The biggest real estate news for the greater Los Angeles area undoubtedly involves the controversy surrounding the Costa-Hawkins Act. Come November 2018, voters will have the opportunity to repeal the law. This may affect landlords, tenants, developers and commercial property investors in a number of ways.
What is Costa-Hawkins?
The Costa-Hawkins Rental Housing Act of 1995 effectively put limits on rent stabilization laws in two major ways. First, it carved out exceptions for condos, single family homes and new rental constructions. “New” became a relative term for each city and went back to the date the rent stabilization laws were enacted. For Los Angeles, the cutoff date became October of 1978. Those building built before the date were under rent stabilization and those built after were not subject to the laws. Second, the Act allowed vacant units of rent stabilized properties to be rented out at prevailing market rates. Thus, an owner of a rent stabilized building could now rent a vacant unit at the current market rate as opposed to being subject to “strict rent control,” whereby the rent could only be increased by a predetermined amount year in and year out.
What if the Act is Repealed?
Despite the noise surrounding the issue from various political groups, in the short-term, not much will actually change. Repealing Costa-Hawkins will only allow cities to change their respective rent stabilization laws. Those in favor of repealing the Act will then have a municipal battle on their hands to get the actual rent stabilization laws to change. To be sure, the momentum will be on their side, but the money behind the political forces in favor of keeping the status quo will undoubtedly apply at the municipal level as well. Consequently, a drastic change in the real estate market following a repeal is unlikely to occur.
In the long-term however, the effects may be considerable. The housing crunch in Southern California, especially in cities such as Los Angeles, has empowered tenant rights groups. If these groups are able to sway the municipalities to adopt more stringent rent stabilization ordinances and to expand its reach, then the real estate market will definitely be affected. There will be minor market corrections across the board in terms of real estate prices, nothing drastic is predicted (something along the lines of a three to five percent correction would not be surprising). More concerning however, will be the impact on new developments and construction. It would make little sense for a developer to invest the time and money to construct a building in Los Angeles if it would be more profitable to build elsewhere. Along the same lines, investors will be less likely to purchase rent stabilized properties in cities with rent stabilization ordinance in effect.
The Costa-Hawkins Act is named after the politicians who took credit for it: Senator Jim Costa and Assemblyman Phil Hawkins. Even though voters will have a chance to repeal the law come November, much of the aftermath will be dictated by a new generation of politicians both at the state and municipal level. Although a somewhat cynical viewpoint, it seems likely that most of these politicians will go with who their greatest supporters are. The contributions (a.k.a. “money”) from commercial property owners and investors is unquestionably greater than those from the tenant advocacy side. And perhaps the only thing that politicians love more than credit is… contributions. Much may change on the surface, but for better or worse, it is more than likely that things will stay the same.