Since 2017, I’ve been complaining about an executive order passed by Governor Newsom that limited property owners’ ability to raise rents to keep up with increases in the cost of living. I’m happy to report that the order finally expired. However, after Californians voted down statewide rent control, lawmakers (in their infinite wisdom) decided to implement it anyway. So, here’s what we’re left with.
As of now, those with investment property can increase rents on existing tenants by the cost of living plus 5 percent, or by a maximum of 10 percent total. The cost of living is usually measured by the Consumer Price Index, or CPI, which is currently almost 8 percent, allowing property owners to increase rents by the cost of living plus a measly 2 percent (not enough to cover additional costs).
The only bright spots here are as follows. These limitations primarily apply to residential buildings with two or more units (such as duplexes and apartments) single-family homes are usually exempt. New construction is also exempt—the property must be at least 15 years old for rent control to go into effect. Finally, these limitations on rent increases apply to existing tenants, not when renting to new tenants.
Still, given today’s inflation (and the growing inflation we’re likely to have in near future), a 10-percent cap means property owners who provide housing via multi-unit buildings will not be able to recapture their own increased expenses.
As I often do when discussing the housing shortage, I’ll ask my favorite questions: Do we have a lack of available housing? Yes. Is it driving prices up and pricing people out of the market? Yes. Does rent control increase the housing supply or lower the cost of new construction that would provide more housing? Clearly not.
To give you an idea of the severity of the problem: Selzer Property Management manages about 600 residential units in the Greater Ukiah area. Of those, last week one was available.
If we want more available housing (which would then lead to lower rents), we need more stock. Yet, state and local government restrictions make new residential construction more and more expensive.
I’ve heard some people say that we shouldn’t build any more housing because we have a water shortage, to which I reply, “Let’s look at the numbers.” If you compare water usage among residences, industry, and agriculture, you’ll notice that agriculture accounts for about 80 percent. Before we limit new residential construction or insist on retrofitting homes with water conservation equipment that will hardly make a dent in the problem, let’s make sure farmers aren’t watering pears or grapes with outdated sprinkler systems. Requiring drip irrigation (except for frost control) will have a far bigger impact than low-flow showerheads.
If we want enough housing for everyone, we’ll need more housing. Period. Rather than focusing on increasing supply, government officials have aimed at increasing the ability of individuals to either buy or rent a place with subsidized loans, rent control, or subsidized rents. This works for a few lucky individuals, but it doesn’t solve the underlying problem.
If we want to see affordable purchase prices and rents, we’ll need more places for people to live. Frankly, we need the government to get out of the way. Otherwise, the only construction we’ll see is what we’ve seen for the last 20 years—more subsidized apartments. In case you aren’t aware, the construction cost of subsidized apartments is far higher than market rate because the public funds used for that construction come with strings attached, sometimes doubling the construction cost.
The government needs to do three things to get out of the way.
1. Reduce restrictive zoning
2. Reduce exorbitant fees
3. Reduce unnecessary building requirements/restrictions
This is the only way housing will become more affordable. The construction industry has done a superb job keeping costs down in recent decades. Prices have only gone up by inflation. During that same time, however, restrictive zoning and more regulatory requirements for construction have dramatically increased the cost to build. If the government had prioritized housing availability and solved those three problems, the cost of housing would actually have gone down if you use inflation-adjusted dollars. We can keep people safe without ridiculous fees and restrictions.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.