Clap If You Believe In Rent Control

While idling my brain on Twitter, I stumbled across Jordan Fraade promoting his Baffler article about how New York needs rent control. It’s a little like discovering a grown-up who believes in fairies.

For something that so deeply affects the workings of the city’s housing market, rent regulation in New York is widely misunderstood. At a recent event put on by the Pratt Institute and the NYC Planners Network, a group of progressive city-planning professionals, housing advocates on the panel spent as much time explaining how rent regulation works as they did explaining why we should keep it.

The only sensible response to rent control is to get rid of it. All of the discussion should be about how to phase out rent control in a way that doesn’t produce painful market shocks that devastate poor tenants.

Rent stabilization is less stringent; it covers multi-unit dwellings built between 1947 and 1974, and yearly rent increases are set by the Rent Guidelines Board (currently 1 percent, the lowest in fifty years).

A board that oversees pricing. And apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next. This is how the Soviets managed their economy, and look where it got them.

In rent stabilized apartments, tenants have the right to renew their leases, and have more leeway than market-rate tenants when pursuing legal remedies against their landlords if they are being mistreated. (Rent-stabilized tenants have historically and frequently been targets of landlord harassment.)

The linked story is about a building owner with a criminal history who is harassing tenants by degrading the quality of the building. This is to be expected under rent control.

Property owners want to earn a profit. That’s why they buy apartment buildings. When owners can’t increase their gross income by improving the building and raising the rent, their only choice is to cut costs by skimping on building maintenance and operation. They fire the doorman, let the carpets wear thin, and give tenants buckets to collect water when the roof leaks. They switch to lower wattage lights in all the public areas. They shut down the elevator, close the laundry room, and stop replacing busted security cameras. They let repairs go as long as possible, and they use substandard materials and unlicensed contractors. If anyone complains or makes trouble, they get harassed into leaving.

That’s a shitty way to run a building, and decent landlords will try not to run that kind of building. Of course, the easiest way to avoid being a shitty landlord is to not be a landlord at all. Thus rent control discourages good people from owning rental properties, pretty much guaranteeing that landlords are disproportionately likely to be shitty.

According to the panelists, renewing both these regulations is their first priority, simply because they affect so many people—2.5 million New Yorkers, living in about 45 percent of the city’s apartments.

This is why we can’t solve the rent control problem the easy way — by letting it expire. Disrupting the housing of 2.5 million people all at once would create havoc, with some tenants of formerly rent-controlled apartments being forced to seek housing in lower-cost neighborhoods, bidding up the rental prices there. Eventually some tenants will pay more, some tenants will leave, some landlords will lower their rents, and some developers will build new housing until the turmoil settles. But a good plan for getting rid of rent control would get the city to that same endpoint without all the disruption and pain in the middle.

And despite a media tendency to hold up middle-class Manhattanites as the face of rent control, rent-regulated tenants are disproportionately low-income people in low-income neighborhoods. This fact led Delsenia Glover of the Alliance for Tenant Power to make perhaps the most dramatic prediction of the night: if rent regulation is not renewed, low- and moderate-income people will be forced out of New York within a decade.

Either that or New York would have to come up with realistic housing policies. Which is what they do in the vast majority of the U.S. that doesn’t have rent control and yet still have low and middle-income residents living in apartments they can afford. It’s not like free-market housing is a wacky libertarian idea that’s never been tried.

The main problem with rent control in New York is that the system is administered in the clumsiest way possible.

No. The main problem with rent control in New York is the rent control.

Even worse, according to Harvey Epstein of the Urban Justice Center, 250,000 units have been removed from the rolls of rent-stabilized apartments over the years. This happens in a variety of ways, most notably through “vacancy decontrol,” which infamously allows landlords to make an apartment market-rate once the rent reaches $2,500 per month and the tenants move out (Mayor de Blasio has come out in favor of repealing this rule). No matter how it’s done, though, once an apartment becomes market-rate, it stays that way for good.

If you’ve been following along, New York rent control means that if you own apartments that rent for less than $2500 a month, your rent increase last year was capped at 1 percent. That’s less than the inflation rate of 1.6 percent, so your real income actually went down. On the other hand, if you own apartments that rent for more than $2500 a month, you can raise the rent as much as the market will bear.

That leads me to a question: All other things being equal, if you were investing in New York real estate, would you rather invest in units that rent for less than $2500 or more than $2500?

And then I have a followup question: Can you think of any reason why New York might be experiencing a shortage of affordable rental units?

Which leads us to…

The roots of 421a are in the distressed New York of the 1970s, when city leaders feared developers would never again build new housing. In some neighborhoods, 421a comes with no strings attached—if you build, you get a tax break. In other areas, developers can only take the tax break if they include 20 percent affordable housing in a project.

Either way, the result has been a bonanza for builders, allowing luxury towers like One57 to be built mostly tax-free. Williams estimated that the city loses $1.1 billion per year to 421a, and has only gained a measly 12,000 units in exchange. Most housing advocates in the city want the program to be significantly scaled back or scrapped altogether.

Having made the construction of affordable housing unprofitable because of rent control, the city then sets up a program to give away taxpayer money to developers. Through the miracle of regulatory capture, however, many of those developers aren’t actually using the money on projects that advance the affordable housing goals of the program. The programs do manage to further tie up the city’s housing stock in regulatory knots.

Which leads to…

Noting that 90 percent of all tenants in housing court appear pro se, Epstein said that New York’s current system for resolving housing disputes is “complaint-driven,” explaining that “we’ve set up a structure that prevents people from preserving affordable housing because no one’s looking over the landlord’s shoulder, and they know it.”

In a functioning free market, the people “looking over the landlord’s shoulder” are the tenants. If they don’t like the way their landlord is treating them, they can move out. If the vacated unit rents for a $1000-a-month, and it takes the landlord a month to get somebody in it, that’s equivalent to fining the landlord $1000 for mistreating the tenant. Landlords will work hard to avoid that, if not because they’re nice people, then because they like their money.

That incentive system breaks down under rent control. The threat to move out and stop paying rent is less effective when the rent is low because the landlord has less to lose. And if the tenant has locked in a good rate, the threat to leave isn’t very credible since it would mean moving someplace with higher rent. Actually, since decades of low rental rates have discouraged investment in rental properties, where would the tenant go? Tenants are stuck and the landlords know it, so they don’t have to try very hard to hang onto good tenants.

Without the discipline of the market, tenants’ rights advocates are stuck proposing layer after layer of regulations and procedures, each one trying to offset the perverse incentives of what came before.

There has been plenty of advocacy around the rights of rent-regulated tenants—like this spring’s battle to renew state rent laws, and last year’s unsuccessful fight to get a rent freeze. But there’s been little visible work done on behalf of tenants who are still a majority of the city’s renters: those who don’t live in rent-stabilized or public housing. I asked Williams after the panel what market-rate tenants might be able to expect after this spring’s battles, and she was blunt: “They’re screwed.”

I’d like to hear more of an explanation of why Williams thinks that. According to Landlord.com only four states have rent control — California, Maryland, New Jersey, and New York — along with the District of Columbia. The rest of us live without rent control, and we’re not exactly living in a hellscape. In fact, Googling around for the “Top 10 priciest U.S. cities to rent an apartment,” seven of them — San Diego, Oakland, San Jose, Los Angeles, Washington D.C., New York City, San Francisco — have some kind of rent control.

That doesn’t mean that rent control causes higher rents — the causality could go the other way, with high rents making it politically likely that a city will adopt rent control — but it does cast doubt on the long-term effectiveness of rent control.

Furthermore, some basic economics tells us that artificially capping the price of a good is likely to create a shortage. We had a spectacular example of this during the 1973 oil crisis, when the government respond to shocks in the oil market with price controls. As with New York real estate investors who stopped building rental units, oil companies stopped importing as much oil, and gas stations started running out of gas at the pumps. Even with alternate-day rationing, there were long lines for the gas stations, and fights would break out between people waiting in line. The trucking industry was especially hard hit by the high prices and shortages, and tensions rose to the point that there were shootings and bombings.

In the housing production chain, renting an apartment to a tenant is only the last step, and trying to force prices lower there is only going to work if the production process itself can actually be modified to operate less expensively. If New York isn’t producing enough affordable housing, they place to fix it is further back in the process. You have to figure out what barriers are keeping the market from producing the low-cost housing that is so clearly in demand.

We do this all the time with other products. Just in my lifetime we’ve figured out how to make lots of things less expensive — food, clothing, appliances, mobile phones, televisions. The most extreme example I can think of is computers. When the Cray 2 supercomputer was released in 1985 it cost $40 million in today’s dollars. Equivalent computing power costs maybe $800 today (and it’s more reliable and fits in your briefcase). But we didn’t hammer down the cost of computers by having an Alliance For Computer Users that pressured the Computer Pricing Guidelines Board into lowering the caps on computer prices.

And that won’t work for housing either.