City Journal

Peter D. Salins
Rent Control’s Last Gasp
At long last, Albany is poised to liberate the city’s housing market—and New Yorkers will benefit greatly.
Winter 1997

At long last the  seems at hand—something two generations of housing experts thought they’d never live to see.

In Albany and elsewhere, the complex drama of achieving it—which will be filled with hidden machinations, unlikely bargains, and plenty of scare talk—has already begun. Senate Majority Leader Joseph Bruno, without whose support rent regulation cannot survive, has announced his willingness to let it die on the day in mid-June when it automatically sunsets unless renewed. Governor Pataki, on the record as opposed to rent control, has replied that phasing controls out may be better than ending them suddenly. The New York Times, somewhat unexpectedly, has given its editorial blessing to some sort of gradual demise, while New York City politicians have declared their determination to hold the line, knowing that for many of their constituents retaining controls is the only issue. When all the deal making is finally accomplished in Albany—when Assembly Democrats have offered up as yet unnamed concessions to Republicans in exchange for going easy on rent-control reform—some significant change is bound to emerge, but its precise shape is guesswork for now.

That discontinuing rent controls is even on the agenda in New York is something of a miracle. Rent regulation has been a fixture of life in the city for decades, seemingly no less permanent than yellow taxis or the Knicks. No one thought it could ever be gotten rid of.

So what happened? For one thing, the state has watched as one liberal redoubt after another—Massachusetts, California, Washington, D.C.—has eliminated or scaled back rent regulations in recent years, without creating the Dickensian misery predicted by the hysterical defenders of controls. As Boston Globe columnist Jeff Jacoby writes, “Remember the housing crisis that exploded in Boston after voters approved Question 9 [in 1994] and abolished rent control in Massachusetts? Remember the tidal wave of evictions, the masses of poor senior citizens kicked out of their homes? . . . Of course you don’t. It never happened. There was no crisis.” And there wouldn’t be one in New York either, as many of the city’s residents have come to realize.

Moreover, it has finally dawned on many New Yorkers that rent controls, far from solving the city’s housing problem, are a prime cause of it. As New York’s Citizens Budget Commission has put it, “The most fundamental criticism of rent regulation is that it perpetuates the very problem it was designed to address: a housing shortage.” Indeed, with 1.1 million rent-regulated apartments, the city is a showcase for the distorting effects of controls: a minuscule vacancy rate, middle-class families trapped in apartments too small for their needs, wealthy retirees paying a pittance for three bedrooms, and virtually no new construction to relieve the strain and to upgrade the housing stock. Finding a decent apartment in New York City—and especially Manhattan—is a harrowing ordeal, and New Yorkers are fed up with it.

The regulatory edifice responsible for this crisis started off innocently enough. In the late forties the city decided to continue wartime rent controls, fearing that prices would skyrocket in a market where no new housing had been built for half a decade. But the controls on existing apartments remained in place long after construction revived, so by 1969, rents for hundreds of thousands of new apartments, exempt from controls, far outstripped those of older apartments, still frozen at their 1947 levels. The City Council responded by imposing a somewhat more flexible system called rent stabilization on all rental units not covered by rent control. Today rent stabilization dwarfs rent control, covering over 90 percent of regulated apartments.

Both sorts of regulation provide essentially the same benefits. In the first place, of course, they hold down rents. Since 1970, rent control has allowed a landlord to raise an apartment’s rent by 7.5 percent a year until hitting a “maximum base rent” well below the market price. Prices under rent stabilization are the domain of the Rent Guidelines Board, a body appointed by the mayor. Its determinations have fluctuated wildly over the years, but the overall effect has been to keep rent increases below the rate of inflation and, in the city’s best neighborhoods, far below market levels.

Rent regulation also gives tenants a hefty bundle of entitlements. The most important of these, arguably even more valuable than the limits on rent hikes, is the right of tenants and their relatives to occupy their apartments for as long as they wish, whether their landlords want them to stay or not. This means that landlords have to get the permission of tenants or the state to do things with their property that they could do as a matter of course elsewhere, from performing renovations to tearing down their buildings or turning them into co-ops or condominiums.

Rent regulation in New York still operates under the pretense of being a temporary, emergency measure. The law’s expiration every three years is supposed to give the State Legislature a chance to re-evaluate, but like clockwork the New York City Council proclaims that New York’s housing crisis endures. How does it know? Because for years now, the U.S. Census Bureau’s triennial survey of the city’s housing has found a vacancy rate of less than 5 percent, and this, according to a state commission, is “prima facie evidence of a continued ‘housing shortage.’”

But rent regulation itself helps to create this dearth by putting an enormous damper on housing construction. Developers respond to economic incentives as any other business would, and when they look at rent control, they see a policy that cuts deeply into the profitability of rental properties and discourages affluent tenants with rent discounts from shopping around for the new apartments that developers would build. Why put up a new building under such constraints? Indeed, since the fifties housing construction in New York City has fallen steadily and precipitously. Before rent stabilization arrived on the scene in 1969, New York built 35,000 dwellings a year on average. In the early seventies, the rate dropped to 20,000 a year, and a decade later, to 10,000. So far in the nineties, housing construction has crept along at a dismal pace of fewer than 8,000 units a year, the lowest level since the Depression. This steady long-term trend defies simple explanation—the city’s general economic woes have certainly played a role, as have restrictive zoning, environmental, and building laws—but it confirms what every introductory economics textbook teaches about the effect of rent controls on the supply of housing.

Rent controls also interfere with the dynamics of the housing market in more subtle ways. Because discounts under rent regulation increase the longer a tenant occupies an apartment, they create an incentive not to move that grows stronger over time. The result: little turnover in the housing stock. As the U.S. Department of Housing and Urban Development reported recently, “Even moderate rent-control ordinances reduce mobility noticeably, thereby leading tenants to occupy units whose characteristics are not well-suited to their current circumstances, such as family size and job location.” That’s why so many elderly singles in New York live in spacious apartments while families with two or three children live doubled up with friends or relatives.

Rent regulation has also had perverse effects on the character of housing in New York. Its financial benefits have discouraged millions of New Yorkers from owning rather than renting their homes, leaving them with a homeownership rate of 28 percent, less than half that of Americans in other large cities. And the unqualified right of regulated tenants to stay put has made it impossible for owners to tear down their buildings when they are half empty or no longer financially viable. There’s only one avenue open to disgruntled landlords who want to get out of the housing business: abandonment—which explains why New York City has come to own 40,000 apartments and inherits an additional 5,000 to 10,000 units a year.

What is perhaps most galling about rent regulation in New York is that the housing scarcity it generates affects the entire city while its benefits fall to a select few. Cocktail-party talk about movie stars who pay a song for luxury apartments isn’t so far off the mark. The greatest subsidies go to stable households living in desirable apartment buildings and neighborhoods, a class composed mainly of affluent whites, usually singles or couples, often elderly. At the same time, most poor and minority families, especially large households with children, don’t benefit in the least from rent controls.

A number of studies have tried to figure out the full extent of this inequity, calculating the subsidy—that is, the difference between the maximum rent for a regulated apartment and the actual rent for a comparable unregulated unit—enjoyed by New Yorkers of different neighborhoods, races, and household sizes. Harvard’s Joint Center for Housing Studies discovered that Manhattan’s high-income neighborhoods and a few wealthier areas in Queens won the lion’s share of New York’s rent subsidies. In 1989 the typical discount on the Upper East Side, for example, was $432 a month, while in East New York and most of the Bronx and Brooklyn, the discount was actually negative, meaning that landlords were unable to find tenants willing to pay the maximum allowable rent. The consulting firm Arthur D. Little Associates estimated in 1986 that rent regulation in New York amounted to an annual subsidy of $754 million. White households received 95 percent of that sum, though they constituted only 56 percent of tenants; black and Hispanic households received just 2 percent. The study also found that one- and two-person households received 74 percent of the rent-regulation subsidy, while families with children got under 1 percent.

Even for the lucky if undeserving few who reap its windfall, rent regulation comes at a steep but hidden price: decades of deferred maintenance and substandard services. As the HUD study concludes, “The benefits of rent control, from the tenant’s standpoint, are likely to decline steadily over time, as the quality of the unit deteriorates.” As a class, landlords are neither altruistic nor dumb, so they pass along the cost of rent regulation as best they can. The most recent Census Bureau data on housing conditions in New York City show that regulated apartments are far more likely to have serious maintenance problems: in 1993 the incidence of one or more serious defects in a building was only 7.4 percent among unregulated units but 11.7 percent among rent-stabilized ones and 17.6 percent among those under rent control. The trend in maintenance goes in opposite directions too. From 1987 to 1993, the incidence of defects among unregulated units fell by 35 percent while it stayed the same among rent-stabilized apartments and increased by 8 percent among rent-controlled ones.

Fifty years of destructive housing policy are quite enough: it’s time for New York’s legislators to proclaim rent regulation a failure and end it. But how exactly should the coup de grâce be administered?

The simplest way would be to follow Massachusetts’s example and allow controls to expire on a fixed date. Senator Bruno has proposed 1999; Charles Urstadt, housing chief under Governor Rockefeller, has suggested immediate abolition. But while it is true that such a clean break would make a big impression on New York’s housing market, giving both tenants and landlords an unambiguous economic signal and a schedule by which to make their future plans, going cold turkey would deliver an unnecessarily harsh shock, even if tempered by exceptions for low-income, elderly, and disabled tenants, as suggested by both Bruno and Urstadt. Instant decontrol may be a good cudgel with which to threaten Assembly Democrats, but even the most intrepid foes of rent regulation are unlikely, for good reason, to embrace it.

Governor Pataki has endorsed a somewhat more humane and orderly approach to delivering the fatal blow: far-reaching vacancy and luxury decontrol. The state has tried both before, if somewhat tepidly. In 1971, Governor Rockefeller, at Urstadt’s urging, pushed through legislation that allowed all controls to lapse as apartments were vacated. When Rockefeller left office to become vice president in 1974, the State Legislature quickly restored a version of the status quo ante by passing the Emergency Tenant Protection Act, the law that currently governs rent regulation. During the triennial review of rent regulation in 1993, Albany did impose luxury decontrol on the city’s most expensive apartments, but with a laughably stringent standard—a monthly rent of more than $2,000 and a household income of over $250,000 (for two years in a row, no less).

The most desirable way to phase out rent regulation would be to take something from each of these approaches: immediate vacancy decontrol, an income threshold of $100,000 for luxury decontrol (the furthest one can possibly stretch the definition of “middle income”), and termination of all controls in five years, with a Rent Hardship Board (as Urstadt would call it) to extend controls for hardship cases for another five years.

A year ago, Albany insiders would have instantly dismissed even so moderate a proposal for deregulation. Phasing out rent control simply wasn’t on the table. But the political tides have shifted so profoundly that such an agenda is now squarely in the mainstream.

True, such reforms would not liberate New York’s housing market overnight. In the five years before all controls disappear, a $100,000 income limit for luxury decontrol would only affect an estimated 35,000 apartments, or 3 percent of New York’s regulated rental housing. Vacancy decontrol over the same stretch of time would also make just a modest dent. Assuming that it would operate at roughly the same rate as vacated rent-controlled units have come under rent stabilization over the last two decades—about 7 percent a year—only 40 percent of the housing stock would be free of controls by 2002.

Vacancy decontrol might quicken this pace by giving landlords an incentive to track down illegal tenants. Thousands of apartments now maintained as inexpensive pieds-à-terre (unlawful because only primary residences are subject to rent control) or illegal sublets would disappear from the regulated housing rolls. And vacancy decontrol should allow only a spouse to take over a lease, so that tenants of record can’t pass on controlled apartments as legacies to children, other relatives, or companions—a practice common today.

Deregulation along these lines would also create an immediate boom in housing renovation in New York’s better neighborhoods, according to Dale Hemmerdinger, president of ATCO Prop- erties, a firm that owns and manages many luxury rental buildings in the city. Landlords would be able to get the market-level rents that deregulation would permit, he says, only if they thoroughly modernized their properties so as to match housing standards in the suburbs and other cities. They would have to reverse the under-maintenance that has allowed them to defray the costs of rent control.

Over the course of the next decade, as controls disappear entirely and refugees from regulated apartments push up demand in the housing market, residential development would also revive. Empty-nest couples and widows who, under rent controls, rattle around indefinitely in the three-bedroom homes of their child-rearing years would move into newly available one-bedroom and studio apartments. The middle-income families and singles who now live in Manhattan’s best neighborhoods at bargain rents would settle for cheaper—and probably better—apartments in less fashionable parts of the city; and the young couples who under rent regulation now hang on to apartments poorly suited for raising families would become homeowners.

If such forecasts come true even in part, deregulation would mean big dividends for the city’s economy. Housing renovation and construction might generate as many as 100,000 jobs and $500 million in tax revenues. And if New York provided housing that was better maintained and more fairly priced, it could attract more middle-income people to the city and hold on to those who have been leaving in order to escape their cramped, expensive dwellings.

Who, then, stands against such obviously reasonable reforms? Who leaps to the defense of millionaires enjoying deep rent discounts? Who objects to a policy that allows widows to live out their remaining years in the secure enjoyment of their rent-controlled apartments? Look no further than the New York State Tenants and Neighbors Coalition, the noisiest and most influential of the state’s rent-regulation advocates—and a group increasingly on the defensive as its reactionary views clash with current thinking.

In a recent interview Michael McKee, manager of the group’s rent-law campaign, took the view that no reform is good reform. Like other devotees of rent regulation, McKee does not distinguish between this or that beneficiary; the whole system serves the cause of “affordable housing” and “social justice,” and it stands or falls as a piece. Rich tenants get an undeserved windfall? It doesn’t matter, because low rents are a universal entitlement, akin to Social Security, says McKee. Rent controls cause scarcity and deterioration in the housing stock? He dismisses the notion with an ideological wave of the hand. Left to its own devices, he says, the marketplace inevitably exploits hapless tenants, subjecting them to “rent gouging” and “unjustified evictions.”

McKee’s one soft spot shows just how distant he is from the real world of housing. He sympathizes with the complaint of small landlords that current rents are too low to make their buildings profitable. The law should assure them a “fair” return on their investment, he says. And what might that be? McKee suggests 1 percent over the long-term mortgage rate—an amount that landlords could easily make without the trials of running a building by investing in risk-free certificates of deposit.

Thankfully, such views no longer prevail in Albany. Now, only the Assembly, with its Democratic majority, shares the advocates’ nonchalance about the harmful effects of rent regulation. So rent regulation in New York is finished, right?

Not necessarily. In Albany, change of any kind—much less a monumental change like doing away with rent controls—never comes easily and seldom depends on the merits. Though fighting a rearguard action, urban Democrats are passionately determined to maintain the status quo. Republican senators from upstate and the suburbs have little to lose if they allow rent controls to die, but they haven’t much to gain either. As a result, the Senate may be willing to continue rent regulation in exchange for concessions from Assembly Democrats on issues like welfare reform, business deregulation, and further reductions in state taxes. Deferring across party lines to others’ regional interests, especially on hot-button issues, is a venerable Albany tradition. If the Senate refuses to participate in such horse-trading, the Assembly leadership may try to get its way by holding hostage the whole legislative docket, including the budget.

In the end, only Governor Pataki can ensure the triumph of rent deregulation, and he too will have trade-offs dangled before him by desperate Assembly Democrats. To bolster the governor’s resolve, the opponents of rent regulation must convince the state’s opinion elite and the public at large that controls really are harmful, not just to New York City residents but to the economic vitality of the entire state, whose fortunes rise and fall with the city’s.

If such a convergence comes about—if rent controls finally breathe their last—it would be an incredible watershed for New York. It would show that deal making need not scuttle every promising reform that dares to show its head in Albany. It would show that Governor Pataki is serious when he talks about transforming the state’s political culture. And, perhaps above all, it would show that reviving the New York City economy is not a lost cause.

SHARE
respondrespondTEXT SIZE
If you enjoyed
this article,
why not subscribe
to City Journal? subscribe Get the Free App on iTunes Or sign up for free online updates: