Regulatory Policy

California Voters Chose Basic Economics over Feel-Good Policy in ‘Rent Control’ Referendum

Apartment building in Redwood City, Calif. (Andrei Stanescu/Getty Images)
Golden State voters made the right decision on Proposition 21.

For once, California got it right.

The deep-blue state went for Joe Biden on Election Day, a result which was never really in doubt. But in a key policy referendum on expanding “rent control” in the state, California voters wisely rejected a proposal to allow local governments to place price freezes on rental housing.

Proposition 21 asked Golden State voters whether cities should be allowed to impose rent controls on housing that had been occupied for more than 15 years. Under the status quo, rent “stabilization” policies, which limit rent increases, are allowed. But this ballot measure would have allowed localities to institute rent freezes.

Pushed by labor unions, Democratic politicians, and even the ACLU, the proposition aimed to make housing more affordable for struggling Californians.

“This initiative will allow California cities to pass sensible limits on rent increases and protect families, seniors and veterans from skyrocketing rents,” Senator Bernie Sanders said in his endorsement of the ballot measure.

The campaign was rooted in emotional appeal and calls for empathy. But with nearly 60 percent against the referendum, Californians wisely saw through the rhetoric and recognized rent control for the fallacy that it is.

The reason rent control always fails comes down to simple supply and demand.

By capping rental prices at artificially low, below-market rates, rent control limits the supply of housing. In the short run, property owners are incentivized to use their properties for purposes other than renting, such as converting them to condos.

It also reduces the incentive for landlords to renovate or even maintain their properties because they can’t recoup their costs in increased compensation. And those lucky enough to secure rent-controlled apartments will hoard them, even if they can afford the rent at market prices.

In the long run, rent control diminishes the return on rental units, so developers will build less new rental housing. They will be incentivized to instead build more commercial property and luxury housing, which are not typically subject to rent-control laws. This is, of course, exactly the opposite of what lawmakers wanted.

The underlying problem of unaffordable housing is caused by the fact that in many cities there are far more apartment seekers than there are properties available for rent. Paradoxically, rent-control measures intended to fix this situation end up exacerbating the underlying shortage driving it in the first place.

Despite the continued political viability of the feel-good left-wing policy, the demerits of rent control are something of a settled matter among economists across the political spectrum.

In a 2012 IGM Forum survey, economists were asked if they agreed that rent-control measures in U.S. cities such as San Francisco and New York City had succeeded in recent decades. More than 80 percent said no. Only 2 percent thought they had successfully made housing more affordable.

“Rent control discourages supply of rental units,” said MIT economist David Autor. “Incumbent renters benefit from capped prices. New renters face reduced rental options.”

“Next question: does the sun revolve around the earth?” Chicago Booth economist Richard Thaler responded.

Studies and empirical evidence have confirmed economists’ skepticism of rent-control policies time and time again.

Rent-control policies in Cambridge, Mass., were allowed to lapse in 1994. Afterwards, studies found that benefits had accrued to a select group of lucky renters but imposed billions in increased costs on other city residents who faced higher rents. Research also showed that the proportion of low-income residents in the city had actually declined under rent control, suggesting the net effect had been to decrease affordability.

A 2019 study examining rent-control policies in San Francisco during the 1990s found clear evidence of failure. It concluded that rent control ultimately reduced the supply of housing by 15 percent and “likely drove up market rents in the long run, ultimately undermining the goals of the law.”

Even the left-leaning Brookings Institution has concluded that “rent control appears to help current tenants in the short run, [but] in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.”

Thankfully, the evidence against rent control was so mounting that even California voters didn’t fall for it this time. Hopefully, their real estate realism spreads to blue states across the nation.