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Proposition 98 and Rent Control - the Policy Issues:

Much of the opposition to Proposition 98 - the only one of the two California initiatives taht will be voted on June 3 that will actually protect property rights against eminent domain - has nothing to do with takings. Instead, it is focused on the provision of Prop 98 that would phase out rent control. In this post, I argue that this opposition is misguided. If enacted, Prop 98 will actually have only a modest effect on rent control in California. Even if you think that rent control is a boon to poor tenants, it is important to recognize that this group has far more to gain from Prop 98's protection against eminent domain than it stands to lose from its rent control provision. Moreover, if Prop 98 does succeed in abolishing rent

If time permits, I will do a follow-up post on the political aspects of the rent control provision, where I will argue that including it in Prop 98 was a tactical mistake by the initiative's sponsors. Here, I focus on the policy merits.

I. The Modest Impact of Prop 98 on Rent Control.

One of the key reasons why Prop 98 is likely to have only a minor impact on rent control is that most California cities are already forbidden to enact rent control ordinances under Sections 1954.50 and 1954.53 of the 1995 Costa-Hawkins Rental Housing Act. However, the Costa-Hawkins Act does exempt those California cities that already had rent control laws in 1995, which include major metro areas such as LA and San Francisco. Even in these areas, the impact of Prop 98 will be less significant than some opponents claim because Prop 98 exempts current tenants of rent-controlled housing units. Thus, it is not true that anyone will be "thrown out on the street" as a result of Prop 98's anti-rent control provisions.

Even more important, the rent control aspect of Prop 98 will be easy to reverse if California voters want to do so. The California constitution is easy to amend by referendum initiative, as numerous past examples show. Given the popularity of rent control, a pro-rent control initiative could likely be passed on during the next election cycle in 2010. In the meantime, very few tenants will actually be affected by Prop 98's rent control provisions because current tenants are grandfathered in. Local government and urban planning groups strongly support rent control, and they would have both the money and the incentive to put a pro-rent control initiative on the ballot if Prop 98 passes. These groups, of course, were easily able to find the money to sponsor Proposition 99, the anti-property rights initiative they put together to counter Prop 98.

This point is crucially important. If you oppose Prop 98's rent control provision because you believe that rent control is an important protection for poor tenants, you have to weigh the anti-rent control aspects of Prop 98 against the important protections it offers to poor tenants against eminent domain. As I explain in my recent LA Times op ed, the use of eminent domain routinely expels numerous people - most of them poor - from their homes, and the rival Proposition 99 will do nothing to protect them. Indeed, Proposition 99 specifically excludes tenants from even the very minor protections it would provide for homeowners. Because of their political weakness, the poor are routinely targeted for condemnation. Since World War II, some 3 to 4 million people (most of them poor minorities) have been expelled from their homes as a result of "urban renewal" and "econoimc development takings" (see pg. 269 of this article for the data). As an Institute for Justice study points out, California is no exception to this pattern and is in fact "one of the most active states in condemning properties for the benefit of other private parties." Overall, poor tenants have far more to gain from Prop 98's protections against eminent domain then they might lose from its rent control provision. And this is true even if you believe that rent control is good for tenants on balance.

II. Why Rent Control is Poor Policy.

To the extent that Prop 98 might succeed in undermining rent control, this is actually a good result. Like other price controls, rent control reduces the quantity and quality of the good in question. If apartment owners can't charge market prices for their units, they are likely to put fewer apartments on the market and take worse care of the ones they do offer for rent. That is why jurisdictions with rent control - including in California - often suffer serious housing shortages. All of this is basic economics, and is broadly accepted by most economists from across the political spectrum. If you want a more detailed statement, see this essay on rent control by economist Walter Block, in the recently published Concise Encyclopedia of Economics. As Block points out, rent control is opposed by the overwhelming majority of American and Canadian economists (over 90 percent), including liberal ones.

There are many far better ways to help low-income tenants. For example, as I explain in this post, zoning regulations artificially increase the costs of housing in many urban areas. California cities have some of the harshest zoning laws in the country. Cutting back on restrictive zoning laws would help poor tenants far more effectively than rent control.

If you prefer a more active government role in helping the poor, rent control is still the wrong choice. The government could instead subsidize rental payments for the poor (as some states already do), or give them tax breaks on rent (as many states do, though I don't know if California is one of them). The government could also subsidize the construction of low income housing. All of these alternatives are superior to rent control because they don't have the negative side effect of reducing the quantity and quality of available housing. In addition, unlike rent control - which is often exploited by tenants who are far from poor - the benefits of these alternative policies can be targeted to the poor tenants who actually need them.

The alternatives are also far more just than rent control. If society has an obligation to subsidize housing for the poor, there is no reason to arbitrarily impose this burden solely on apartment owners who rent to poor tenants. The costs should instead be shared by all taxpayers or at least by all of the relatively affluent. To the extent that rent control does succeed in helping poor tenants, it does so only by arbitrarily singling out a single social group to bear the cost. Most landlords who rent to the poor are not particularly wealthy themselves, and there is no reason to force them to bear the full cost of a societal obligation that should be shared by all of us.

Smokey:
Of course, Ilya is right. Prop. 99 would open the door to developers conspiring with property owners to evict all tenants from a building in order to build the latest colossus.

Because of Prop. 13, the property taxes on many apartments are still at 1980 - 1990 levels. Local governments are salivating at the prospect of conspiring with developers to condemn those apartments, and re-build high-rent new ones. Developers win. local politicians win. Tenants get evicted -- the ones who can least afford it.

It was stupid to even mention rent control in Prop. 98, but at least 98 would reverse Kelo in the state.

And the Secretary of State's language on the ballot summary is a bald-faced lie; something like: "Would eliminate rent control." [going by memory here, but it said something to that effect on the voter's ballot summary.]

If governments want to help poor tenants, fine. But there are plenty of very well off tenants who are being forcibly subsidized by property owners in rent controlled areas. How is that different from theft?
5.20.2008 12:22am
Crafty Hunter (www):
The first paragraph of this post, at least on Firefox 2.0.0.6 with JavaScript turned off, appears to be cut off after "... if Prop 98 does succeed in abolishing rent".

I can't think of anything to add otherwise, since the rest of your post seems well constructed. I particularly liked the closing sentence of the last paragraph. :)
5.20.2008 12:22am
OrinKerr:
If you oppose Prop 98's rent control provision because you believe that rent control is an important protection for poor tenants, you have to weigh the anti-rent control aspects of Prop 98 against the important protections it offers to poor tenants against eminent domain.

Ilya, for those people who are in this category, I assume they would want some idea of the numbers of people who are affected by a phasing out of rent control vs. the number of people who might be affected by eminent domain reform. (That is, when balancing these two, it helps to know the numbers that impact the one vs. the other.) Do you happen to have any rough guesses on that? In other words, how many people in California today are lucky enough to have rent controlled apartments? And how many Californians are kicked out of their apartments in a given year due to eminent domain?
5.20.2008 1:28am
OrinKerr:
To answer my own question above, a bit of googling suggests that about 1 million people in California live in a rent-controlled place. I read the Castle Coalition report to say that in 5 years, from 1998 to 2002, "223 individual properties" were condemned for private institutions; I don't know how many people lives in those properties on average. If those numbers are right, it sounds like it will be an uphill battle to get Prop 98 passed; it seems likely that rent control is a bigger issue to Californians than is eminent domain.
5.20.2008 1:37am
Justin Levine:
An excellent question Orin Kerr. I don't know the numbers myself, but I suspect that FAR more people are affected by rent control policy than by eminent domain decisions.

Let's also keep in mind an important aspect of the Kelo decision that is not discussed in most debates: Kennedy's crucial vote-splitting concurrence. I found Justice Kennedy's reasoning to be wishy-washy (as is typical for him), but he essentially said that any government takings for the benefit of other private owners would need to be scrutinized on a case-by-case basis. So it is not a foregone conclusion that such takings couldn't be challenged on Constitutional grounds.
5.20.2008 1:38am
California Renter:
As said in prior discussion of Prop 98/99, the rent control was introduced to force property owners to share some of their windfalls after Prop. 13 passed.

If people really want to undone this social compact, I think it's appropriate to remove Prop. 13 protection from rental/commercial properties, and used the revenue to fund low income housing.

It's all fine and dandy for people to say they are for programs to be funded from general tax revenue, then at same time trying to prevent adequate revenue from being collected to fund those program. I don't know enough about Prof. Somin, but generally I don't have much faith on the sincerity of such libertarian arguments.
5.20.2008 2:14am
Crackmonkeyjr (www):
So California's voters have already made it so no one will ever move out of their house because they would lose their grandfathered property taxes, now they are making it so no one will ever move out of their apartment for fear of losing grandfathered rent control. This should have lovely effects on the economy.
5.20.2008 3:09am
Public_Defender (mail):
Professor Somin, you're still hiding stuff. The opposition to Prop 98 also claims that its language would gut environmental laws. You probably oppose those laws, but many California voters probably support them.

Opponents also claim the proposition would make it nearly impossible to use eminent domain to obtain natural resources (like water) for public use.

It's just laughable to say that Prop 98 is anti-developer. Using professor Kerr's figures, the proposition would have helped 223 individual property owners defend against developers over a five-year period. By contrast, Prop 98 would protect large developers from environmental and rent control regulation.

Basically, Prop 98 is a large developer's dream.
5.20.2008 6:31am
Patrick McKenzie (mail):
On the general subject of rent control, assuming one wanted to alleviate the inevitable housing shortage without incurring the backlash from the existing tenants, why wouldn't one just amend the rent control legislation to read "With regards to all rental dwellings constructed before {insert date of amendment}..." ?

Granted, it screws over existing landlords in favor of new landlords, and incentivizes them to sell their current properties and build new ones, which would probably cause an oversupply of rent controlled properties on the market and thus a decline in their value. But their cash flow would be only as bad as it ever was.

Plus, this would make developing rental units into a virtual license to print money, alleviating the housing shortage in a short order. In the medium term you'd end up with a market clearing prices on adequate supply of non-controlled apartments, and the existing inventory of rent-controlled apartments with poor repairs and the like.
5.20.2008 7:19am
byomtov (mail):
While I agree with Ilya that rent control is poor policy, I think he is wrong to claim that the costs are borne solely by landlords.

Rent control, or the risk of its imposition, reduces the supply of non-rent-controlled apartments, thereby driving up rents in general. So some landlords benefit, as their tenants' rents are higher than they would otherwise be.
5.20.2008 10:32am
Specast:
Looks like Orin partially covered this, but Ilya says:


One of the key reasons why Prop 98 is likely to have only a minor impact on rent control is that most California cities are already forbidden to enact rent control ordinances . . . However, the Costa-Hawkins Act does exempt those California cities that already had rent control laws in 1995, which include major metro areas such as LA and San Francisco.


It's kinda silly to say the impact is "minor" on the grounds that it only affects the residents of these major urban centers, which have 8 million or so residents. Unclear what fraction of those residents live in RC apartments (though Orin has a guesstimate), but the impact on them will be major.

I'm a landlord and RC has cost me money. But any decision to ban it should be made very explicitly, not as a slipped-in-to-secure-campaign-money provision. Fact is, Prop 98 and its advocates are being deceptive about the RC aspect. (Ilya's Op-Ed is, unfortunately, a good example of that.)

I say vote down 98 (and 99, if you like) and force the anti-Kelo crowd to put up a clean anti-Kelo law for a vote. What's wrong with that?
5.20.2008 12:34pm
R_B (mail):
In response to Patrick McKenzie, I believe rent regulation in California does not apply to units built after 1979. At least that is how it is in SF, and I assume that to be a state law.
5.20.2008 3:35pm
luagha:
Not a week goes by that you aren't reading a story in the papers here in San Francisco about landlords trying various shenanigans (turning off water, engaging in faulty never-finished construction, erroneously changing locks, etc) to try and 'persuade' people in rent-controlled apartments to move out so they can engage in development.
5.20.2008 3:58pm
Smokey:
luagha:

Those acts are illegal, and no responsible property owner condones them.

The central problem, as byomtov succinctly points out, that...

Rent control, or the risk of its imposition, reduces the supply of non-rent-controlled apartments, thereby driving up rents in general. So some landlords benefit, as their tenants' rents are higher than they would otherwise be.
In the long run, rent control always results in fewer housing units being built. This results in rents being higher than they would be in a market that did not discourage an adequate number of rental units to be constructed.
5.20.2008 5:43pm
luagha:
I am totally in agreement, Smokey. Not only are such acts illegal, they target those people who have the fewest resources to lawyer up and protect themselves. Furthermore, once you are in such a situation with one's landlord, there's really no 'winning' as said landlord is really never going to be in a mutually beneficial relationship with one. All the economic costs and fallouts are exactly as you describe.

That being said, and speaking as someone currently making enough money to never be troubled by the need for a rent-controlled apartment, and who is going to vote yes for Prop 98 and no on Prop 99...

If Prop 98 passes, I expect to be reading about landlord-tenant rent-control disputes every day instead of every week.
5.20.2008 6:18pm
bob (www):
The "right way to do X is Y" argument gets a little tiresome when presented by people who would fight tooth and nail against Y, and who know that Y is less popular than X (often because it's more targeted, and therefore has a smaller constituency). If Prof. Somin were truly concerned about providing rent relief to the poor, he would support a proposal that replaced rent control with rent subsidies, not one that eliminated rent control without providing relief.

I look forward to the Professor's upcoming op-ed campaign in favor of increased transfer payments to the poor.
5.20.2008 9:27pm
Justin Levine:
Spot on bob.
5.20.2008 10:56pm
Andrew J. Lazarus (mail):
I repeat my comment from the previous thread, that Prof. Somin has said it would be "easy" (his word) to amend the CA Constitution to restore rent control after the passage of 98, but that it was necessary for anti-Kelo advocates to incorporate anti-rent control language to get landlord moneys to wage the necessary "expensive" initiative amendment campaign.

Which is it? Easy to pass an initiative or expensive?

There are arguments against rent control, and as the original post points out they have met with some success in Sacramento, But it wasn't enough for the landlords (is it possible that the anti-RC came first and the sensible anti-Kelo clauses were added later as a bodyguard?).


Prop 98 deserves to be defeated for its sneakiness alone.
5.21.2008 2:22am
Michael Ejercito (mail) (www):

So California's voters have already made it so no one will ever move out of their house because they would lose their grandfathered property taxes, now they are making it so no one will ever move out of their apartment for fear of losing grandfathered rent control. This should have lovely effects on the economy.

You should understand that banning rent control on all apartments would incite opposition from voters who live in rent-controlled apartments.

Laws that remove rent control on future leases/rental units that do not affect renters living in current rent controlled apartment will not incite as much opposition from voters.

Removal of rent control of future rental units will encourage the construction of new, non-rent-controlled units.
5.22.2008 8:00pm