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Prop 10 makes the housing problem worse

Dale Satre, @DaleSatre

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California faces a housing affordability crisis. San Francisco alone has the median price of a one-bedroom apartment costing $2,400 per month, according to data firm ApartmentList. In a city with a median income of $6,725 per month after taxes, according to the Mayor’s Office of Housing, the crisis is a rabid debate in the city and the state. The Department of Labor classifies rent as unaffordable if renters spend more than 30 percent of their income on housing costs — while finding this applies to more than half of California renters. One third of renters pay over fifty percent.

Proposition 10 is on the ballot to restore the “California Dream” of home ownership, a dream currently on life support. Prop 10 proposes allowing cities and counties to “develop and implement local policies that ensure renters are able to find and afford decent housing” by repealing restrictions on rent control.

Unfortunately, Prop 10 paints a fairy tale of regulating away the housing crisis, and flies in the face of historical cases that prove it will make the problem worse. The measure doesn’t address the key issue causing our crisis: a population boom without new development to support it. Instead, this will exacerbate the crisis by reducing housing supply and discouraging new building that would fix the crisis.

It’s a rule of economics that capital goes where it’s welcome. Prop 10’s backers seem to forget that. The Wall Street Journal reported in May that property owners and investors are already spooked by California’s bid at rent control. The first quarter of 2018 saw a 22 percent increase in multifamily unit sales as landlords sold properties that would be affected by the proposed regulations, and investors report they are holding off from building because of uncertainty.

One of the many cases of counterproductive rent control comes from San Francisco itself, which has been experimenting with rent control since 1979. Stanford economists published a paper in August finding landlords decreased the housing supply by 15 percent by converting the properties to more expensive condos/AirBnB-type vacation homes, selling their properties, or redeveloping buildings. The tenants benefiting from rent control stayed in their properties longer because they didn’t want to lose the low rates, which decreased the housing supply even more and increased displacement pressure for minority groups. Overall, the study found rent control sped up the gentrification it was trying to prevent.

Economists from the Massachusetts Institute of Technology proved property values drop by more than 10 percent when policies like Prop 10’s are enacted. This could benefit homebuyers, but this wouldn’t be helpful to renters because homeowners would be significantly restricted in how they rent out rooms. The average California home could lose around $60,000 in value if Prop 10 passes, causing a shortage in property tax revenues and creating yet another crisis.

Prop 10’s backers know they are treading on constitutional law, as it forces landlords to rent property without fair compensation, so the backers added a provision for that too. Section 10 of the legislation would hold the state liable to pay for the policies’ legal defense, even on losing and frivolous positions. Taxpayers would be required to write blank checks for the ensuing litigation, and the text explicitly states this would include all court cases up to the Supreme Court. When even the backers know that they can be challenged this high up, it’s not a good sign.

Prop 10 was written to help the poor, but the real tragedy is that its policies would end up hurting those same people. Until the state modifies its zoning and environmental laws already in place that restrict economic development, the housing problem will not get better. When the laws of economics go against the laws of government, there is usually a clear winner and it will not be the voters. Our housing is not something that should be played with by interest groups that clearly don’t know the game.

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One Response to “Prop 10 makes the housing problem worse”

  1. Gavin R. Putland on October 4th, 2018 4:31 pm

    VACANCY TAX: BETTER THAN RENT CONTROL

    Rent control doesn’t force owners to offer their properties “to let” at the allowed rent. Rent control doesn’t force land owners to build more housing. On the contrary, it discourages both, reducing the supply of housing and RAISING other rents! Exempting NEW buildings from rent control may avoid deterring construction, but it still doesn’t open up EXISTING buildings for tenants. Worse, it means that the stock of rent-controlled housing becomes a shrinking fraction of the whole housing stock — unless the exemption is only for a limited time, in which case you’re discouraging construction again!

    Will removing regulatory barriers to construction solve the problem? Not by itself, although it’s obviously a necessary condition. Cheaper housing requires developers, builders, and owners to increase supply to a point where it reduces their return on investment! They obviously won’t do that voluntarily. They will do it only if they are penalized for NOT doing it!

    SOLUTION: Put a punitive tax on vacant lots and unoccupied housing, so that the owners can’t afford NOT to build housing and seek tenants. By reducing the owners’ ability to tolerate vacancies, a vacancy tax strengthens the bargaining position of tenants and therefore reduces rents. It yields both an *immediate* benefit, by pushing existing dwellings onto the rental market, and a *long-term* benefit, by encouraging construction.

    Such a tax, by reducing the cost of housing, would make it easier for employers to pay workers enough to live on. A similar tax on commercial property would reduce rents for job-creating enterprises. That’s GOOD FOR BUSINESS and GOOD FOR WORKERS.

    A vacancy tax is also GOOD FOR REALTORS because they get more rental-management fees for properties coming onto the rental market, plus commissions from any owners who decided to sell vacant properties to owner-occupants (who of course don’t pay the tax).

    Best of all, the need to avoid the vacancy tax would initiate economic activity, which would expand the bases of other taxes, allowing their rates to be reduced, so that the rest of the city/state/country gets a tax cut!

    Gavin R. Putland,
    grputland.tumblr.com .

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Prop 10 makes the housing problem worse