Consider the Long-Term Consequences of a Rent Cap

Dear Santa Barbara City Council Members,

I respectfully ask you to consider the long-term consequences of adopting a rent cap tied to only 60 percent of the Consumer Price Index (CPI). While the goal of protecting tenants from rapidly rising housing costs is understandable and commendable, a permanent cap that fails to keep pace with the actual cost of owning and maintaining rental housing will create an ever-widening gap between rental income and operating expenses.

This is the effect of compounding, sometimes referred to as exponential growth. Each year’s increase builds upon the previous year’s increase. Even what appears to be a relatively small difference in annual growth rates becomes substantial over time. For example, if operating costs increase by 4 percent annually while allowable rent increases are limited to 2.4 percent (60% of CPI), the gap between costs and income grows larger every year because both figures compound.

Over the long term, this policy could have several unintended consequences for our community:

•  Allowable rent increases will fail to keep pace with rising costs such as insurance, labor, utilities, property taxes, regulatory compliance, and major capital improvements.

•  Property owners are likely to be forced to defer maintenance, modernization, and energy-efficiency improvements because those investments cannot reasonably be recovered.

•  Older rental housing may gradually deteriorate, affecting neighborhood appearance, safety, and tenants’ quality of life.

•  Reduced returns may discourage investment in new rental housing, worsening Santa Barbara’s existing housing shortage.

•  Small, local “mom-and-pop” housing providers, who often operate with narrow margins, may be disproportionately affected.

•  If rent-controlled properties become less valuable than comparable unrestricted properties, the city’s future property tax base may also grow more slowly.

To enforce this proposal, the city has also suggested creating a Rent Registry, a permanent new bureaucracy estimated to cost approximately $2 million annually, with those costs borne by housing providers.  Before creating this new entity, I respectfully ask the Council to consider several important questions:

•  What measurable problem will the registry solve?

•  Is there evidence that demonstrates that a rent registry reduces housing costs?

•  How many additional housing units will it create?

•  What safeguards will protect owners’ and tenants’ private information?

•  Would these funds produce greater public benefit if invested directly in affordable housing, infrastructure improvements, or programs that improve housing quality?

A $2 million annual registry creates no new housing, repairs no existing housing, and does not reduce construction costs. Before imposing a permanent new tax on housing providers, the city should demonstrate that this expenditure will produce measurable improvements in affordability that could not be achieved more effectively through direct investment in housing production, rental assistance, or preservation of existing housing.

The combination of a restrictive rent cap and an expensive regulatory program will likely discourage future investment in Santa Barbara’s rental housing. Developers and property owners routinely compare cities when deciding where to invest. Increasing regulatory costs while limiting future revenue growth makes Santa Barbara less attractive for the investment needed to expand our housing supply.

If the council believes annual rent increases should be limited, a far more balanced approach would be to cap increases at 100 percent of CPI, publish the allowable annual adjustment each year, and provide renters with a straightforward enforcement process. Such an approach would protect tenants from excessive increases while allowing rents to keep pace with the actual cost of providing safe, well-maintained housing. It would also eliminate the need for an expensive, ongoing registry funded by local housing providers.

I respectfully urge the council to adopt policies that protect tenants without discouraging the investment, maintenance, and preservation of the very housing our community depends upon. The long-term health of Santa Barbara’s housing stock depends on maintaining a fair balance between tenant protections and the economic realities of providing quality rental housing.

Thank you for your thoughtful consideration of these comments.