Recently, Vice President Kamala Harris proposed capping rent increases across to five percent nationwide. She also stated her desire to abolish the algorithmic software that helps landlords price their units. These two initiatives became part of the newly-released Democratic National Committee platform. If enacted, Vice President Harris’s housing plan would force California to cap rent cap even though the state’s residents have voted overwhelmingly against this very idea two times in the last six years — by 19 points in 2018 and 20 points in 2020. This November, the state will vote on the issue again, but political analysts do not expect it to fare any better this time around.
Californians continue to reject the idea of price controls because they know from experience that they do not work.
A 2018 study of San Francisco’s rent control regime, which remains grandfathered in despite the state outlawing rent price caps 30 years ago, demonstrates that it reduced the supply of rental housing, negatively affected housing affordability, and increased economic inequality. And yet, despite having rent control in place, San Francisco still has the third highest rental rates in the nation.
Despite the lackluster track record of rent control, Vice President Harris wants to force all of California to govern with price controls. Her intentions may be good, but if implemented, the effects of this policy would not be.
Vice President Harris’ desired ban on landlords’ algorithmic pricing software is even more problematic. Not only would it cause all the same negative consequences of a rent cap (from housing shortages to increased rental inflation), but it would also undercut the AI revolution that California is currently leading.
Most of the California economy has become dependent on similar AI software for everything from reducing traffic jams to booking its tourists’ hotels. Many legal analysts fear that the government going after AI in the rental industry will open the floodgates for AI regulatory action across numerous sectors and industries. That could quickly prove problematic for the state, which is currently leading the nation in AI innovation and has much of its future GDP tied to the technology.
Vice President Harris thinks that the actions are needed because landlords are colluding and price gouging, but this assertion is not accurate. While California’s rental prices rose over the last three years due to government-induced inflation, its rental rates are now falling.
Rental website Zumper found rent for one-bedroom units dropped substantially in many of these cities in the past year — down 9.1% in Oakland, 5% in Los Angeles, 2.3% in San Jose, 1.7% in San Francisco, 1.3% in San Diego and 1.1% in Long Beach. This data indicates that price-gouging is not a problem and that more government interference in the industry is not needed.
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The solution to the housing and inflation crises, both nationally and locally, is not government price-setting but rather increasing housing supply.
Governor Newsom campaigned on building 3.5 million units in California alone, and Vice President Harris touched on this as part of her economic package, stating she would work with industry to ensure the construction of 3 million more housing units if elected. They should follow through on their promises — encouraging development, streamlining the approval process for new projects, and reducing the regulatory burden on builders. By making it easier to build, California and the nation will reduce current shortages, naturally bringing down prices and making homes even more affordable.
Price controls may appear to offer a tempting quick fix, but they are a dangerous illusion that risks worsening the problem. The vice president might disagree; nevertheless, she should let California and the individual 50 states make their own determination. Forcing a one-sized-fits-all government mandate upon them would be entirely unfair. If she is elected and decides to proceed with the plan, the California congressional delegation should fight it tooth and nail.
John K. Paglia is a Professor of Finance at Pepperdine Graziadio Business School (PGBS) where he has been on the faculty since 2000.
