Due to the high demand for housing in California, rental costs are rising, and access to affordable housing is limited throughout the state. The Legislative Analyst’s Office of California reports that the average California renter spends 50 percent more for housing than renters in other states.
Currently, one-fifth of all renters in California reside in cities with rent control, as permitted under the Costa Hawkins Rental Housing Act of 1995. This act, sometimes known as the “anti-rent control bill,” established three major rent control regulations in California: It permits landlords to increase rent on rent-controlled apartments to market rates when a new tenant moves in, prohibits cities from applying rent control to units built after February 1995 (and in some cities, such as Los Angeles and Santa Monica, even earlier), and excludes single-family homes and condominiums from rent control.
In 2019, California Governor Gavin Newsom enacted a measure extending rent control throughout the state. This rule regulated rent increases until 2030, stipulating that rent in all rent-controlled apartments may grow by no more than 5% yearly plus inflation, or 10%, whichever is less. This was the result of Governor Newsom’s 2018 announcement of the unpopular Proposition 10, which aimed to repeal the Costa Hawkins Act and increase rent control.
Now, leading up to the November 3 elections, California voters will be able to vote on whether or not to approve Proposition 21, a new measure that aims to promote affordable housing and rent control.
What Is California Prop 21?
The primary objective of California’s Proposition 21 is to amend the Costa Hawkins Rental Housing Act of 1995 in order to expand rent control throughout the state, so bypassing any municipal rent control laws. If enacted, the legislation will maintain two significant modifications to the existing condition of rent control:
First, the bill will let local governments establish limitations on rent increases for new tenants, so impeding the provision of the Costa Hawkins Act that permits landlords to raise the rent on a rent-controlled unit to market value when the current tenant vacates.
However, individual governments must still let landlords increase rent by up to 15% over the first three years following a new tenant’s occupancy. This is due to the fact that every landlord in California has the legal right to a Fair Rate of Return, allowing them to raise rents just enough to generate yearly profits from their rental properties.
Second, the bill will let cities and counties implement rent-control restrictions on properties older than 15 years, with the exception of single-family houses owned by individuals with two or fewer properties. This implies that, pursuant to Proposition 21 and excepting the aforementioned limitation, buildings constructed prior to 2005 are eligible for rent control.
This proposition will be on the ballot in California on November 3, 2020. The bill would enter into force in 2021, although its expiration date is not specified.
Who Is Impacted by California Prop 21?
The California Prop 21 bill will certainly have the greatest impact on landlords. Because a greater number of properties would become eligible for rent control, some landlords’ rental earnings would presumably decline as a result of rent price restrictions.
Under the proposed plan, certain landlords would not be permitted to raise the rent on a rent-controlled property to market value once the tenant moved out. However, a landlord’s Fair Rate of Return would still be needed.
As with other rent control legislation, the purpose is to make housing more affordable for California’s tenants. As a result, some tenants will have many more renting alternatives within their price range, with the goal that fewer renters will migrate as a result of rent rises.
How Will Proposition 21 Affect the California Rental Market?
Several reactions are anticipated if Proposition 21 is adopted, which might impact the state’s economy and municipal tax streams. The state first mentions the prospect that more landlords would sell their homes as a result of rent control legislation. It is also anticipated that the value of rental properties will diminish since landlords will be unwilling to spend as much for a home if their rental revenue decreases.
According to Proposition 21, both local and state revenues will undoubtedly decrease over time, with property taxes bearing the greatest impact. This is because, as property values decline over time, landlords would pay less in property taxes. However, more stringent rent control regulations would also result in a rise in sales taxes since tenants with more purchasing power after paying rent would be subject to higher sales taxes.
Prop 21 Pros and Cons
Like many rent control legislation, Proposition 21 is surrounded by controversy over whether it should be enacted and how to address California’s rising demand for more affordable housing.
Expanding rent control measures is the greatest approach to giving more affordable housing to California renters, according to proponents of the bill. In addition, they claim that it is an efficient approach to reduce the homeless population in many of the state’s cities, an issue that taxpayers are paying to address. Additionally, proponents say that the proposal will assist with housing difficulties facing veterans, seniors, and families.
Those opposed to the motion argue that the idea, along with the expansion of rent control laws, will be detrimental to both tenants and landlords. They contend that by regulating rent costs and so generating more cheap choices, private developers will be dissuaded from constructing affordable housing units in their buildings. The proposal is also worrisome for landlords whose rental revenue is insufficient to cover the expense of their homes. Those who disagree with the initiative also reference a study by the Massachusetts Institute of Technology (MIT) that indicated house prices in locations with strict rent control regulations could decline by up to 20%, which is a worry for homeowners in the state.
The demand for new rent control laws calls into question the effectiveness of rent control as a means to increase the availability of affordable housing and assist tenants.
According to a 2018 study done by the Brookings Institution, rent control tactics cause more harm than benefit in the long run. Although rent control laws provide tenants with temporary financial respite, they can lead to gentrification and an overall decline in housing affordability. However, the report emphasizes that the ways in which renters benefit from rent control, such as a reduction in displacements owing to rent rises, cannot be overlooked.
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