We all keep hearing about the cries about the housing crisis across the Bay Area, as the amount of housing developments stay the same, while the number of residents continues to increase. A worrisome part of the housing crisis is that an adequate solution has not been presented for the ongoing crisis. Not only do a majority of the articles that highlight the issue fail to disclose who is responsible for the housing shortage, but they fail to discuss potential ways to develop additional housing.
While it is well-known that San Francisco desperately needs housing, laws that are in place make it incredibly difficult for developers to want to do business in California. As a result of the laws and changes, developers are becoming less willing to create new housing developments, which has the potential to make it even more difficult for developers and landlords in the future.
What is Costa Hawkins?
In 1995, the Costa Hawkins Act was passed in an effort to ease some rent regulations that would allow landlords a chance to increase rent to match the housing market once long-term tenants had moved out of the rent control unit. It is a law that allowed landlords a chance to increase rent to meet the market rent once long-term tenants have moved out of the rent control unit.
Tenants that live in cities like San Francisco that have rent control oftentimes barely allow landlords to raise rent by 2% in the rent controlled units in any year. With this is mind, imagine that an average tenant resides in a unit for more than 10 years. If their starting rent was $1,000 per month, that means that rent in 10 years would be $1,200. Unfortunately, a majority of the units will need significant upgrades after those 10 years.
After a long-term tenant moves out of a property, a landlord typically needs to get a significant amount of work done. This could include repainting the property, adding new carpet or refinishing floors, or making minor updates such as purchasing new appliances. Altogether, the work easily adds up to approximately $15,000 for such basic updates alone. While this could be possible for some landlords, it greatly increases the difficulty for average mom and pop owners in the area that do not have the funds to cover the updates.
These are just a couple of the reasons that Costa Hawkins was put into place originally. This was done as a result of landlords being forbidden from raising rent in rent controlled properties.
What Makes the Repeal Risky?
A repeal of Costa Hawkins would be risky for both landlords and renters. With the Act, landlords were granted permission to raise the price of properties after tenants move out, in an effort to maintain the properties within the housing market. It helps to ensure that the properties can be adequately managed without becoming an overwhelming financial burden.
What are the Effects of Repealing Costa Hawkins?
While there is support for a repeal, the housing market would face an uncertain future, as many changes would be seen if it were to be successful. Landlords would be faced with the task of maintaining properties that have a rent cap on them. It is difficult to say how the structure of the housing market would be changed, making it an unknown for many.
A paper published in the National Bureau for Economic Research studied the effects of rent control. According to the paper, they found that rent control dramatically limited the supply of renting housing. Additionally, rent control has pushed landlords to focus only on owner-occupied housing and new housing for the wealthier population. This has affected the entire city, resulting in a 6 percent decrease in rental housing, as well as increasing rent in San Francisco by 5.1 percent. Overall, it was found that the rent control policy fueled the gentrification of San Francisco, which has resulted in an income inequality.
Final Thoughts
Overall, developers continues to look for alternatives that are profitable and don’t require constant changes, and they are surely finding them in Texas, Colorado and Seattle to name a few. This loss of the developer pool will only result in less housing developments at a time when a significant increase in housing is necessary.