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L.A. should abandon rent control

Politicians should work with the private sector to encourage affordable housing and rent stability through productive incentives.

May 21, 2010|Paul Habibi and Eric Sussman

On Friday, the Los Angeles City Council is likely to pass an ordinance preventing many landlords from raising rents for four months. This is a step in the wrong direction. Instead, the council should revoke the city's Rent Stabilization Ordinance entirely.

Rent control policies have laudable goals, especially in populous and undersupplied housing markets like Los Angeles'. However, the city's law, like all rent control, has failed to accomplish its objectives in the more than 30 years since it was passed. Rent control is widely accepted by many economists to have had an adverse effect on both the quantity and quality of housing.

L.A.'s rent stabilization law has many flaws. First, it applies only to projects of a certain size and age. All residents within such projects are protected, regardless of income or net worth. Thus, an eight-unit building built in 1977 is subject to rent control, while a 10-unit building built in 1979 is exempt. It also wasn't designed to protect those who most need it. A lawyer earning $200,000 a year renting in a pre-1978 building would be afforded the benefits of rent control, whereas a struggling retiree living off Social Security, but renting in a post-1978 building, would not be. This, of course, makes little sense. Moreover, the outcomes of rent control are entirely predictable, based on simple economic principles. The negative effects include:

A shortage of apartments and artificial inflation of rents, because the limited stock of unregulated units must absorb the excess demand for rent-controlled units.

A reluctance on the part of owners to build new apartments out of fear that rent control laws will be extended.

A tendency of owners to defer repairs and renovations because of the limited prospects for return on their investments. This has a job-killing effect too, because landlords aren't hiring as many carpenters, painters, electricians, plumbers, roofers and landscapers.

Lowered property tax revenue, because landlords covered by the rent stabilization ordinance can demonstrate that their buildings are less valuable.

An incentive for landlords to remove units from the rental market to achieve higher returns through other means, such as condo conversions.

An increase in animosity between landlords and tenants, with landlords being motivated to seek creative or illegal means to evict tenants, and tenants being motivated to seek equally creative ways (through such unauthorized things as subleasing or bringing in additional occupants) to hold onto rent-controlled units.

The fact is that most tenants in rent-controlled units are already paying below-market rents. Some 40% of renters pay less than 30% of their income for rent and can afford modest rent increases. For a tenant paying $500 a month, the current 3% allowable annual increase under L.A.'s ordinance amounts to a modest $15 per month. Moreover, while the council seems intent on denying landlords even that 3% raise, it just approved a 4.8% increase in electricity rates, which landlords will have to absorb.

Abandoning rent control would not mean abandoning the worthy goals of affordable housing and rent stability. But it would put the burden on the public sector, where it belongs. It is not equitable or desirable to have one narrow and arbitrary segment of the private sector burdened with this responsibility.

Politicians at all levels need to work with the private sector to promote the development of affordable housing. Certain economic "carrots" (as opposed to the rent control "stick"), such as property tax reductions, accelerated depreciation deductions and the ability to exclude for tax purposes a portion of rents received from low-income tenants, would promote the development of affordable housing. The costs of these "carrots" would be borne by all. Need-based programs to subsidize rent for those who require such assistance can and should be expanded. HUD's Section 8 program is one such example. While it too may have its issues — and it does — it is at least needs-based and allows landlords to achieve something far closer to market rents for their rental units.

With its flawed rent control law, Los Angeles has opted to take a simplistic approach to a complex problem. Whatever the City Council does or doesn't do in Friday's vote, it will have done nothing to address the underlying needs of either landlords or tenants.

Paul Habibi and Eric Sussman are lecturers in real estate at the UCLA Anderson Graduate School of Management and owners of rent-controlled property in Los Angeles.

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