Real estate expert talks about potential impact of rent control

A statewide rent control initiative is headed to the Nov. 6 ballot. If passed, it would repeal a 1995 law that limits local governments’ ability to slow rent hikes.

If Proposition 10 — the “Local Rent Control Initiative” — is passed, local lawmakers would still have to approve rent control initiatives for cities like San Diego and Poway that do not have rent control laws in place.

It would repeal the Costa-Hawkins Rental Housing Act that generally bans caps on rent increases on all single-family homes and condos plus apartment buildings constructed after 1995. Its impact could be far reaching, according to Norm Miller who spoke with attendees at the June 26 Insights forum in Rancho Bernardo organized by the North San Diego Business Chamber.

Miller is the Ernest W. Hahn Chair of Real Estate Finance at the University of San Diego School of Business and affiliated with the Burnham-Moores Center for Real Estate.

According to Miller, the price of housing — whether for purchase or rental — has many impacts, including on businesses. When the cost of housing is high, employees often tell current or prospective employers that they need more pay, which employers are not always in a position to offer. This in turn creates unfillable job openings and subsequent impacts on business growth and success.

He said rent should be only about 25 to 30 percent of people’s income, but for more than 30 percent of Californians it is approaching 40 to 50 percent of their income.

Those affected not only include those wanting to move into the area, but the youth growing up here now who as adults will want to raise their families here too.

“The rent increases we’ve seen in the last several years are rare,” Miller said.

If a rent increase limit of, for example, 2 percent is instituted, he said several things are likely to happen. They include current multi-family units in the planning or construction stage becoming condos for purchase instead of apartments for rent. In addition, the turnover of rental units will likely slow down “dramatically.” Currently the average is for tenants to move after 1 1/2 years.

Miller said this turnover effect will be similar to that caused by 1978’s Proposition 13, where homeowners are less likely to sell in order to keep their property taxes low.

“The average tax rate is 61 percent of the full assessment,” Miller said. “That means some pay 20 to 30 percent (of their property’s value) and some pay 80 to 90 percent.” Communities such as Coronado and Point Loma have the lowest turnover and tax rate, despite the high home values. Consequently, he said prices of other homes are pushed up.

Rent control benefits, like those of Proposition 13, could also be allowed to be passed on to future generations via inheritance. “That is disastrous,” he said. As an example, he said due to Proposition 13 over a couple generations some could pay taxes of “almost nothing” while others pay up to 50 times as much. Currently, differences of 10 to 20 times among neighbors already exist and this leads to less turnover of for-sale housing inventory.

When rent control occurs on an apartment building, Miller said landlords are more likely to not make repairs for longtime tenants, which means the units deteriorate faster than they would otherwise. They also might discriminate when it comes to selecting tenants, opting for those more likely to move out faster. Consequently, property values will decline, in the short run around 10 percent and in the long run around 30 percent. They are also likely to charge higher rents on new tenants to make up for not being able to increase rents on existing tenants.

There are some who will benefit from rent control, he said, mostly tenants who are not likely to frequently move.

But Miller said the short-term fix on high rental rates — most likely only impacting buildings with more than six units — will make the housing problem worse 10 to 20 years from now. “Those proposing have good intentions ... but are not thinking long term,” he said.

Increasing density is a solution to the housing problem, but one “tough to pass” because of all the NIMBY (not in my backyard) attitudes, he said. People tend to think of how increased density will impact them now, in terms of traffic and other issues, instead of the need for housing in the region for future generations, including their children and grandchildren.

Another hindrance to new construction is the many regulations imposed on developers. “We need to push for regulatory changes,” Miller said. “On the coast there is a height limit of 30 feet. They need to raise it. You can do four or five stories without steel construction to keep it affordable.” But the influence of entities like the California Coastal Commission — even on areas miles from the coast — is difficult to overcome.

Miller said the California Environmental Quality Act (CEQA), while originally good intentioned, has also been used “mostly to block development. It has become a political tool.”

Other solutions Miller proposes include lowering parking requirements since he said requiring 1 1/2 spaces per studio apartment is too high, especially in light of a future when there could be less vehicle ownership due to ride sharing services. In addition, permit review needs to go faster and when changes are made, only the changes and not the entire project should go through subsequent reviews. Miller also said developer fees should be prorated by size, since currently big and small units face the same fee, leading to no incentive to build smaller, less expensive units.

email: rbnews@pomeradonews.com