Here are three ways to achieve affordable housing. The first is encouraging a large migration out. Some cities have become literally ghost towns. After the auto unions forced Detroit’s automakers to buckle and leave, houses could be purchased for a buck.
The second is building more homes than necessary. It’s all about supply.
The third is a recession. Housing values plummeted in the Great Recession of 2007-09.
Perhaps this third scenario has not been lost on Gov. Gavin Newsom. His goal was to create more affordable housing. Locking down the economy may certainly impact real estate values. As if this universal coronavirus-caused depression were not cruel enough, recently proposed political remedies would make this thing even worse.
Which is why I hope my colleagues in the Legislature step back and reconsider Assembly Bill 828, by Assemblymember Phil Ting, D-San Francisco.
Among other things, the bill would force most property owners to cut residential rents by 25 percent, even for tenants who didn’t lose jobs because of the economic disaster. Supposedly it would be “temporary” for 12 months. But “temporary” government actions commonly are extended. The Proposition 30 tax increase from 2012 even included “temporary” in its title, but was extended to 2030 by Proposition 55 in 2016, despite surplus revenues that year.
Any industry forced to make 25 percent cuts in prices would be devastated. Ting should ask such high-tech companies in his city as Uber and Twitter what would happen if they were forced to cut prices by 25 percent.
If AB 828 becomes law, many apartment owners would flood into already anticipated, overcrowded bankruptcy courts due to an inability to pay their own expenses, including mortgages, maintenance and staff. Their filings would compete with other businesses, especially restaurants forced to permanently close.
When government inserts itself in the free market with price and rent controls, unexpected and unfortunate economic calamities will occur. Surveying global rent control laws, Swedish economist Assar Lindbeck concluded, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”
Lindbeck is not alone in his assessment. The overwhelming majority of economists agree that rent control has disastrous effects.
Under AB 828, what then is a financially strapped property owner to do? Consider converting an apartment building into condominiums? Selling or trading the units may avoid fiscal ruin for property owners, but it also will reduce the number of rental units on the market.
If bills like this become the norm, then do not be surprised when you see a freeze in new apartment construction. Why would anyone invest in apartments if their rents are reduced below the threshold of making a positive cash flow? And what would prevent California from forcing even more rental cuts? If 25 percent is needed today, why not 50 percent or 75 percent tomorrow?
AB 828’s supporters also ignore California’s recent history on rent control. The voters spoke clearly in 2018 when they rejected Proposition 10, the rent control initiative. In a democracy, shouldn’t lawmakers follow the clear will of the people, instead of snubbing it?
Defying the will of a democratic vote, in 2019 the Legislature passed a rent-control bill, Assembly Bill 1482, by Assemblymember David Chiu, D-San Francisco. It limited rent increases to 5 percent a year, plus inflation.
Why did larger apartment providers, like the California Apartment Association, support AB 1482? Because of California’s liberal, one-party Legislature. Property owners knew absurd bills like AB 828 could come from this body. That’s why they agreed to the terms of their surrender, getting a few concessions they wanted.
After AB 1482 was imposed, several property owners told me they were getting out of the rental business. Others said they were immediately raising rental rates, which they had kept low for good tenants, to market rates, and from now on automatically would raise rents the maximum of 5 percent a year, plus inflation. That’s how rent control laws can backfire.
The mother of all recessions also led Gov. Gavin Newsom to impose a two-month eviction ban for non-payment of rent. So tenant laws already are in place whose effect will not be known for months. To further heap the burden of this pandemic on the backs of property owners would potentially crush the system.
Several remedies to the housing shortage already exist – if California has the will to implement them. These include reforming the California Environmental Quality Act to streamline development approvals and reforming zoning laws.
By contrast, AB 828 would worsen California’s housing supply. It should be rejected like a house frame with a bad case of dry rot.
This article originally appeared in the Voice of OC. Read it here