UNDER DISCUSSION

  • Rent Regulation and the Housing Market

Arguments Against Rent Regs are Vacant of Facts

Some say New York could relieve high rents by removing rent regulations. And other people say the world is flat.

When Mayor Bill de Blasio speaks in favor of "affordable housing," it's important to ask exactly what he means. In New York City "affordable housing" and "rent stabilization" are pretty much one and the same. But there's an active political lobby that wants to see the end of rent regulation to increase rents. These real estate PACs outspent many candidates in city council races. They hope politicians repay their generosity through more permissive zoning, fewer landmark restriction, government subsidies, and—this is a key to maximizing profit—the gradual but complete abolition of New York City's rent regulations.

It's not news that landlords oppose rent regulations. But what is surprising is their devious argument for convincing renters to join their cause. Landlord organizations say if New York ends rent regulation and creates a "free market," your rent might go down. Why? Because, as the Real Estate Board disingenuously say, renters not covered by rent stabilization subsidize those who are.

Of course this is not true. Rent in the City is not a fixed-sum game. We could pay more rent; we could pay less. But landlords find it useful to blame poor tenants for the exorbitant rent they charge to the slightly better off.

Two-thirds of New Yorkers rent but just 39 percent of apartments are unregulated, market-rate units. Forty-five percent of rentals, just under one million apartments, are protected by rent stabilization. Stabilized rent still goes up, but at a regulated annual rate of (usually) 3 to 5 percent. Along with protecting tenants from huge spikes in rent, stabilization gives tenants the right to renew their lease. This guarantee of stability is often more important than saving a few hundred dollars a month.

Rules about which apartments are rent stabilized are complicated, but generally apply to large buildings built before 1974 and to new construction which benefits from taxpayer money (subsidies and/or zoning breaks). It is common for buildings to have a mix of stabilized and market-rate apartments because regulation (usually) ends when rent reaches $2,500 per month. Rent stabilization does not apply to buildings with fewer than six apartments.

Outside of wealthy Manhattan, rent-stabilized apartments are, on average, $250 cheaper than market-rate apartments. (In Manhattan south of 96th Street, this differential balloons to $1,245.) But they still make money. Large property owners complain about the onerous financial burdens of regulation.

The New York Times quoted a man whose family owns nine Brooklyn buildings with 150 apartments saying, "These small rent increases just don't cut it." Some of his apartments, he said, brought in rent below market rates. Such limits on his rental income, he said, "made it hard to cover maintenance expenses and taxes."

When you hear a family with upwards of $20 million in residential property pleading hardship, think of a used-car salesman insisting he takes a loss on every sale. It ain't true!

According to 2011 data, 93 percent of rent-stabilized buildings (and 94.5 percent of all residential buildings) turn a profit. The average rent-stabilized building generates a monthly profit of $400 per apartment. On top of this most buildings appreciate over time.

Nobody is forced to own a rent-stabilized residential building, yet investors continue to buy these buildings. Why? Because rent-stabilized buildings make money. Large residential buildings are often owned by investor groups who care only about profit. If these groups could make more money elsewhere, they would. But it just so happens that New York's large rental buildings—even rent-stabilized—are a fabulous low-risk investment.

Of course if rent regulation were abolished these buildings would indeed be worth even more. But what is good for investors can make bad public policy. Increased rent would be a transfer of money from the lower and middle classes straight to the rich.

Government-regulated rent and may sound strange to the rest of America since some suburban housing developments still sit half vacant after the real estate crash of 2008. But New York City has an extreme housing shortage. There is almost no excess housing supply or empty lots on which to build. With a shortage of a necessity, normal laws of supply and demand don't work. Regulation is needed to keep free-market greed in check.

Zoning rules have been relaxed to increase urban density and residential supply. This probably helps, but it does not come close to meeting demand. Over the past twenty years, one million new residents have moved into New York City. And housing supply and rent can increase in synch. It's called gentrification.

The fixed cost of supplying a two-bedroom apartment in New York City is probably around $1,500 a month (including Manhattan property tax). But with no extra supply, market-rate rents do not stabilize around some concept of true worth. Unregulated rent is less about the worth of an apartment than the wealth of other renters. What makes your rent go up isn't your neighbor paying less but somebody with more disposable income needing a place to live.

Already one-third of New Yorkers spend more than half their income on rent. But unlike landlords, tenants don't have that the luxury of choice. Between 2005 and 2011, household incomes in New York fell while median rents still increased 10 percent.

Cambridge, Massachusetts, where I used to live, is often cited as a case study for successful rent deregulation. In 1994 a majority of city residents voted to preserve rent control. But they were politically outmaneuvered by Republicans who banned city rent regulation through a statewide referendum. Before Cambridge deregulation, rent-controlled apartments in Cambridge were 25 to 40 percent cheaper than free-market apartments.

Like in New York City today, it was claimed that ending rent regulation would, through some mystical free-market hand, cause a convergence of rents. Of course that didn't happen, because that's not how rent in a tight housing market works. Without regulation, all rents went up. A lot.

Those who could afford to pay more, did. But many families didn't benefit from, as one study put it, "increased housing quality" because they couldn't afford to pay more rent. This is the lesson for New York. Working-class families were effectively evicted, banished from the city. Very quickly, Cambridge became a wealthier and more culturally homogenous place.

Rent regulation can indeed have a negative effect on property values. But within reason, that's not a bad thing, since higher property values and increased rents go hand-in-hand. If the goal is affordable rent, more slowly increasing property value isn't a bad thing (it also helps protect property owners from their own greed in the form of real-estate bubbles and crashes).

Still, landlords fight for higher rents and rent regulation gets smaller every year. New York City needs Mayor de Blasio to fight for the city by expanding rent regulation to cover all large apartment buildings, old and new. And the ceiling for rent regulation should increase along with rent. Not only is this morally correct, New York City's economic and cultural diversity depend on rent stabilization.



Edward Maloney

Thank you for one of the most intelligent, logical and factual articles on Rent Regulation. Regulated housing has proven to be the single best if not the only preserver and protector of affordable housing. What is needed is universal rent regulation for all tenants. And the single most important thing that Mayor DeBlasio can do if he is sincere about wanting to protect and create affordable housing in New York City is to demand that Albany repeal the Ursdadt laws to bring home rule to New York City concerning rental issues which will stop city residents being held hostage to the whims and industry bought votes of upstate politicians who don't represent many tenants and are easily bought off by real estate industry campaign contributions.



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