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A Choice of Homeownership or Serfdom

A disturbing California trend: How rent control and other public policies are destroying real property rights and threatening the American dream of homeownership

By C.A.R. Past President Kevin Brown

California has long boasted about possessing one of the largest economies in the world, which has provided bragging rights, as well as cover, for many of its politicians. This “cover” has allowed California politicians to project a sanguine outlook to their constituencies while pursuing and protecting failed public policies that have largely contributed to creating the largest housing crisis in the United States. An outdated, 40-year old environmental law known as CEQA (California Environmental Quality Act), the zero development NIMBY (Not In My Back Yard) attitude of property owners, and the lack of local government adherence to — and state government enforcement of — the California housing element law has led to a politically designed lack of construction and subsequent housing shortage over the past four decades.

The cliché “build it and they will come” suggests that if you create something, demand will be generated for that very same thing. This appears to be the failed reverse strategy that local governments, state governments and NIMBYs have adopted in their decision not to build: “If you don’t build it, they won’t come.” This conundrum has been born out of California’s exploding population growth over the past 40 years, and the lack of supply in the rental, low- to moderate-income and market rate housing markets. California’s population growth has exploded, rising from 21.54 million in 1975 to almost 40 million in 2018. During this same period, we have seen demand for housing significantly outstrip supply.

Keeping pace with population growth and projecting housing supply is not rocket science. In Northern California, the Association of Bay Area Governments (ABAG) projects the housing supply needed to keep pace with population growth. These projections, known as the regional needs assessment (or RENA) numbers, are submitted to the State Housing Conservation and Development Agency and, in turn, are issued to local cities and municipalities so they can build accordingly. Over the past 10 years, it has been projected that we should have built 180,000 units per year to keep pace with population growth, when in reality we’ve only built an average of 75,000 units per year. To counter these deficiencies, the lack of local government planning and soaring housing costs, a growing number of cities throughout California have adopted measures to control the rent a landlord can charge a tenant and to prevent property owners from taking possession of their properties unless they pay considerable compensation to tenants. These policies have stigmatized apartments and single-family dwellings.

Enter the combustible world of rent control and real property rights, where the lines between ownership and tenants’ rights have been blurred to such an extent that, in many California cities, the differences are indistinguishable. What started over four decades ago as a local grassroots undertaking to control rents in a few cities has evolved into a movement that now threatens real property rights on a multistate level. Initially local real estate associations were at the vanguard, working together with small mom-and-pop property owners and likeminded interest groups to fight off harsh and often punitive ordinances that threatened their real property rights and economic futures. For many minorities who had the foresight to scrape together resources to purchase a home or rental property, this was their first shot at capitalism after centuries of oppression and living in an economic system designed to deprive them of owning real estate. For many, real estate ownership provided an opportunity to plan for retirement and pay for their kids’ educations.

There is a common misconception that policies like rent control and just cause for eviction only affect apartment buildings and their owners, but the reality is that these policies also negatively impact single-family homeowners. Even though each issue may impact residential and multifamily property owners differently, both groups are now facing a tough road ahead due to many factors that are affecting their bundle of rights and property values:

  • A burdensome system of compliance in rent-controlled cities.
  • The right to increase historically low rents.
  • The right to maintain a rent control exemption for new construction built after Costa-Hawkins was implemented in 1995.
  • The right to maintain a rent control exemption for owner-occupied, 2- to 3-unit dwellings.
  • The right to recapture capital improvements the owner has made to his or her property.
  • The right to make a reasonable return on investment.
  • The right to enter your property.
  • The right to retake possession of your property.
  • The right to raise rent to the allowable rent-controlled ceiling
  • The right to move into a home after purchase.
  • The economic loss to a new property owner due to tenant buyouts after purchase.
  • Tenant just cause for eviction laws that have led to tenant life estates.
  • The right to control the number of tenants or unknown sub-tenants that have moved into a home or dwelling unit without permission.
  • Costly legal eviction expenses for the owner and free (taxpayer paid) legal services for the tenant.
  • The right to due process — many rent-controlled cities have put off hearings on owner-related issues for months, in some cases up to half a year.
  • Tenant black market activities where the tenant is running a business within the property owner’s business by subletting at a considerably higher rent or renting out their rent-controlled apartment through Airbnb.
  • In many cities where single family dwellings are exempt from rent control, they are not exempt from just cause for eviction (meaning the city decides the reasons you may evict a tenant).
  • For new developments in many cities, like Oakland, there is an added cost to homeownership and rentals due to onerous and punitive impact fees (up to $25,000 per unit) that local governments have placed on the backs of developers. These fees are then added to the purchase price and passed onto the new homeowner or renter, or the developer will deem the project economically unfeasible to build.

 And there is talk of:

  • A vacancy tax for those owners who choose to leave their properties vacant.
  • A ban on allowing property owners to engage in short-term rentals, such as Airbnb.

Property owners are also facing a multitude of costly legal challenges and pitfalls to reclaim their property after a tenant has stopped paying rent, and many local ordinances have negated some of the key provisions in lease/rental agreements. Moreover, there is a new movement afoot by tenants’ rights groups to repeal Costa-Hawkins, which has gathered enough signatures to qualify for the November 2018 ballot. Costa-Hawkins, a bill sponsored by C.A.R. and signed into law in 1995, protects the right to decontrol a rental unit after a tenant moves out. The proposed repeal will include taking away the rent control exemption for single-family dwellings. If tenants’ rights groups are successful in repealing Costa-Hawkins, I believe the next law to be attacked will be the Ellis Act, also sponsored by C.A.R., which protects the property owner’s right to exit the residential rental business.

I truly believe in homeownership, but with the falling numbers (currently at 54 percent) in our state, on this current trajectory, renters will be in the majority within the next decade. At the local level, many politicians understand that rent control will decrease new construction in the future, and in cities like Oakland with a 60 percent tenant population, politicians are ignoring this reality and choosing politics over sound policy for the sole purpose of getting re-elected.

I also believe that America is better off with a larger middle class, and homeownership is the cornerstone and mechanism that has lifted many up the economic ladder, positively impacting present and future generations. Many property owners have ignored or misinterpreted the signals coming forth from the tenants’ rights movement, which has diminished our real property rights and our control of our hard-earned assets. What local real estate associations and their staff who are inactive in advocating for real property rights need to do is revisit their mission and understand why they exist. REALTORS® and property owners need to wake up, educate themselves and understand what is at stake for their livelihoods and the future of their profession.

On a recent visit to Washington D.C., I carved out a few hours to visit Lincoln’s cottage on the outskirts of town, a 19th century retreat where our 16th President spent a great deal of time during the Civil War and after the death of his son, Willie. During the tour, the docent told an interesting story of how Lincoln received an unannounced late-night visitor, a gentleman from England, who was profoundly curious about this American experiment of a union of states and an open government ruled by the people. President Lincoln immediately explained how he, a common man, started at the bottom and was for the most part self-educated. He further explained how, without a formal education, he worked very hard and through perseverance and determination became a lawyer, congressman and then president of the United States, the highest office in the land. What President Lincoln was describing to his guest was “The American Dream.”

“The American Dream of Homeownership” earned its moniker through providing decades of tangible and intangible benefits to homeowners and communities, enriching the lives of Americans regardless of race, religion or socioeconomic status. Homeownership provides the necessity of shelter and also financial stability, and it evokes the emotional sensation of personal security and independence. For many Americans, building equity through homeownership has paid for college and retirement, created an emergency fund and allowed them to pull themselves up from the bottom, just like our 16th president.

The word “landlord” is somewhat of a misnomer — “tenant,” too. In Medieval times, landlords historically owned real estate and were the “landed gentry,” those in the highest echelons of society who owned the great estates throughout Europe. Only a select few chosen by royal lineage, wealth or birth lived behind the walls of these sprawling estates, ostentatious shows of wealth and power exclusive to the well-heeled. Tenants were the common (free) people who built modest dwellings on the landlords’ estates, farmed the land and gave a percentage of their crops to the landlords in exchange for protection from thieves and rival forces. The crops the landlords received were called "rent." These tenants lived out their lives poor, often destitute, and were known as serfs. Our current system of real property ownership has evolved where ownership is available to all Americans, not a select few. Unlike the original "landlords," this modern system of homeownership created the American recipe of independence, self-determination and economic empowerment that made our country great. As real property rights erode in our state, there will be a day of reckoning where politicians and NIMBYs will have to take responsibility for the disempowerment of their fellow citizens and the return to feudal times.

 

 


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