The Unintended Consequences of Regulation

You’ll have to excuse me while I step onto my soapbox for a moment. Government regulation is not only getting in the way of efficiency, which is bad for business, but it is also harming the very people it purports to help.

When it comes to rent control, casualty insurance, and financial regulations, the government cannot seem to get it right.

Rent Control Doesn’t Work
Let’s start with rent control. Anyone in California can tell you there’s a housing shortage—we’re feeling it right here in Mendocino County. If our goal were to make the shortage even worse, it would be hard to create a more diabolical plan than rent control. California voters understand this, which is why they’ve voted it down twice. In 2018, Proposition 10 failed by 19 points. In 2020, Proposition 21 failed by 20 points. Yet, lawmakers just wouldn’t quit, and now we have rent control restrictions.

Let me ask my favorite questions: Does our lack of housing drive up prices and prevent people from entering the housing market? Yes. Does rent control increase the housing supply or lower the cost of new construction that would provide more housing? Nope.

The government needs to remove rent control and then do three things to address the housing shortage: 1. Reduce restrictive zoning, 2. Reduce exorbitant fees, and 3. Remove unnecessary building restrictions.

This is the only way housing will become more affordable. It’s clear the government is aware that restrictive zoning is a problem because they are trying to undo it right now. Unfortunately, they are going about it all wrong. Instead of deregulating zoning for undeveloped land, they are trying to retroactively re-zone existing developments. This means that if you bought a house in a neighborhood full of single-family homes, you may find yourself in a neighborhood full of duplexes and accessory dwelling units (ADUs).

Antiquated Models for Insurance Don’t Work
On the insurance front, regulation is reducing the number of insurance companies willing to write real estate casualty policies. In California, especially in rural areas like ours, the risk of wildfire has increased dramatically during the last several years; yet, the state limits what insurance companies can charge. As a result, some companies are refusing to write new California homeowner policies, and other insurers are leaving the state altogether.

If you can believe it, the state requires insurance companies to price their policies based on an antiquated financial model that uses historical data going back 20 years, rather than creating projections that consider the dramatic impact of climate change in the last few years. Past claims are no longer a good predictor of future risk. But, instead of allowing insurance companies to charge enough to cover claims, regulators simply deny reality.

Bait & Switch Schemes for Lenders Don’t Work
In 1978, the legal decision Wellenkamp versus Bank of America made it illegal for most lenders to enforce something called the “due-on sale” clause. This clause requires a real estate loan to be paid off when a property changes hands. In the late 1970s, the average life of a mortgage was seven years and lenders priced their loans accordingly. After the Wellenkamp decision, lenders were stuck with loans for 30 years when they had planned to hold them for seven.

So, what did lenders do? They stopped offering long-term loans with the same favorable terms. It wasn’t long before the government realized they’d blown it, and in 1982, a couple of senators (Garn and St Germain) introduced a law effectively undoing the Wellenkap decision.

Whether you’re trying to borrow money, buy insurance, or find a place to live, the government’s efforts to rearrange the law of supply and demand keeps backfiring. You can break other laws (with consequences, of course), but you cannot break the law of supply and demand.

The next time someone says we need a new law to protect us from greedy lenders, landlords, or insurance companies, remember those business people may just be trying to make a reasonable profit. After all, that’s why everyone is in business—to make a profit. If businesses cannot do so, they will stop offering services in our state and we’ll be left with few or no options.

Okay, I am stepping off my soapbox now. Thanks for listening.

If you have questions about property management or real estate, please contact me at 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.

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