Changes to Look out For in the 2018 Real Estate Market

We recently wrote about predictions for the 2018 housing market. This article is an extension of our previous post, and covers two important legislative battles that are gaining momentum.

Rent Control:

Rent control legislation proposals are popping up on a state and local level. According to this article, Assemblyman Richard Bloom (D-Santa Monica) will be proposing legislation on January 11th to repeal Costa-Hawkins, which would allow local governments to implement new rent control policies. Additionally, tenant advocates and their affiliates have filed a potential 2018 initiative to repeal Costa-Hawkins. Locally, at the “No Place like Home” symposium in Santa Cruz, a representative of the Santa Cruz Tenant Organizing Committee rallied for support for a 2018 Rent Control campaign.

With some of the highest rents in the state, would Santa Cruz benefit from rent control? In my opinion, in the long-run, no.

At face value, rent control keeps rent low for tenants who are struggling to find affordable housing in a high-priced market like Santa Cruz. It would shift the power from the landlord to the tenant. However a majority of economists, on both sides of the political spectrum, agree that rent control will likely decrease the quality and supply of rental housing, while incentivising people to stay in their houses longer than they would have otherwise. It may also result in more affluent individuals dominating the rental market. In an already tight market, this would exacerbate the supply-issue in Santa Cruz and the Bay Area, and result in lower-quality housing overall. You can find these points further explained here.

Evidence for the negative affects of rent control can be found in a recent study of rent control in San Francisco from 1995 – 2012. The two Stanford economics conducting the study found that “rent control increased the probability a renter stayed at their address by close to 20 percent”. Additionally, they “found that landlords whose properties were exogenously covered by rent control reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 5.1% and caused $2.9 billion of total loss to renters” . On the other hand, the renters staying in rent-controlled housing gained an aggregate benefit of $2.9 billion in savings.  So overall, there was no net-benefit to the city from rent-control policy and it actually exacerbated the affordable housing issue for many. (source)

Record high rents in Santa Cruz is serious issue that needs to be addressed. As recounted in this Sentinel Article, families, students, and individuals are suffering from what is officially a full blow housing crisis. Rent control may provide temporary relief, but to address this issue in an effective and forward-thinking way, local government would be wise to increase incentives for and remove regulations that inhibit rental housing construction. Unfortunately, rent control would do the opposite.

The Future of Proposition 13

Under Prop. 13, property tax increases on any given property are limited to no more than 2% per year as long as the property is not sold. A property is assessed for tax purposes only when it changes ownership and property taxes may not exceed 1% of the sales price with the 2% yearly growth-cap applicable to future years.

Through Propositions 60 and 90, those who are 55 and older can purchase a property of equal or lesser value than the original property sold (using the current-day sales price), and can transfer their tax base to the new property. This means these individuals avoid reassessment and will not see a dramatic increase in their property taxes.

Unfortunately, those individuals that qualify for prop 60 and 90 face restrictions on where they can purchase homes and transfer their tax base. For example, Santa Cruz County does now allow inter-county transfers, meaning you cannot transfer your tax base if the home you sold was in a different county. A proposal by the California Association of Realtors addresses this issue. Under the initiative, homeowners who are over 55 or severely disabled would be able to keep those lower tax obligations for any home they purchase, as long as it’s within the state of California.

What are the pros and cons of this initiative?

The downside is that this kind of change could be costly for local governments. In a high-priced market like Santa Cruz, this may be a serious issue. The county would likely lose tax revenues as individuals from less expensive markets moved into homes and transferred tax bases that reflect slower growing, lower priced markets.

The obvious and much needed benefit from this change would be an increase in housing inventory. The Legislative Analyst’s office estimates that the number of homes for sale could jump by tens of thousands per year.

What are your thoughts about these upcoming changes? Send us a message and let us know: admin@schneiderestates.com.