What is Rent Control? It’s a Policy That Only Destroys Badly Needed Housing!

What is Rent Control? It’s a Policy That Only Destroys Badly Needed Housing!

By Daniel Yukelson, Chief Executive and Executive Director

Believe me, I totally get it. Housing affordability in the Greater Los Angeles Area is a difficult issue to solve. I tend to agree that describing our housing situation as an affordability crisis can be a true statement. It seems that so many young adults, particularly our recently minted college graduates and young adults in their 20’s and 30’s who are in search of an apartment cannot afford to own, and may never be likely to afford to own, and very often share rent with one or more roommates or continue living with mom and dad.

This situation is sad. When I began my career in accounting at Ernst & Young (It was called Ernst & Whinney back in those days to show you how old I am…), I decided to leave home and move into my own place with a girlfriend who was working on her graduate degree (and who later became my wife…), at least I could afford to rent an apartment and a few years later, I was able to afford to purchase a house for my family of three and then four with moderate effort and little help from our parents. 

Another true-ism about this so-called housing affordability crisis is that the rules of economics are objective and do not obey anyone’s will. This means that the cause of our housing affordability problem must be found in basic economic theory, having to do with the supply and demand for places to live.

Supply and demand should be a relatively simple concept to grasp. When prices are increasing, or in the case of rental housing, if we experience a gradual or rapid increase in rent pricing over time, then economics undoubtedly indicate a situation where demand has exceeded supply. In other words, more people are looking for a home than there are housing units available on the rental market. Of course, then, for the well off, this may not be a problem because for the “wealthier,” the cost of rent at market may not be an issue. That then leads to a whole other issue of gentrification, which we will tackle some other time. 

We see this phenomenon all time. “Got rent control? Then, got a housing shortage.” Demand gets out of whack with supply, or is it the other way around? Just look at the 8 states in the U.S., plus the District of Columbia, which have rent control along with a vast array of tenant protections that are so unbearably strict that owners are often left asking themselves: “Who really owns my building? Me or my tenants?”

We are nearly at that point, or perhaps we are already there, where risk outweighs the reward, we seek for the investment capital we’ve deployed in purchasing and maintaining rental property, and sacrifices made in terms of the time and hassles we put up with while operating rental housing. Today, strict rent control regimes like those in Los Angeles, West Hollywood, Santa Monica, and Unincorporated Los Angeles County to name just a few, also come with huge legal exposure in the form of anti-price gauging, anti-tenant harassment, habitability, discrimination, Americans with Disabilities Act (ADA), rent collection risk, taxes, personal injury, government mandates, and on and on.

You see, in an unhampered and free market economy where there’s some degree of regulatory balance (not one-sided), real estate investors and developers would seek to take advantage (in a good way) our current “crisis” situation where demand for housing far exceeds the supply of housing and would welcome and race forward for this opportunity to make a profit by providing badly needed, additional housing units for rent. New buildings would appear across the market spectrum, from luxury towers to moderate apartments. But then again, that could only happen here if something can be done to fix the entitlement process and reform the California Environmental Quality Act (CEQA). It’s not a difficult thing to understand unless you are a politician who is bent on achieving political expediency by placating the majority of our population who are renters in order to keep their held office and to achieve the holy grail of their eventual government pension, which by the way, is paid for by the taxes we landlords generate.

There should be no doubt about it. Every real estate investor and developer understands this simple fact: profitability depends on high occupancy, timely rent payments, and the ability to evict tenants who do not honor their contractual commitments without legal red tape. So, when “the money” (investors and developers) is able to achieve a situation of a free market economy in housing, then and only then will Los Angeles Area builders search out profits by again constructing with the goal of meeting the housing demand curve. 

Builders in the Greater Los Angeles Area face a major geographical constraint, as much of the area is fully built up to or at or near full capacity. This fact makes open and buildable land a scarce resource, and the price of a scarce resource tends to increase because no more land is produced. This fact alone will always push up prices for rental housing units, along with the extenuated and very costly entitlement timeline we have in most areas of Southern California.

On the demand side, Southern California has historically been a gateway for new immigrants to the United States, and the influx of people has, prior to Immigration and Customs Enforcement activities, consistently risen. This is where the objective and major reasons for high dwelling prices come to an end. The remaining causes are politically driven.

Sadly, overregulation is suffocating housing supply. Reform is desperately needed.

The Rent Control Blunder

There is a saying that is commonly linked either to Einstein or Franklin, but more likely from Rita Mae Brown's 1983 novel, “Sudden Death” (and was paraphrased from a saying used by Alcoholics Anonymous): “The definition of insanity is doing the same thing over and over again and expecting different results.” This is precisely what the rent control regimes in California should be diagnosed with, as we have been subjected to rent control for nearly 50 years. And throughout this nearly 50-year history, our situation has only gotten worse, and every newly minted rent control or rent stabilization ordinance that local jurisdictions have given birth to always seems to come out the same. Every rent-controlled city or county always follows some version of the “same old” playbook of rent limits, just cause eviction rules, rent registry, inspection cycles, anti-harassment, and more. As Rita Mae allegedly said, it’s insanity.

Over and over, and once more again, the substantially same rent regime rules come out of the closet. And what’s the result?

Well, look what the City of Los Angeles and many of its surrounding “rent stabilized” have gotten for it: 

(i) lower quality, poorly maintained housing;

(ii) housing shortages and skyrocketing rents where demand exceeds supply;

(iii) lagging construction and failure to build new housing to meet ongoing demand;

(iv) the largest homelessness populations;

(iv) the new de-population of California;

(v) costly administration and enforcement of rent stabilization and tenant protections;

(vi) gentrification causing long-term residents to be forced out; and

(vii) loss of naturally occurring affordable housing typically provided by “moms and pops” who are forced out of business. I am sure I left out a few.

But, for a moment, let’s forget about us landlords. Tenants also have negative side effects from rent regulations.  Cheap rent encourages tenants to stay where they are, which can seem like a good thing, but it’s not. For example, when tenants are given an opportunity to make a “career move” for more money and opportunity, they are often reluctant to do so if it means giving up their cheap, below-market apartment, or they may decide to drive long distances to a new job opportunity. Besides discouraging investment in and development of housing, rent control leads to housing shortages in other ways.

Take, for example, a single mom who may be living by herself in a 3-bedroom, rent-controlled apartment long after her children have moved and started families of their own, and her spouse had passed away, or they were divorced. Situations like this one result in shortages of larger rental units, so that the next couple with children will not be able to find affordable housing.

Then, of course, there’s the obvious adverse impacts on rental housing when income is kept artificially low via rent increase limits (and sometimes by rent “freezes”), property owners just cannot keep up with maintenance requirements and upgrades. Rent control is a collision course for owners and renters alike, I’m afraid.

A left-leaning, Socialist economist, Swede Assar Lindbeck, admitted, “In many cases, rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” I wish the declared and leaning Democratic Socialists of America elected officials who seem to be propagating in public office these days would listen attentively to their fellow social democrats and older “comrades.” Unfortunately, much of our housing policies are driven by ideological and political priorities, rather than thoughtful and economic ones.

This politically and ideologically concocted process is presented as “fair,” but fairness is meaningless when it not only obstructs housing supply for millions of Californians but also destroys the livelihoods of housing providers. It is the equivalent of deliberately restricting food production in the name of equity and then wondering why groceries are expensive.

Rent control is an old socialist utopia, one that collapses every time it is tried, leaving behind shortages, decay, and human frustration. You cannot defy gravity from a skyscraper, and you cannot defy the laws of economics from City Hall.

Yet leftist politicians insist on trying.