LA Is Destroying Its Housing Market
A regulatory morass has delayed the city’s rebuilding, so the council has decided to further obliterate its market with stricter rent controls.
SACRAMENTO, Calif. — After a series of devastating wildfires obliterated 22,500 homes, only 8,400 — or a lackluster 38 percent — have been rebuilt. You probably think I’m referring to the January fires in and around Los Angeles, but I’m not. These numbers, courtesy of the Los Angeles Times, refer to the rebuilding process from a previous set of fires from 2017 to 2020. After the 2018 Woolsey Fire in Los Angeles and Ventura counties, only 41 percent of the burnt homes have been replaced.
As the Times aptly noted, “Now, with 13,000 homes lost this year in Los Angeles County, these experiences offer a scope into the future.” Analysts offer their various in-the-weeds explanations (difficult terrain, insurance issues, individual owners’ financial hurdles) for the slow rebuilding, but it’s foolish to overlook the big picture. Again, per the newspaper: “Along the California coastline, overlapping layers of regulations make it hard to build at any time. When fire strikes, homeowners can find the circumstances unforgiving.”
With regard to this year’s fires, the state’s rebuilding dashboard shows fewer than 2,000 permits issued for all of the affected communities. ABC 7 reports that Malibu has issued only 11 permits for the January fires 10 months after the fact. State and local officials have waived myriad environmental and other rules, yet despite that sensible approach the regulatory process is excruciatingly slow. The devastation has only exacerbated the region’s housing crisis, which had already been burdened by a housing shortage for many years before the devastation.
One prominent study argues that the LA area is short 338,000 housing units, but guesstimates for the shortfall vary widely based on the research. Nevertheless, with the region’s median home prices pushing $1 million and median rents of around $2,800, most observers would agree that much more building is in order. Meanwhile, some other lovely, high-demand cities such as Austin, Texas, have seen prices plummet by — get this — letting the market work.
Instead of following that sensible example, the Los Angeles City Council last week decided to undertake the worst imaginable approach from a boosting-supply standpoint: tightening up its rent-control statute. As Swedish economist Assar Lindbeck famously said, “[R]ent control appears to be the most efficient technique presently known to destroy a city — except for bombing.” Or except, maybe, for setting large segments of the city on fire.
As the Los Angeles Daily News reported, the council established a new rent formula for the 650,000 Angelenos who live in rent-controlled apartments. Currently, landlords can raise rents 3 percent to 8 percent and even as high as 10 percent when the landlord pays utilities. The new rule will limit hikes to between 1 percent and 4 percent, and it applies to nearly three-quarters of the city’s multi-family rental stock. In simple terms: At a time when the city desperately needs more rental units because of the wildfires, it approved a policy that will restrain housing supply.
A prominent study of San Francisco’s rent control ordinance found that it reduced housing supply by 15 percent and perversely encouraged property owners to keep their properties off the market altogether given the difficulty in evicting nonpaying tenants. Economists are in rare, near-universal agreement about the effects of such ordinances. They do reduce prices for existing tenants, but they quash supply by discouraging new building. They discourage renters from ever vacating their apartments. They drive up costs for the market in general and discourage building improvements. They obliterate housing markets and upward mobility.
Regarding Los Angeles’ specific rent control policy, a February study from Beacon Economics found: “Almost two-thirds of increases in average rents for RSO [Rent Stabilization Ordinance] units are driven by turnover, not annual rent increases for continuing tenants. Making rent control stricter by lowering the caps could backfire — stricter caps will mean that rents will have to be raised more during turnover, which currently occur for 40 percent of units every three years. This could cause average rents to rise faster for RSO units.”
Landlords aren’t willy-nilly pricing people out of their existing apartments, but generally raise rents after tenants leave. Those rents will now become much higher and the market will become more aggressive. Notably, landlords are raising rents in part because of growing costs, some of which are driven by government policies, per Beacon: “Operating costs, including insurance, maintenance and regulations, have risen sharply — insurance premiums increased 17% in 20 months, and maintenance costs grew 25% more than CPI over the past decade.”
Consider this against the backdrop of a Times article from October, which reported the following: “Los Angeles apartment construction has dropped by close to a third in three years as developers struggle with unprofitable economics and regulatory uncertainty.” Given the regulatory and tax burdens, developers told the newspaper they need rents of $4,000 to $5,000 a month for these projects to pencil out. The city needs much more construction. The rent ordinance only applies to 1978 and older buildings, but it will have ripple effects.
Now let’s return to Texas. The Dallas–Fort Worth metro area permits more houses each year than the entire state of California. And the Texas Tribune explains Austin’s falling rents: “The chief reason behind Austin’s falling rents, real estate experts and housing advocates said, is a massive apartment building boom unmatched by any other major city in Texas or in the rest of the country.” It’s amazing what happens when regulators get out of the way.
Los Angeles remains a lovely city with idyllic weather, great scenery, and beautiful beaches. It’s not everyone’s cup of tea and indeed the city has seen some population drops, but demand remains high for housing. Instead of doubling down on a regulatory system that delays wildfire rebuilding for many years or slows apartment building to practically zilch, officials there need to roll back rent controls and revamp its permitting system so that the private sector can finally function.