Examining the Perils of Rent Control and Exploring Superior Alternatives

California’s Proposition 33, a well-meaning legislative initiative, aims to stabilize rents and make housing more affordable by repealing the 1995 Costa-Hawkins Rental Housing Act, thereby allowing cities and municipalities across California to enact draconian forms of rent control on any residential property without restriction. Several cities are already preparing to do so.

In a state that already has a massive housing shortage, heightened rent control regulations will only further hinder the construction of badly needed affordable housing.

Indeed, while its intent is to help alleviate the housing crisis, the passage of Proposition 33 would instead result in severe unintended consequences that would only further destabilize California’s already strained housing market and worsen our housing crisis over the long run.

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Key Concerns with Proposition 33:

Ignores the Laws of Economics: You don’t need a Ph.D. in Economics to understand that the cost of housing (rents) is a function of supply and demand. Due to NIMBY opposition and other regulatory and legal challenges, California’s housing deficit has grown to over one million units, representing a quarter of the overall housing shortage across the U.S. Simply put, we are not building enough new homes to keep pace with household formation and population growth.
Reduces Supply: Rent control limits the economic incentives to develop new rental housing and maintain existing rental stock. As a result, Proposition 33 will ultimately cause California’s housing supply to fall further behind the state’s growing need for affordable housing. This will only exacerbate the existing housing shortage, leading to greater competition among renters and inevitably higher rents—the opposite of what is intended.
Landlord Exodus: Stricter regulations and reduced profitability will push many small-scale “mom-and-pop” property owners (who dominate the California market) to exit the rental market altogether. This will reduce the availability of rental units, further tightening supply and intensifying the housing crisis.
Restricts Mobility: Limited housing options and increasing rental prices make it harder for families to relocate to areas with better jobs and economic opportunities, quality education, or improved living conditions, hampering social and economic mobility.
Degrades Property Conditions: Capped rental income will hinder landlords’ ability to maintain or upgrade properties. Over time, this will result in declining living conditions, as property maintenance and safety standards deteriorate.
Inequity in Application: Proposition 33 does not differentiate between low-income renters and wealthier tenants, potentially benefiting those who do not need assistance while failing to adequately serve vulnerable populations.

Reduces Property Values: By allowing any form of rent control without restriction, Proposition 33 will clearly impact the values of all residential properties across the state.

Consensus View of Economists: Rent Control is Bad Policy

Overwhelming Opposition: More than 80% of economists across the country oppose rent control measures like Proposition 33, citing concerns over market distortions. Numerous academic studies have shown that rent control is directly associated with supply shortages, reduced incentives for property maintenance, and, counterintuitively, increased rental prices in the long term.

A Historical Perspective: The Costa-Hawkins Act of 1995

The Costa-Hawkins Rental Housing Act, passed in California in 1995, offers a useful historical reference. This law put reasonable and necessary guardrails on rent control in several ways:

It exempts single-family homes and newer buildings (constructed after 1995) from rent control regulations.
It allows landlords to raise rents to market rates when a tenant vacates, encouraging property investment.

Benefits of Costa-Hawkins:

Promoted New Construction: By exempting newer buildings from rent control, it incentivized the development of new rental properties.
Preserved Market Flexibility: The ability to reset rents when tenants vacate helped keep the rental market dynamic, allowing for property improvements and reinvestment.

Costa-Hawkins contributed to balancing tenant protections with market-driven incentives, in contrast to the broader restrictions proposed by Proposition 33.

California’s Tenant Protection Act (AB1482), which took effect in 2020, built upon this balanced approach by providing statewide tenant protections, including limits on rent increases, protections from evictions without cause, and relocation fees for no-fault evictions.

Superior Alternatives to Proposition 33:

Instead of restrictive measures like Proposition 33, there are more sensible and effective approaches to address California’s crisis:

Increase Housing Supply: Encouraging the development of new rental housing is critical. Incentivizing construction and simplifying development regulations would expand supply, helping to stabilize rents and provide more options for renters. California’s ADU and “Builder’s Remedy” laws are just two examples of good policies promoting the construction of new housing.
Targeted Housing Vouchers: Rather than broad rent control, housing vouchers can directly assist families in need without distorting the rental market. Vouchers offer flexibility, empowering low-income tenants to choose suitable housing while allowing the market to function efficiently.

Conclusion:

Proposition 33, while aimed at making housing more affordable, risks deepening California’s housing crisis by reducing supply, driving up rents, and degrading housing quality. By focusing instead on policies that increase new housing availability and providing targeted support to those most in need, policymakers can achieve a more sustainable and equitable solution. Expanding the rental supply and offering direct assistance, rather than blanket restrictions, will better ensure access to safe, affordable, and high-quality housing for all.

We respectfully urge you to vote NO on Proposition 33.

This report reflects the opinions of Paladin Realty and does not constitute legal advice. Paladin Realty is not a legal expert. Readers should not rely on the accuracy of the information herein and should consult carefully with their legal counsel to further understand existing and potential rent control laws, ordinances and regulations and should not make investments based on the brief summary of complex laws, ordinances and regulations provided herein. This report does not and will not constitute a part of any offering memorandum and is not intended to constitute investment advice and does not take into account the investment objectives, financial situation, or particular needs of a recipient. Paladin Realty does make any representation or warranty as to the accuracy or completeness of the contents of this report and takes no responsibility for any loss or damage suffered as a result of any omission. The opinions contained in this report are subject to change without notice. The author(s) of this report and Paladin Realty’s research team may participate in investment decisions and receive compensation based upon the performance of Paladin Realty and/or certain of its investment funds.

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