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De Blasio’s Misguided Housing Plan

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De Blasio’s Misguided Housing Plan

Development—not inclusionary zoning—is the key to revitalizing New York’s housing market. September 1, 2015
Photo by John Moore/Getty Images

New York City mayor Bill de Blasio has made an increase in Gotham’s stock of affordable housing—to the tune of hundreds of thousands of new homes—one of his highest priorities. The goal is laudable, but the way the mayor is going about achieving it ensures that he will fall far short. He may even end up making the city’s remaining housing less affordable.

The root cause of New York housing problems—including unaffordability—is the city’s seriously dysfunctional housing market. Since 1990, New York’s population has grown by 1.17 million—a number greater than the entire population of all but eight other U.S. cities. If the city’s housing market were as healthy as its economy, the population increase would have been matched by a corresponding expansion of its housing stock. Given the average prevailing household size, the city should have added at least 488,000 dwelling units in order to maintain prior levels of housing quality and cost—and even more if it hoped to raise quality or lower cost.

That didn’t happen. Since 1990, only 347,000 dwelling units were completed. The only way the city’s housing market can equilibrate under such circumstances is through greater dwelling density (much of it illegal) or rising prices (in rents or sales prices). Since prices in two-thirds of the rental market (1.3 million units) are regulated or determined by income formulas, much of the price impact shows up in deferred maintenance and deteriorating housing conditions.

Given this context, the mayor’s affordable-housing program is misguided in its diagnosis of what ails the city’s housing. Consistent with his “two cities” theme, de Blasio has narrowly defined New York’s paramount housing concern as the high rents paid by the city’s poor and near-poor households, as well as a lack of income diversity (and racial diversity) in the city’s neighborhoods. In fact, because of rent control, direct subsidies, and the capped rents of public housing, a greater proportion of lower-income households are protected from “unaffordable” rents in New York than in any other American city. Those most harmed by disproportionate rent increases (or soaring home prices) are actually the city’s middle- and lower-middle-income residents, many of them newcomers shut out of the rent-stabilized market and ineligible for subsidies. As to diversity, New York’s sheer density, even outside Manhattan, has generated far more socioeconomic and ethnic heterogeneity than is to be found in any other U.S. city—or most suburbs.

Aside from high costs, the city’s most serious housing problem is misallocation of the existing stock, which has made housing in New York not so much a true market but a lottery, one that makes it possible—because of rent control—for small, often rich, households to hit the housing jackpot, getting spacious apartments in prime neighborhoods at bargain rents, while large families pay comparable rents for crowded apartments in shabbier parts of the city and new households put up with exorbitant rents for tiny units in marginal locations. The allocation of New York’s government-subsidized apartments is even more of a lottery. Even under the most aggressive deployment of current subsidy programs, the pool of newly available apartments is so limited that only a fraction of income-eligible families can benefit, and the ones that do aren’t necessarily the neediest.

For housing in New York (or anywhere else) to improve in quality and become more affordable for families across the income and demographic spectrum, the overall rate of housing development (including the upgrading of existing homes and apartments and the conversion of non-residential properties) must exceed the rate of population growth. That’s how it happens in all U.S. cities with superior housing environments—the places that attract out-migrating New Yorkers. Thus, the mayor’s hoped-for level of affordable-housing development, at 200,000 new and preserved (not true additions to the stock) units—even if it were attainable—wouldn’t come close to fulfilling the city’s housing needs.

The city can do much better, and has done so in the past. From 1960 to 1970, New York built 369,000 new dwelling units—an increase of 13.4 percent, greatly exceeding the rate of population growth at the time (which was under 2 percent). A predominant share of the new apartments and homes—complexes like Lefrak City and Park City Estates in Queens, Trump Village in Brooklyn, and much of Riverdale in the Bronx, as well as thousands of one- to three-family row homes—was broadly affordable. During the same period, housing conditions in New York’s poorest neighborhoods improved dramatically. A high rate of housing development benefits all New Yorkers, middle-income and poor alike—especially those who currently lose out in the subsidized housing lottery.

How can New York restore the heady development pace of the 1960s and its attendant improvement in housing quality? The city could ease the harmful effects of rent stabilization through higher allowable rent increases, the acceleration of luxury decontrol, or, more substantially, through outright vacancy decontrol. However, since these reforms won’t happen under Governor Andrew Cuomo (who has the last word, because rent stabilization is state law and subject to a periodic “sunset” provision) or Mayor de Blasio (whose influence is felt primarily through his appointments to the Rent Guidelines Board), the best alternative is to wrest more development from those housing-policy levers that the mayor is willing to use.

Aside from the chilling effect of rent control (especially with 0 percent annual rent increases), housing development in New York is stagnating mainly because of the city’s sclerotic zoning and building ordinance, which controls where housing of any kind can be built, severely limits density outside of Manhattan, requires too much parking (in a city where most people travel by subway or bus), and curtails the use of the most efficient building methods and materials. In addition, many potential residential-development sites are either difficult to reach because of lack of adequate infrastructure or in need of expensive environmental remediation. The mayor’s housing plan addresses these constraints with some sensible reforms, but its single-minded determination to make private developers absorb the lion’s share of the cost of low-income housing, and to do so by building only mixed-income projects, will severely compromise—possibly even negate—its beneficial effects.

Freed of that millstone, the plan’s four key proposals might be worthwhile in their own right, and could jump-start the annual volume of housing production. De Blasio’s plan would use city capital-budget funds to set the stage for new development through construction or repair of needed road and utility infrastructure, brownfield remediation, and development of ancillary parks, schools, and other facilities. It would liberalize city zoning rules to permit increased residential density and development in current non-residential areas. It would lower developers’ costs and speed the pace of development approvals. Finally, it would permit (and encourage) new residential development and the adaptation of existing homes and apartments to reflect the preponderance of small households.

Who can quarrel with any of these strategies? Each of them, especially if implemented in concert, could sharply accelerate the volume and quality of housing development in New York. Unfortunately, the way the housing plan hopes to put them into action undermines their potential effectiveness. While the plan is hobbled by a wide variety of unreasonable requirements, its primary poison pill is the cross-subsidization scheme known as “inclusionary zoning.”

The economics of inclusionary zoning work like this: given the value of land at any specific site, allowing additional apartments to be built there by easing zoning restrictions yields an increment of essentially “free” land. The land-cost savings can then be passed on as a rental discount to income-eligible tenants, with one important hitch. The economics of inclusionary zoning depend on the developer’s ability to market the remaining apartments at their full (pre-zoning-liberalization) price—and that assumes that high-income renters or buyers are willing to pay sky-high market prices for the privilege of having lower-income neighbors. As a report on inclusionary zoning by NYU’s Furman Center (whose last head is the city’s current housing commissioner and author of the city’s housing plan) notes:

In order for additional zoning density to have value that can cross-subsidize affordable units . . . rents must be high enough to generate a sufficient return on the development costs for the whole project to justify construction of any building in the first place. . . . Given the wide range of market rents in New York City neighborhoods, this means additional zoning density will be extremely valuable to developers in some areas, but may have little or no value in others.

On its face, inclusionary zoning is appealing: it costs taxpayers nothing and it generates a modest amount of income diversity. But it can never come close to solving New York’s housing-affordability problem at the scale needed. Even in the best of economic times, inclusionary zoning is limited by three factors: the market for expensive housing (i.e., the existence of enough extremely affluent households willing to live in mixed-income projects); the availability of highly desirable sites, mainly in Manhattan or fashionable sections of other boroughs; and reasonable construction costs. During Mayor Michael Bloomberg’s 12-year tenure, the high-water mark in the deployment of inclusionary zoning, the program generated about 165,000 ostensibly affordable housing units—only a fraction of what was needed.

To usher in an era of affordable housing for all New Yorkers, de Blasio should apply the four strategies of his housing plan to large swathes of the city—without the inclusionary mandate. In practice, that means allocating capital-budget funds for brownfield remediation and infrastructure improvements to open up previously unsuitable sites for residential development; reforming the zoning and building rules exactly as proposed (minus the cross-subsidization requirement); speeding up the developers’ approval process; and legally allowing—through adaptive reuse and relaxation of the building code—New York’s dominant smaller households to occupy smaller apartments. A housing plan reenvisioned in this way could easily produce a large enough volume of new and reconstructed dwellings to improve housing conditions, not only for the city’s lower-income households but also for its millions of middle-income families.

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