Increasing rent control will decrease needed housing supply

In Los Angeles, people are being offered six-figure dollar sums for homes they don’t even own. At least not in title or in principled terms. The targets of these offers are tenants living in rent-controlled housing, which they have almost as much of a “right” to the property as the true owners.

The proposals are called “cash for keys,” a process in which owners of rent-controlled housing dangle stacks of cash in front of renters, hoping they will take the money and leave. The property owners want the homes vacated for various reasons, including renting the property at market rates or demolishing the unit and using the real estate for another purpose.

So why not evict the tenants? The homes, after all, belong to the owner.

Because, in part, eviction is never a pleasant experience. It can take months, it is expensive, it has to be carried out with “meticulous adherence to state laws and regulations,” and it “is a nightmare for both tenants and landlords,” says Good Life Property Management.

According to the California Department of Real Estate, “generally, the amount offered to tenants” in cash-for-keys transactions “varies and is usually negotiable.” DRE says tenders range from $500 to $5,000. But the Los Angeles Times reports that a family living in a rental home in Highland Park, where offers to neighbors began at $22,000 – several of which were accepted – was approached with a $100,000 proposition from the new owners, and turned it down. 

“After taxes,” the Times explained, Ana Lopez, who lives in the house with her husband, felt “the money was not enough to remain long-term in her community, where the average monthly rent is more than $2,000 and the median sale price of a home is more than $1 million.”

Read Free Cities Center Director Steven Greenhut’s column about rent control
in San Francisco.

Read William Anderson’s
Free Cities Center
article about the
impact of rent control.

It’s a natural reaction to sympathize with Lopez. She and her husband pay only $800 a month in rent. Why give up such a comfortable arrangement?

In a functioning housing market, there would be no need for a cash-for-keys scheme. But the larger housing market in California, and the smaller – but still mammoth – housing market in Los Angeles are so skewed by public policy they malfunction like a square wheel. Laws are tilted heavily toward tenants.

They lean so hard in their favor that some owners don’t want to offer housing where there’s rent control – more than a dozen cities in California, including three of the four largest, cap rental rates in some way – and developers are reluctant to invest where public policy undermines their incentives to build. Development companies are not charities, they’re businesses and they need profits to survive, and the greater the profits, the more they’ll build.

PRI fellow Steven Greenhut not long ago asked why anyone would give up tens of thousands of dollars in rent income by letting their properties sit empty. Including the reasons mentioned above, he found that landlords who own properties in cities where rules are biased toward renters “live in fear of getting a tenant from hell.” If owners “lease their apartments to one of these types – and they’re often very sophisticated – then it could mean months without rent” and extended legal battles to dislodge them.

This fall Californians have a chance to authorize policymakers to further violate property rights when they vote in the general election. If they approve Proposition 21 cities and counties will be free to “apply more kinds of rent control to more properties than under current law,” says to the Legislative Analyst’s Office.

Let’s not overreact and predict a disaster should the measure pass. Nonetheless, it will have an impact, and it won’t improve the lives of those it is intended to benefit.

In a 2016 report, the LAO helpfully noted that rent-control laws fail to “increase the supply of housing and, in fact, likely would discourage new construction,” which is needed in massive quantities to make housing more affordable.

Laws also restrict the volume of housing available to rent. An analysis by California State University, Sacramento, and the Sacramento Regional Research Institute that measured the effects of rent control in Santa Monica and Berkeley across two decades found the rental housing supply fell by more than 8.7% in the former, and by almost 7.5% in the latter.

Then there’s the National Bureau of Economic Research paper that examined the consequences of rent control in San Francisco. Researchers determined that when owners were “treated by rent control,” the rental housing supply fell by 15%, “causing a 5.1% city-wide rent increase.”

If not for decisions by policymakers to advance the interests of tenants over those of landlords, whose capital ensures that property is available for rent, no one would have ever heard of “cash for keys.” Because there would be no need for it. But poor lawmaking has a way of producing dire conditions, a dynamic seen every day in California.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

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