It wasn\u2019t long ago that state policymakers were worried about falling home prices and the impact the declines were\u00a0having on the California economy. Today those worries have turned 180 degrees and policymakers are focused on\u00a0opposite concerns\u2014the rising costs of rental housing and the impact it may be having on low-income families.<\/p>\n\n\n\n
This report makes the following findings:<\/p>\n\n\n\n
The growth in housing prices in California has been impressive in recent years. In the City of San Jose, for example,\u00a0asking rents have risen by 8% per year for the last three years. Some of these gains are being driven by a recovering\u00a0economy, which is driving job growth and higher incomes. From 2011 to 2014, the share of renting households\u00a0using over 30% of their income to cover the cost of housing fell modestly due to improved economic circumstances\u00a0for many renters in the state. Still, the share of the population spending more than 30% of their income on housing\u00a0in California remains the highest in the nation at just over 54%. This, combined with the still too-slow pace of new\u00a0home construction, suggests the challenge of rising rents is likely to get worse before it gets better.<\/p>\n\n\n\n
Policymakers are struggling to find appropriate responses to the growing problem. At the local level this has led to\u00a0discussions about the controversial issue of rent control. Such ordinances are certainly well intentioned, but\u00a0questions remain as to whether they are the most appropriate strategy to combat housing affordability issues\u00a0among the renter population. Clearly such rules can directly reduce the rental burden of those fortunate enough to\u00a0live in a stabilized unit. But the transfer of income from the owner of the property to the tenant also has the impact\u00a0of reducing the overall supply of housing. This \u2018winners versus losers\u2019 phenomenon implies that the net impact is,\u00a0at best, mixed. In Beacon Economics\u2019 analysis, we have reviewed the literature on the subject, which generally\u00a0indicates mixed opinions over whether rent control laws generate positive impacts in the cities in which they are\u00a0enacted or not.<\/p>\n\n\n\n
Beacon Economics has undertaken an analysis of rent control ordinances in the State of California to better understand the effects these ordinances have on local housing markets. But we start by setting aside the standard rent\/supply question often at the core of such debates. Worries about unaffordable housing clearly are aimed at lower income households so rent control policies need to be considered in the context of social assistance and not strictly in the framework of market supply and demand. Our study starts with a more specific question\u2014does rent control specifically help low income families and residents.<\/p>\n\n\n\n
Our findings support the view that they do not work as intended, and can actually do more harm than good to the overall rental housing market. In particular, rent control ordinances largely attack the symptoms (high cost of living) of a much broader causal factor, rather than the source of high housing costs. That source is California\u2019s\u00a0lack of new housing supply commensurate with new population growth \u2013 something that continues to drive\u00a0housing costs higher in the state.<\/p>\n\n\n\n
To explore these findings in more depth, Beacon Economics conducted a quantitative analysis using demographic and housing data from the 2000 U.S. Census and the 2013 American Community Survey to assess whether rent control ordinances:<\/p>\n\n\n\n
The quantitative analysis found that:<\/p>\n\n\n\n
The findings in Beacon Economics\u2019 review of existing literature, as well as our own analysis of the available data,\u00a0demonstrates that rent control policies are not an effective way to deal with unaffordable housing. What\u2019s more,\u00a0rent control policies can have negative consequences for low-income households due to higher growth in rents for\u00a0units not covered by such policies. In other words, rent control policies can protect some people at the expense of\u00a0others since residents who do not live in rent-controlled properties face higher rents as well.<\/p>\n\n\n\n
At best, the existing literature suggests that rent control laws do not accomplish their goals of increasing diversity,\u00a0providing affordable housing for low-income residents, or reducing homelessness. At worst, rent control laws\u00a0actually move cities further away from these goals by making low-income residents in cities with rent control laws\u00a0worse off or leading them to move elsewhere. In San Jose, for example, 57.1% of low-income households did not\u00a0live in rent-controlled housing (pre-1980 structures with three units or more) in 2013, which leaves them\u00a0vulnerable to higher rent growth in housing that is exempt from rent control policies.<\/p>\n\n\n\n
Ultimately, prices increase due to high demand, low supply, or a combination of the two. Addressing the\u00a0larger problem of California\u2019s housing shortage\u2014especially in markets with strong rent growth\u2014is the more\u00a0economically sound approach to dealing with unaffordable housing.<\/p>\n\n\n\n
The following report is divided into three broad sections. The first section outlines the quantitative analysis\u00a0Beacon Economics undertook to assess the impact of rent control policies on low-income households, rental\u00a0housing supply, and median rents. The second section provides an overview of rent control ordinances in the state, along with a review of relevant literature on the topic. In the final section, the City of San Jose, where the City Council has recently started to explore ways to reduce further rent growth beyond its current ordinance, is examined along with some of the potential effects of making these changes.<\/p>\n\n\n\n