How Will Props 5 & 10 Affect Local Real Estate?

In this upcoming November election, Propositions 5 and 10 are on the ballot that may address housing issues, including rent control. In this article, real estate specialist Olivia Patterson-Ryans will take a closer look at these two important initiatives.

Historically, landownership has represented power and wealth. Back in the day, the rulers, the Kings and Queens owned the land and controlled the “Kingdom”. He who owns the land controls the people; where they live, what they eat, how they make a living.

Fast forward to modern day California, USA. The average landlord is not necessarily wealthy. They have been regular folks working and building a business, rentals as the product. In 2018, we are in a radically different era, one in which the new wave of landlords are large corporate investors. These new developers and corporate investors are being accused of rent-gouging, running up rents to unaffordable levels to increase profits at the expense of middle- and low-income tenants. Thus! the emotionally charged Proposition 10 is put forth on the November ballet. Rent control in California was first introduced in reaction to the rapid inflation of the 1970s. While the goal was to slow the rise in housing costs, highly restrictive rent control rules in several cities severely reduced property incomes. This led owners to convert rental properties to condominiums and more-profitable commercial uses, reducing the supply of existing rental housing. Meanwhile, new development stalled because developers could no longer justify the cost of construction.

In response, Democratic State Senator Jim Costa and Republican Assemblyman Phil Hawkins co-sponsored a bipartisan compromise: The Costa-Hawkins Rental Housing Act.

California law known as the Costa-Hawkins Rental Housing Act limits how far cities and counties can go when passing local rent control laws. As a result, rent control cannot apply to single-family homes or to housing built after January 1995. Local laws also cannot restrict the rents landlords charge when new tenants move in. Proposition 10 would overturn Costa-Hawkins, freeing local governments to set rent control laws without state restrictions.

Proposition 10

Myth Dispelled:

Prop. 10 does not mean mandatory state-wide rent control. It gives the local cities and counties the authority to enact rent control if they choose to do so. It does not REQUIRE them to do so. Prop. 10 would return power to cities by allowing them to set their own rent control rules. Proposition 10 also requires that rent control laws “to allow landlords a fair rate of return”.

PURPORTED UNINTENTED CONSEQUENCES OF PROP 10:

While many say rent control can help to keep housing affordable, others point to evidence from across the country that demonstrate; rent control actually reduces the supply of existing rental housing and impedes new development. Specifically:

Rent control reduces property values and decreases tax revenue for local governments. Rent control hurts mom-and-pop businesses, encourages property owners to neglect building maintenance, and can lead to deteriorating neighborhoods.

Rent control is not based on income, so the benefits often accrue to high-income households. Moreover, if applied to single-family homes, rent control could eliminate rental housing for many families and decrease property values for California homeowners.

While some dismiss these concerns and argue that only large corporations would be hurt by rent control, the reality is that stock in publicly traded real estate investment trusts (REITs) is owned by public employee and teacher pension funds, non-profit endowments and the mutual funds that are in most 401(k) portfolio.

The California Association of Realtors® is trying to solve the low housing inventory shortage that we are currently experiencing in California. The theory is that older homeowners are not placing their homes on the market due to the low tax benefits they are currently receiving through Proposition 13, thus contributing to our housing inventory shortage.

Proposition 5

Prop 5 extends Proposition 13 by allowing senior and disabled homeowners to transfer their low, existing Proposition 13 tax assessment to a new home anywhere in the state and using the option as often as they choose.

Supporters say, if older homeowners have a tax advantage to move without fear of increased taxes, this would allow young families to purchase these homes at current market value and therefore, increasing taxes paid to the government.

Opponents of the proposal say that by allowing lower taxes on homes valued much greater than the original purchase price of the home, the government would stand to lose significant tax revenues that is used to pay for public schools, etc. A conservative estimate is a loss of $1 to $2 billion dollars in revenue annually to the State. They also say that it is unfair for people not to pay their fair share in taxes, and that taxes by home value is needed to support the increasing cost demands for government services, such as public schools. It has helped make California unusually dependent on income taxes and has offered its most abundant benefits to the very wealthy.

The above is intended to stimulate your interest how California law can affects real estate, and how you can make a difference by going to the polls and making your decision known. OPR