The 2018 midterm elections promise to be contentious. In the midst of the furor over alleged bad behavior on all sides, social media sparring, deep-seated partisan squabbling, and a visceral reaction to many of the major players in American politics today, housing policy may seem like a relatively calm port in the storm. However, shelter is a basic human need, and while real estate may not be quite as controversial in nature as many of the candidates themselves, it will play a role in this election.
Investors will best benefit from being aware of the issues and monitoring the results of initiatives on the ballot even if the voting is not happening in their state. Furthermore, understanding how election results may affect housing policy and the practical aspects of investing, such as the cost of labor and materials, provides investors with another “tool” for market analysis and strategic decision-making.
Here, we examine 3 real estate factors to watch in the 2018 midterm elections:
Factor #1: Rent Control Repeals & Regulations
Markets in the Spotlight:
- California | Proposition 10: Proposition 10 would repeal the Costa Hawkins Act, freeing “frozen” rent control policies up for removal or adjustment.
- Illinois | Repeal Rent Control Preemption: Illinois currently has a statewide ban on rent control. If the repeal passes, it would remove that ban.
Rent control limits the amount a landlord may charge for renting out a home, apartment, or other types of real estate. It creates a price ceiling either by capping the amount that may be charged or creating limits on the rate at which rent can be increased for existing tenants. Rent control is usually linked in some way to inflation, and supporters of the concept believe it helps create a larger stock of affordable housing options for tenants. Critics argue that rent control distorts the market, encourages landlords to evict tenants instead of work to retain them in some cases, prevents property owners from creating sustainable long-term income using rental strategies, and often stunts the growth of new-housing inventory.
Issues this November:
Proposition 10/Repeal of the Costa Hawkins Act (California)
California passed the Costa Hawkins Act in 1995. Costa Hawkins provides exemption from rent control for rentals built after 1995 and nearly all single-family residences. It also permits landlords to raise rents to market rate levels in the event of a vacancy rather than linking controlled rent rates to a unit (a common practice prior to the implementation of Costa Hawkins).
What happens if Proposition 10 passes?
Proposition 10 will repeal Costa Hawkins. It does not prohibit rent control in the future, and the repeal could conceivably lead to expanded rent control in cities if local policymakers believe the move will increase the supply of affordable housing. However, this could have the opposite of the desired effect. Many analysts, including those at California’s Legislative Analyst’s Office, believe expanding rent control discourages new construction because it makes new rental housing a less profitable venture.
What if Proposition 10 fails?
If the proposition fails, policymakers will likely seek other ways to create a larger affordable housing inventory. Those methods might include relaxing the permitting fees and processes required for new construction and proposing amendments to Costa Hawkins for next November.
Repeal of Rent Control Preemption (Illinois)
The 1997 Rent Control Preemption Act prohibits regulation of any form on residential and commercial rent prices in Illinois. Critics of the act say responsible rent-control measures in markets like Chicago could help residents remain in their communities and save money for down payments on a home. Two bills introduced to the Illinois General Assembly this summer would overturn rent control preemption and implement the initial stages of rent control if they pass.
What to Watch:
While voters will not weigh in via ballot directly, elections of other officials, including the state’s governor, will directly affect whether the legislation in the General Assembly passes in the coming months. Election of more officials who support some form of rent control will likely result in forward movement of legislation to implement such programs in some form. Election of officials who believe rent control may damage the local housing economy and stunt new construction may send those bills back to the drawing board.
Factor #2: Tariffs & Trade Policy
Tariffs are taxes on imported goods. They serve as a means for governments to create revenue and affect domestic and international trade. For example, raising tariffs on imported goods may lead consumers to buy similar domestic goods instead. However, the relationship between tariffs and support of domestic products has become more complicated as the manufacturing process for many products has become more complicated. Today, many items are produced in part overseas and in part at home, which makes the effects of tariffs on the domestic economy more difficult to predict.
The Issue Today:
Under the sitting presidential administration, tariffs play a significant role in trade policy. The Trump administration has enacted a number of tariffs on a wide variety of imports, partially in an attempt to strengthen domestic producers’ position in those industries and partially as part of a larger drive to reposition the United States on other related trade issues.
Tariffs currently affect real estate investors most directly when it comes to the cost of materials for rehabs, renovations, and new construction. According to the Associated General Contractors of America (AGCA), existing and proposed tariffs on lumber imports, steel imports, aluminum imports, and flooring products and components involved in the production of luxury vinyl plank and tile have affected the cost of materials already. The AGCA warned in a public statement that contractors will likely continue to offset price increases in materials by raising the cost of their services or opting not to fund purchases of improved equipment and additional personnel. Both reactions will contribute to the ongoing construction labor shortage in the United States at this time. On the other hand, domestic producers of these goods say that if the tariffs remain in place or are enacted in the coming months, their production costs and, by extension, the pricing on their materials, could fall in response.
What to Watch:
Tariffs are not on the ballot, but politicians on both sides of the issue are. By placing pro-tariff individuals in office, many analysts and political pundits argue voters implicitly endorse the practice and vice versa. If supporters of tariffs tend to lose their political offices in November, analysts predict the current aggressive trade policy might be toned down. This could affect the cost of materials used in housing nationwide and, furthermore, it will also impact local and regional markets that may have benefited from domestic producers’ optimism about the effects of the tariffs. Those domestic producers may slow expansion or hiring if they do not believe the protection provided by tariffs will last.
Factor #3: Zero Net-Energy New Home Construction
Markets in the Spotlight:
- Nevada | Question 6: Question 6 legislation would increase mandated minimums for obtaining electricity from renewable energy sources, thereby affecting utilities costs.
- Arizona | Proposition 127: A ballot initiative that will require Arizona utilities to generate half of their energy through renewable energy sources such as solar and wind by 2030.
- Alaska | Fairbanks mayoral election: Candidates are making renewable energy a key point in debate.
Zero net energy (ZNE) is defined by the U.S. Office of Energy Efficiency and Renewable Energy as construction enabling a building, when complete, to “produce enough renewable energy to meet its own annual energy consumption requirements.” Zero-energy buildings (ZEBs) use cost-effective measures combined with on-site renewable energy sources, such as solar panels, to achieve the goal of zero net energy consumption.
Why is this a midterm issue?
Earlier this year, California made headlines for passing legislation requiring all new residential construction to be ZNE by 2020. Other state and local politicians have proposed similar measures that would require certain sectors of the housing market to begin incorporating energy-efficient systems. For example, in Milwaukee, Wisconsin, newly proposed legislation would require small residential construction to include solar-powered energy systems.
The California measure has also led manufacturers of products for home products, such as lighting systems, to create more “classes” of energy-efficient and -compliant offerings that may be more expensive to purchase even if the upfront costs are made up over time. This affects costs of materials nationally even if those products are not mandatory in all construction.
Critics of this type of legislation and policy say that ZNE mandates like those in California inhibit the growth of the affordable housing inventory. They also warn this type of initiative, if improperly implemented, can displace large portions of the population that cannot afford costlier upfront housing costs.
What to Watch:
In the event that politicians supporting ZNE mandates and related legislation take or retain office in November, this will likely shape national leaders’ willingness to tackle federal energy legislation and, by association, environmental tax policy and other environmental issues that could affect home values regionally and the cost of construction and homeownership nationally.