusionary, economically-segregated cities. As we note in the following pages, however, rent control is only a step in this direction and must be supplemented by additional government initiatives to raise incomes and reduce poverty.

Limitations of Rent Control

We acknowledge that in addition to rent control being just one part of the solution, it also has limitations and requires thoughtful policy design to mitigate any downsides. We believe that none of these limitations should preclude the use of rent control to prevent residential displacement, but it is important to consider and respond to these limitations when designing local programs. 

  • Means testing: A common critique of rent control is that it is not means-tested, and thus does not specifically target the renters that need it most. Proponents of rent control point out an important reality: that any means-testing would very likely lead to discrimination against low-income renters because landlords would be incentivized to evict eligible tenants or solely rent to non-qualifying tenants who could pay higher rents. Additionally, as detailed in Part I, data on rent burden rates indicate that a majority of renters do stand to benefit from greater housing affordability, and they rightfully should, as California's high rents reflect unearned increases in rent based on public investment and services, and scarcity conditions in which tenants are subsidizing landlords. There is no more reason to limit the benefits of rent control to the lowest-income tenants than there is to limit the benefits of public utility regulation to only the lowest-income users of electricity and water. We thus recognize that meanstested approaches are important and appropriate for other policies, but in the case of rent control, the lack of means-testing provides critical benefits that overcome this aspect of the policy.
  • Potential effects on supply and tax revenues: Others raise concern that rent control may decrease housing supply109 and property values, and subsequently impact tax revenues.110 Yet, numerous empirical studies, as well as housing production trends in cities with rent control, show no negative effect on housing production, often finding that other local conditions and market cycles have a greater influence on supply.111 112 The three largest Bay Area cities with rent control (San Francisco, San Jose, and Oakland) have only 27 percent of the region’s housing but according to the U.S. Census Bureau those cities have built 43 percent of the Bay Area’s new multifamily rental units in buildings with five or more units since 2000. Similarly, the City of Los Angeles, with 42 percent of the housing in Los Angeles County, has built 62 percent of new multifamily rentals since 2000.113 Other concerns, such as the potential loss of rental units due to condominium conversions, can be addressed through ordinances regulating condominium conversions, which nearly all California cities with rent control employ. Nonetheless, landlords may be able to take advantage of other loopholes, which should be addressed through additional changes in state law. On the other hand, rent control may involve tradeoffs, which require California to make an intentional choice about its priorities. While data suggests that it is not associated with a decline in property values,114 the Legislative Analyst’s Office notes that under strong rent control systems, tax revenue from residential rental property will rise more slowly.115 But inflicting enormous hardship on tenants, driving millions into poverty, and tens of thousands into homelessness, is too high a price to pay for generating more tax revenue. California has better options for raising the revenue we need for state and local government. Rent control’s benefits, both to renters and to the state as a whole, far outweigh the costs. 
  • Need for additional government action to create choice and opportunity: It is also critical to recognize that the need for reforms extends beyond rent control and housing policy more broadly. Although rent control can prevent forced displacement, for residents of neighborhoods with concentrated poverty, rent control alone may not be enough. Some extremely low-income families may be unable to pay even the lowest market-rate rent, or they may be prone to missing a rent payment and thus subject to eviction for just cause. The state must therefore ensure access to stable, living-wage jobs that allow families to weather any financial emergencies, comfortably afford rent month-tomonth, and build savings and assets over time. This is one part of ensuring not just stability, but full access to opportunity and choice—both the choice to stay in their current homes and neighborhoods, as well as the choice to move to areas where they may have greater access to opportunities for selfadvancement. Part of this must involve additional public investment in resources to improve school quality and employment opportunities, as well as other pathways to opportunity, mobility, and equity. Another factor is vigilant enforcement of laws already on the books, such as fair housing laws that protect renters from discrimination. Rent control provides a baseline for housing stability, but Californians must also work toward establishing stronger employment policies, more equitable tax structures, greater investment in the socially-owned housing sector, and other reforms that support the goals of social equity. 

Putting Tenant Protection and Housing Production Together: Near and Long-Term Strategies

Rent control alone does not solve for the full range of Californians’ housing needs, but it addresses one key need held by a large segment of California’s population: the growing housing costs that burden over 9.5 million renters, while also advancing our state’s broader goals of social equity and progress. Rent control is first and foremost about protecting and prioritizing existing residents’ stability, which preserves access to emerging opportunities in their current neighborhoods and helps open up new housing choices that come with increased financial stability. It allows residents to remain a part of the communities that they have invested in and built, access wellpaying jobs, and build wealth that facilitates upward mobility. It provides families with the ability to have peace of mind, to plan for a future, and to belong to a community. We assert that these benefits, as well as the broader societal benefits that they contribute to, are invaluable. California must strive toward achieving them by upholding housing stability for renters as a key public policy goal. To do this, cities need to be able to have conversations about effective rent control policy designs and consider all options that may be necessary to ensuring the broadest range of benefits to their citizens. 

Renter protection and housing production are not an either/or decision. California needs both in order to make room for both new and longtime residents, but without rent control to anchor our policy approach, the individual and societal consequences of the crisis will continue to intensify and harm California as a whole, while the benefits of all other policy efforts will manifest too late. 

With California’s growing population and economy, it is clear that producing new housing is essential to meeting the state’s housing needs. We must continue to pursue changes that reduce barriers to housing production, especially of subsidized housing as well as multifamily housing that can be affordable by design. This includes developing new funding sources for affordable housing development and addressing exclusionary zoning policies at the root of the displacement crisis. But producing enough housing to fill the 3.5 million-unit gap is a long-term strategy, rather than a short-term part of the solution to displacement and housing poverty. 

As discussed previously, the housing crisis is not a simple matter of supply and demand. The key concern is timing. Tenants need immediate relief from extreme hardships they face, and we cannot afford to stand back and hope that new housing “catches up” to demand and “trickles down” to create enough affordable housing. If our goal is to stop further displacement and expand access to places of opportunity in California, relying solely on the market simply will not work. In fact, any production strategy that does not include rent control and other protections will be insufficient. 

The Role of Rent Control and Tenant Protections: Providing a Timely Solution that the Current Market Will Not

A Comprehensive Approach for California’s Diverse Housing Needs: Protection, Production, Preservation, Power, and Place 

There is an emerging framework among researchers, community advocates, and policymakers of a comprehensive policy approach that includes five strategies (the “five Ps”): three which have been more traditionally referenced116 117 —protection, production, and preservation—as well as two important additions— power and placement.118 119 120 Rent control and other renter protections provide a necessary foundation for the remaining four Ps. 

  • Protection: protecting tenants and socioeconomically disadvantaged residents from displacement (e.g. just cause for eviction and rent control policies)
  • Production: increasing the production of new housing by generating funding, removing exclusionary land use policy barriers, and other strategies (e.g. affordable housing linkage fees, public land policies, elimination of exclusionary zoning)
  • Preservation: preserving existing affordable housing, including income-restricted units and units on the market that are rented at relatively lower rates (e.g. funding programs that support the acquisition and rehabilitation of older affordable rental units)
  • Power: ensuring equitable community participation that leads to responsive and inclusive housing decisions (e.g. an expanded role for limited-equity cooperatives and community land trusts)
  • Placement: creating access to housing for socioeconomically disadvantaged people in places that connect residents to opportunities and break patterns of segregation (e.g. fair housing laws and source of income discrimination laws)

The Magnitude of the Challenge

The magnitude of California’s housing shortage indicates just how long-term any effort to resolve the crisis must be. The state currently has an affordable housing gap of 1.5 million homes for extremely lowand very low-income households,121 and overall, it needs to build 3.5 million new homes by 2025 in order to satisfy current demand, address pent-up or latent demand, and accommodate projected population growth.122 Recent statewide measures such as SB 2 (Atkins, Building Jobs and Homes Act) and AB 1397 (Low, Adequate Housing Element Sites), both passed as part of the 2017 Legislative Housing Package, have begun to address barriers to market-rate and affordable housing production.123 However, analyses by the California Legislative Analyst’s Office and the UCLA Anderson Report indicate that it will take many years for additional production to slow the rate of increasing rents, let alone bring them back down to affordable rates.124

  • If construction continues at the same pace since 2000 (an average of 1 percent each year), California will only build approximately 1.2 million homes by 2025125 —less than 35 percent of the total estimated need.126
  • To merely keep California’s housing costs from escalating faster than the rest of the United States, the Legislative Analyst’s Office (LAO) estimates in addition to the 100,000 - 140,000 units that are expected to be built annually, yearly production would need to increase by as much as 100,000 units, with most growth occurring in the state’s high-demand coastal communities.127
  • However, actually reversing the trend and achieving even slightly more affordable levels would require far more. Using the LAO’s estimates, the UCLA Anderson Forecast finds that to achieve a modest 10 percent reduction in price, California would need to increase its housing stock by 20 percent, about 2.8 million additional units of housing.128

The Limits of Market-Rate Housing Production

California’s rental housing market is broken. It is not, and will not be, for the foreseeable future, capable of providing the amount of housing that low-income residents need. The current housing market requires tenants to compete for places to live and allows landlords to charge whatever the market will bear, leaving the lowest-income renters with the only option of paying to live in units that cost more than what they can afford. 

The state does need to build new housing units to address the shortage, but it is critical to recognize that while more housing is needed at all income levels, the market is responding primarily to the demand for housing from middle- and upper- income people.129 130 As they come online, new market-rate rental housing units play an important role of addressing demand at the high end of the market. While primarily accessible to above moderate-income households, these new homes can contribute to preserving the relative affordability of older homes by relieving some of the pressure at the lower end of the market (where the need is greatest). 

This new market-rate housing may eventually “filter down” to prices affordable to moderate and low-income tenants but this process can take generations.131 This will not solve the current shortfall of 1.5 million rental units for very low-income and extremely low-income tenants.132 Researchers Miriam Zuk and Karen Chapple of the Urban Displacement Project at UC Berkeley explain that “units may not filter at a rate that meets needs at the market’s peak, and the property may deteriorate too much to be habitable. Further, in many strong-market cities, changes in housing preferences have increased the desirability of older, architecturally significant property, essentially disrupting the filtering process.”133

Their analysis of the effects of market-rate construction on filtering show that in the Bay Area, roughly 1.5 percent of units filter down annually, meaning that they become newly occupied by lower-income households. They also point out that other research by economist Stuart Rosenthal of Syracuse University, which finds that rents on such units decline by only 0.3 percent per year,134 suggests that these lower-income households also take on a heightened housing cost burden.135

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  • 102. 2 Diamond, Rebecca. Tim McQuade, and Franklin Qian (December 2017). “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.” Accessed at https://web.stanford.edu/~diamondr/DMQ.pdf.
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  • 134. Rosenthal, Stuart (2014). “Are Private Markets and Filtering a Viable Source of LowIncome Housing? Estimates from a ‘Repeat Income’ Model,” American Economic Review 104(2), pp. 687-706, https://www.aeaweb.org/articles/pdf/doi/10.1257/aer.104.2.687.
  • 135. Ibid.