Real Estate Round-Up: Proposition 10 is not an affordable housing solution

Sometimes things are not as they appear. Take for example Proposition 10, The Affordable Housing Act, which will be on the Nov. 6, ballot. Proposition 10 gives local governments the right to adopt rent control ordinances-regulations that govern how much landlords can charge tenants for renting apartments and houses.

Proposition 10 can also enact controls that may prevent landlords from receiving a reasonable return on their rental properties. The motivation behind the proponents of the initiative is based on a social justice point of view – shelter is a most basic right and it should be provided to everyone.

Currently only 26 percent of California's population has the income required to purchase a median priced home. That is a very sad number. If you're reading this, I'll bet you are one of the lucky ones who already own a home and have been enjoying the appreciation the state has experienced over the past 10 years. Rising interest rates and strong market appreciation have priced 74 percent of potential homebuyers out of the market.

This group is currently renting and competing for the limited available properties. Available rental property inventory is so low that rental costs have risen even faster than the price of homes for sale.

The 74 percent who are currently renting are spending approximately 50 percent of their income on rent. That doesn't leave much left for all of life's other expenses, let alone funds to put aside for savings. It becomes a never-ending cycle that without some relief, may never be able to be rectified. Enter, The Affordable Housing Act.

The only problem is, this solution is not the solution. Let me tell you why. First, I want to share some of the history behind Proposition 10. In 1995 the California State Legislature passed Costa-Hawkins. It mandates that cities cannot enact rent control on housing first occupied after Feb. 1, 1995, and that free-standing housing units were forever exempt. It also provides that housing exempted from the local rent control ordinance before Feb. 1, 1995, must remain exempt and that landlords have a right to increase rent prices to market rate when a tenant moves out (a policy known as vacancy decontrol).

Rent control does not work, it does the opposite. Rent control, first and foremost would discourage investment in new rental housing. No investor is going to build rental property knowing that their ability to earn a return on their investment is not based on simple supply and demand but on some arbitrary guideline. Let's be honest, if there were more rental properties available, rents would go down, because tenants would have choices. If there are less properties being built, and if values on homes to purchase continue to rise along with higher interest rates, there will be more tenants and less choice.

The proposed rent control will no longer exempt single family homes or detached townhomes and condominiums. Imagine you are in the military and you get orders to move to Virginia, but you want to return to Fallbrook at the end of your tour, so you rent your home out. If Prop 10 passes, you potentially would not be able to legally give your tenant notice to vacate except for just cause. Try proving that in a timely manner.

Suppose part of your investment strategy includes owning and renting out multiple single-family homes? Currently it is a sound investment strategy from a passive income position as well as an equity builder. With rent control, recapturing adequate funds to maintain the properties and pay the increasing property taxes becomes nearly impossible. What happens when major repairs need to be done? If there is not enough money earned to save for these certainties, repairs will not be made and upgrades will not be done.

Even though the rental guidelines would be decided by the local jurisdictions, the fight will be on at every level. The door will be open. The conversation will be headed in a direction that will not only decrease new construction, it will immediately cause evictions to occur on current tenants, so that rents can be adjusted as high as possible to hedge the future. Many apartment buildings will be converted to condominiums to be sold. Either way, tenants will lose, not win.

The sensible approach is to create ways to build more housing or find ways to free up housing. There are two Propositions on the Nov. 6 ballot that would help with this. Proposition 1 would authorize $4 billion in bonds for affordable housing programs, loans, grants, as well as housing loans for veterans. Proposition 5, the California Association of Realtors sponsored bill, would remove restrictions on allowing seniors (ages 55+) and persons with severe disabilities to transfer their tax assessments with a possible adjustment, from their prior home to their new home.

Don’t be fooled by the title of Prop 10. It will not provide “affordable housing.” Prop 1 and Prop 5 do provide sound solutions. If you would like more information please call me, I’m happy to discuss this with you.

Kim Murphy can be reached at [email protected] or (760) 415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.