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Winter 1991
   
Does Rent Control Help the Poor?
Gerard Mildner, Peter D. Salins
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Peter Salins is chairman of the Department of Urban Affairs and Planning at Hunter College, and co-chairman of NY’s editorial board. Gerard Mildner is an adjunct faculty member in economics at New York University and Hunter College, and a doctoral candidate at NYU. This article is adapted from the authors’ forthcoming book, Scarcity by Design.

One of the new hit movies of the fall season, Pacific Heights, is a rent-control horror film, in which Michael Keaton plays a deranged but clever tenant bent on terrorizing his yuppie landlords. No matter what he folds, spindles, or otherwise mutilates, they cannot get rid of him. The great mystery about Pacific Heights is not its plot, the general outlines of which are perfectly familiar to anyone experienced in the ways of rent control, but its location: It is set, for some reason, in San Francisco. This is obviously unrealistic: By all rights this movie belongs to New York City.

By now every New Yorker can reel off rent-control horror stories, and yet rent control retains its political popularity. Why? Surely not just because many influential New Yorkers are tenants paying below-market rents. The more idealistic, and seemingly more persuasive, justification for rent control over the years has been that it makes housing affordable for the poor and working class. Isn’t doing right by the poor worth a few horror stories?

But the horror stories, bizarre as they may seem, are not aberrations. The most distressing and consistent reality of rent regulation is what we might call the “all the wrong people” syndrome. With almost faultless precision the rent-regulation system bypasses, or hurts, those it was meant to help, and heaps most of its benefits on relatively privileged New Yorkers. The system does not help the poor; it particularly penalizes new New Yorkers, who have always been vital to the city’s economy; and it encourages landlords and tenants alike to behave in ways almost perfectly calculated to tighten the housing market still further and raise rental prices higher. There is no trade-off between horror stories and help for the poor; the help never comes and the horrors remain.

The abiding sin of rent control is that it misallocates resources. It is a truism, for instance, that housing in New York is expensive. But the truism is not true. Housing in New York is cheap, or at least New York has lots of cheap housing, and average prices are reasonable. The problem is that the wrong people live in that cheap housing, while many others are stuck in housing they cannot really afford.

In the last year for which data are available (1987), the median price (including utilities) for apartments in New York City was $395 per month. Fewer than 29 percent of apartments in New York rented for more than $500 per month, and only 8 percent of all units rented for more than $750 per month, according to a report authored by housing expert Michael A. Stegman and published by the city’s Department of Housing Preservation and Development. Nor have rents increased disproportionately in recent years. Allowing for inflation, rents in New York City are only 12 percent more expensive today than they were 15 years ago. Between 1975 and 1987, the median rent rose from $171 to $395, or 131 percent, while consumer prices in general rose 105 percent. Manhattan is the most expensive borough with a median rent of $408 and the Bronx the cheapest at $359.

So much for the good news. The bad news is that after years of rent control, rents in New York bear little relation to tenants’ ability to pay.

The best test of the relationship between housing costs and ability to pay is the rent-income ratio, or the portion of a renter’s income he spends on rent. New York’s median 1987 rent of $395 bears a healthy relation to the median 1987 renters’ household income of $16,000, yielding a rent-income ratio of .296. (Again the figures come from the city’s own Stegman report.) Theoretically, then, the typical family in New York should be spending 29.6 percent of its income on rent, within the 25-30 percent range recommended by home economists and federal housing officials. However, this statistical artifact—the median price divided by the median income—would be an accurate picture of the city’s housing market only if the rich were paying high rents and the poor low ones. That is not the case. The well-to-do, the great beneficiaries of rent control, mostly pay far less than 29 percent of their income for rent, while the poor are routinely confronted with rents they cannot afford.

The city’s 1987 Housing and Vacancy Report examined the relationship of prices to income by dividing the renter population into ten different income classes and computing the average rent-income ratio for each class. The results clearly show that rent control has failed in its primary mission:

• The typical household in the highest income decile of renters, with a mean household income of $62,012, paid an average rent of $672 per month, or 13 percent of its income.

• A typical moderate-income renter household with a mean household income of $22,303, paid a rent of $446, or 24 percent of income.

• A typical lower-income household with a mean household income of $14,127, paid an average rent of $338, or 33 percent of income.

• A typical poverty-level household (in the second decile), with a mean income of $5,361, paid a rent of $259, or a backbreaking 58 percent of income.

In other words, while the most affluent households in New York had an average income over 12 times the poorest, they paid only two and a half times as much rent. And these averages conceal even more glaring inequities: Some affluent families devote less than 5 percent of their income to rent, and many poor ones pay more than 70 percent.

To be sure, nearly everywhere in America the rich spend a smaller percentage of their income on rent than do the poor. But nationally the disparity is somewhat smaller than it is in New York. The important point, however, is not that under rent regulation New York’s poor do somewhat worse than the rest of the country, but that they were supposed to do much better. If the net result of rent regulation is to make the rental market somewhat harder on the less fortunate, and easier for the rich, why have rent control at all?

Because rent regulation helps “all the wrong people,” it dispenses its greatest benefits to Manhattanites. Only in Manhattan are regulated rents far below market levels. This is the conclusion of the most recent study to examine the geographical distribution of rent-control benefits, conducted in 1989 by Henry O. Pollakowski at Harvard’s Joint Center for Housing Studies. For the city as a whole, the mean rent for all unregulated apartments was only $44, or 15 percent more than the mean rent for regulated apartments. But in Manhattan’s better neighborhoods, rents for unregulated apartments ranged from $368 to $432 higher than comparable regulated rents. Excluding Manhattan, the mean rent-regulation subsidy was actually a negative $9, that is, rent-regulated apartments were, on average, entitled to rents $9 higher than the market price. The price-control “windfall” is largely a Manhattan—specifically, a Manhattan below 110th Street—phenomenon.

Manhattan, outside of its remaining slums, is largely the redoubt of the well-to-do. The average household income of the “Manhattan core” in 1987 was $35,000, while that for the rest of the city was under $20,000. Only 13 percent of Manhattan-core families were in poverty, compared to 23 percent for the rest of the city, and most of Manhattan’s poor were living in pockets of inferior housing without large rent-control discounts.

Why do wealthy Manhattanites reap most of the benefits of rent regulation? To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment becomes vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy if they move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment. The result, as New York City developer Seymour Durst puts it, is that, “We’ve got plenty of low-income housing in New York. We’ve just got upper-income people living in it.”

The Young and the Rentless

That rent control helps the rich rather than the poor is the greatest perversity of the system, but not necessarily the one most damaging to the city’s economy or its future. The vitality of New York has always depended very substantially on newcomers, not only immigrants from overseas, but talented people from around the country who are attracted to New York by its great professional opportunities. As the nation shifts to an information economy, and human capital becomes the key factor in production, it becomes ever more important to keep New York a mecca for new talent. Rent regulation, however, is almost perfectly designed to punish newcomers.

Rent regulation has kept vacancy rates low and housing scarce. So new New Yorkers have a choice between paying exorbitant rents for scarce (by national standards) unregulated apartments, or entering the frantic competition for even scarcer regulated apartments. And, as the young searchers soon learn, a controlled apartment may cost a new tenant a great deal more than the landlord gets in rent.

When Elizabeth Green*, a 24-year-old secretary, moved to New York City, she knew that living costs were high, but assumed that she could find an apartment for $500. What Elizabeth found is that in Manhattan $500 does not rent an apartment any bigger than a closet.

“When I came from Ohio,” Elizabeth recounts, “I expected my costs to be double, which they basically are. So is my salary. But my rent is over three times what I had paid before.” She pays $495 for her share of an apartment on East 91st Street, but for her, the cost of rent was just the beginning.

* Her name has been changed.

I went to a roommate service. Their fee was $250, including a membership fee of $35 and two payments of $62.50 after they placed me. Then there was the security deposit and the first month’s rent. So it cost me about $1,500)ust to move in.”

The situation is even worse for newcomers who aspire to apartments of their own. Available studio apartments can fetch between $600 and $900 a month; one bedrooms in safe neighborhoods go for $1,000 and up, while two bedrooms can rarely be found for under $1,500. This is far more than the cost of comparable apartments in other major U.S. cities, even such high-demand ones as San Francisco or Washington, D.C. (Prices have softened a bit in recent months, but not much, and in any event a major recession is a high price to pay for a slightly less overpriced rental market.)

There is an additional cost of finding an apartment in Manhattan: the broker’s fee. Because so few apartments are available, a broker is usually needed to get up-to-date information on all but the least desirable listings. Since a broker’s fee (which in some cases includes an illegal kickback to the landlord) runs about 15 percent of the first year’s rent, prospective New Yorkers may have to pay another $2,000 up front.

Sublets, particularly of regulated apartments, often carry a similar cost: “key money,” the additional cash fee the new tenant must pay the old tenant to do the deal. One new Manhattanite recently told us a classic story: A sublet was available on the Upper East Side for the legal limit of 10 percent above the regulated rent, or about 60 percent of the market price. The catch? The winning applicant would not only have to pay a year’s rent in advance, but (in place of key money) would have to buy a $2,500 painting from the legal tenant, an artist.

Add in the usual security deposit of one to two months’ rent and the first month’s rent and moving into an apartment can easily cost a new New Yorker $5,000. Five thousand dollars is a major hurdle for many prospective (and even longtime) New Yorkers. How many young workers are eager to move to New York, with all its taxes, crime, and congestion, knowing that they will have to come up with $5,000 just to move in?

In the Warehouse

As Moscow shoppers know, the worst result of price controls is scarcity, which New York’s housing market has in abundance. The best overall measure of the scarcity of housing is the vacancy rate. The official vacancy rate of New York’s rental housing—as reported by the most recent city-commissioned Housing and Vacancy Survey—is 2.5 percent, the lowest among major U.S. cities. The average vacancy rate for all U.S. cities is 5.7 percent, according to the U.S. Commerce Department’s most recent American Housing Survey for the United Stated. Chicago, so frequently compared to New York, had a vacancy rate of 7.5 percent.

The official vacancy rate does not tell the whole story. That statistic is based on the number of apartments that are vacant and available for rent. Oddly enough, despite a tight housing market, New York has just as many apartments that are vacant but unavailable for rent.

Why are so many unoccupied apartments kept off the rental market? Some are dilapidated or in abandoned or tax-foreclosed buildings, and hardly qualify as housing. But according to the Stegman report, a fairly large number-53,000, or 3 percent of all rental housing units-are perfectly habitable, if not downright desirable. Roughly half of these apartments are really already en route to occupancy, with executed leases or renovations in progress, and they should be counted in the available category. But the other 26,000 apartments are unavailable for two reasons: Their out-of-town tenants are holding onto them for occasional use, or their landlords are “warehousing” them, keeping them vacant for a future co-op conversion or some other deal more attractive than renting controlled apartments. (See Table 1).

If all currently unoccupied apartments were put onto the rental market, New York’s vacancy rate would rise to almost the national average. In other words, much, if not most, of New York’s housing crunch is caused by landlords and tenants who keep existing, unoccupied housing off the rental market.

Landlords and tenants in New York keep housing off the market because rent regulation makes it attractive to do so. Out-of-town tenants can afford to keep “pied-a-terres” only because rent control makes them so cheap. Surely the purpose of rent control was not to provide people with country or retirement homes a comfortable New York retreat. Likewise, warehousing apartments is extremely expensive. Only the truly awful option of renting at far below market to tenants who may never leave drives landlords to the extremes of not renting their apartments at all. Once again rent control makes “all the wrong people” do “all the wrong things. “

House Wrecking

In 1939, three years before rent control was introduced, Tony Nuzzo’s* father managed to buy a five-story apartment building on Mott Street in Chinatown. Tony and his wife have been managing the building for his family since 1982. The rent regulated building is located in a prime location, but the Nuzzos are losing money and may have to walk away from it.

“We have 35 apartments in the building, totalling 120 rooms,” he explains. “Twenty-two out of 35 apartments have rents of $100 or less per month, with the highest rent being $400 and the lowest $41.25 for a three-room apartment.” Rent regulations allow a 3 percent annual increase, less than inflation in most years.

Tony works during the day as a steelworker and moonlights as a boiler repairman, in addition to working on the boiler in his own building. Tony is hardly the prototype of the greedy absentee landlord. Many of his tenants, who are by no means poor, pay only a tiny fraction of their income in rent.

“I have one tenant who’s a union electrician, which means he’s making at least $20 an hour. His wife and his daughter work, and his rent is 55 dollars and 19 cents. I mean, he’s a nice guy and everything, but if I even try to raise his rent six cents a month, I would get such a squawk.”

* The name has been changed.

There are two ways Tony can avoid losing his building and maybe even make money on it. The current tenants can move out or die, allowing Tony to raise the rents to market levels (after which they will be governed by rent stabilization), or he can take the building co-op. But most rent-controlled tenants are very slow to leave. The system thus gives Tony enormous incentives to drive his tenants out of the building by cutting services or even by active harassment. Some landlords take that course, but Tony refuses to sink to that level. Instead he has tried to buy out his tenants, but rent control gives tenants a deal Tony cannot beat.

“I offered them $20,000 each. I didn’t have it, but I offered it to them. They turned me down. If they had to go find a building on the open market at $1,000 a month, that would last them less than two years. I approached them about converting to condos or co-ops. But who would give you an insider price of $40,000 when they are paying $40 or $60 a month rent? That’s almost 100 years of rent. This situation is impossible.”

Tony’s other option, which he also resists, but which history suggests will be forced on him, is to cut corners on maintenance in the hope his bank account will outlive his tenants. Thousands of small landlords like Tony, the sort of people who for generations were the bulwark of New York’s housing stock, have done exactly that: Again the wrong people forced to do the wrong thing.

As a result, New York’s housing stock is in much worse shape than housing in other U.S. cities, large or small. The Federal Government’s American Housing Survey for the United States shows that New York City comes off badly by virtually every measure of housing quality, compared with cities in general and even with Chicago, another big city with an old housing stock and an underclass population. (See Table 2.)

On every index of housing quality—all of which are related to maintenance-New York fares badly; twice as many apartments in New York have cracked walls, broken plaster, holes in the floor, and exposed wiring than other American cities. A quarter of New York apartments have broken heating systems, compared with less than 10 percent in other American cities. Even compared to Chicago, New York’s rental housing is badly maintained.

The case that rent control is corroding New York’s housing stock is bolstered by data for owner-occupied housing, for which the differences between New York and other cities are much less than for rental units. (See Table 3.) In fact, on three of the eight indices of owner-occupied housing, New York shows up better than the other cities. In all cities owner-occupied housing is better maintained than the rental stock, but when rent regulations are imposed the discrepancies become much larger.

The record is perfectly clear. Rent control does not help the poor; it heaps enormous benefits on those who do not need them, and worsens the lot of the vast ranks of the unlucky and the unconnected. It punishes the sort of landlords we need more of, it encourages good landlords to become bad landlords; and in the midst of a housing crunch it encourages tenants and landlords alike to hoard unoccupied apartments.

Rent regulation, in short, does all the wrong things to all the wrong people. Providing decent housing for the poor is a noble goal, and there are sensible ways to go about it. Rent regulation is not one of them.

 

 

 
The latest data show the poor get poorer and the rich get better apartments
City Journal Winter 1991.
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