California’s New Rent Control Law Will Set Back Housing Construction and Affordability

Less than a year after California voters rejected rent control in a statewide ballot proposition, Governor Gavin Newsom has signed legislation imposing it. For rental units 15 years or older, rent increases will be limited to 5 percent annually. The negative consequences of the new law are extensive. Older buildings, likely to require the most maintenance, will fail to recover costs—leading to “shabbification.” New construction, desperately needed in a state with an estimated housing shortage of millions of units, will also dwindle. Developers confront a future with limited returns on investment. And, as always with rent control, incumbent renters—assured cheap housing, regardless of their income—will benefit, while newcomers see only “no vacancy” signs.

How to explain such a policy? Legislators, no doubt, hear complaints from tenants struggling with rising rents, but California’s ill-advised action has deeper causes. The state has failed to convince, or coerce, local governments to permit the construction of new, relatively low-cost housing—or much housing at all. The Yimby (Yes in My Backyard) movement, led by State Senator Scott Wiener, sought to provide financial incentives for municipalities to permit new building along transit lines and commercial corridors. But municipalities have shown limited interest in “up-zoning” to permit housing other than single-family homes. Mostly zoned for one-family properties, places like San Jose have some of the nation’s highest housing prices.  

Persuading localities to change—or at least to relax so-called exactions, or required public improvements imposed on new developments—remains challenging. Homeowners benefit mightily from the status quo, as prices for one-time starter homes shoot over $1 million—and Proposition 13, a tax cap that ensures home values rise as property taxes remain stagnant, insulates them from dynamics that, in most parts of the country, compel empty-nesters to consider moving out. The roots of NIMBY-ism are bipartisan: environmentalists impose rules and costs, while older homeowners shield themselves from market forces and shift local costs to the state, through income and sales taxes. Rent control is a conspiracy of entitled incumbents. Now count entitled tenants among them.

Change should begin with an effort to persuade locals that some construction is crucial, especially to retain longtime residents and recruit employers. Encouragingly, some localities have started permitting construction of “accessory-dwelling units”—so-called granny flats—that let incumbent homeowners move out and sell their home but live on the same site. What won’t break the logjam is a push to site subsidized “affordable” housing in affluent communities. Socioeconomic sorting is a fact of life, and the middle class reacts badly to having the poor as neighbors. From their perspective, townhouses, two-family homes, and other rungs on the housing ladder are far preferable.

Meantime, shambolic housing policies such as California’s latest version of rent control will only make everything harder. It will likely take a crisis—perhaps an exodus of businesses and residents—to force change. 

Howard Husock, a City Journal contributing editor, is the author of the new book, Who Killed Civil Society: The Rise of Big Government and Decline of Bourgeois Norms.

This article was originally published by City Journal Online.