Rent Control and the Importance of a Free Market

Article originally posted on National Real Estate Investor on October 9, 2019

The issue of rent control is a sensitive one. It’s hard to make a stand for the importance of a free market undefined by governmental intrusion without sounding like a greedy landlord. But there is a place in that market for fair accommodation of housing that’s reasonably priced for all concerned.

California Governor Gavin Newsom signed into law legislation that will impose statewide rent caps, making it the second state to do so. (Oregon passed similar statewide controls earlier this year.) The law would take effect January 1 but is retroactive to March 15 of this year.

Here are the specifics:

  • Most yearly rent increases over the next decade will be limited to 5 percent plus inflation, or 10 percent (whichever is the lower of the gross rental rate). Concessions and discounts are excluded.
  • Rents may be set to market rate once a tenant leaves a unit.
  • Capital improvements may not be used to increase the rent beyond the cap for existing tenants.
  • Tenants will receive protections against being evicted without cause.
  • This law does not supersede any existing rent control laws/tenant protections.
  • The law does not change the rules for tenants already under rent control rules in Los Angeles, San Francisco, and other cities across the state.
  • The cap does not apply to apartments built within the last 15 years. In addition, single-family home rentals are exempt unless they’re owned by corporations or institutional investors.
  • A landlord who wants to convert a building to condominiums, or make substantial renovations to units, could evict tenants, but would have to pay relocation assistance equal to one month’s rent.

The Institute of Real Estate Management (IREM) has a long history of opposition to government control of rents. It’s vital that property owners have the right to seek rents that encourage investment in new construction, as well as enhancements to existing properties.

At the same time, IREM is equally opposed to excessive rent increases. But, we firmly believe that a property should be allowed to produce sufficient income to accommodate the basic needs of its residents, including enhancements to maintain market competitiveness.

The flip side of that argument is essentially an argument for problem creation. Rent control legislation threatens not only the traditional rights of citizens, but significantly affects the housing inventory by stifling that investment, hastening the deterioration and loss of existing housing, and discouraging new construction. It’s a blow to value creation.

And that’s much more than a single landlord issue. Lowering the value of multifamily properties affects a community’s tax base by causing a disproportionate shift of the tax burden to other types of real estate, especially single-family homes and commercial properties, which in turn will curtail vital municipal services. Rather than inspiring more affordable housing, the expense of complying with rent control laws and regulations inevitably increases the cost of housing to the consumer, and the expense of enforcing rent control adds to the cost of local government.

Of course, IREM supports the availability of affordable housing for all as a social responsibility, but we also defend the right of Americans to own property free of unreasonable controls. Congress, HUD, and numerous other agencies have invested billions of dollars in urban areas to foster economic growth and housing development.

Wherever local rent controls have been initiated, the affected community has gone from growth to no growth, and from development to economic malaise. In these communities the already massive infusion of federal funds is threatened. We believe Congress and the Administration could assist in discouraging further controls by imposing a cap on housing fund allotments to municipalities that choose to implement rent controls.

We also urge elected officials at all levels of government to oppose rent control as counterproductive to the best interests of all segments of society and, ultimately, the economic well-being of the nation.

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