As a business economist by training, I’m always eager to see real-world applications of economic theory. No better textbook example could be found than New York City’s acknowledgment on February 8 that the latest Housing and Vacancy Survey (HVS), a study of housing conditions, shows the rental vacancy rate in early 2023 at 1.4 percent, the lowest in more than 50 years. The news is catastrophic for New Yorkers who need a place to live and for people who want to move to the city. There’s not enough housing to go around; only the affluent can be confident in the competition for scarce apartments. New York’s politicians should have foreseen that the rent-regulation legislation they supported would get us here. Now, many of the same politicians need to address the problems they have created.

When the New York State Legislature passed, and then-governor Andrew Cuomo signed, the Housing Stability & Tenant Protection Act of 2019, many Democratic politicians took a victory lap. “I’m confident the measure passed today is the strongest possible set of reforms that the Legislature was able to pass and are a major step forward for tenants across New York,” Cuomo said. “With this bill,” State Senator Zellnor Myrie said, “we finally put power back in the hands of tenants . . . and take a step toward housing justice for all New Yorkers.” It turns out that there is a price to be paid for their indifference to the likely effects of the legislation.

The 2019 law eliminated most of the routes that landlords could use to raise rent-stabilized apartment rates close to market levels: vacancy allowances, vacancy decontrol, and luxury decontrol. It also greatly curtailed permitted rent increases for Major Capital Improvements (MCIs) and Individual Apartment Improvements (IAIs).

As I wrote then, while the ability to raise rents “helped ensure that buildings were properly maintained and received capital investment . . . landlords also routinely gamed the system, creating openings for critics who wanted to do away with these provisions.” But rent-law reformers in the legislature had no interest in the quality of rental housing, only in being able to assure tenant voters that their rents wouldn’t go up. The data in the city’s report do show a flattening in rent increases from 2021 to 2023, compared with earlier periods between surveys, and this is likely due to the 2019 legislative changes.

Unfortunately, renters’ living conditions got worse. In 2019, Joseph Strasburg of the Rent Stabilization Association, a landlords’ group, was quoted as saying that the “legislation effectively shuts down reinvestment because it eliminates the resources landlords need to upgrade and maintain their buildings and apartments.” The HVS reports on the presence of housing problems that serve as indicators of poor maintenance, such as rodent infestation, leaks, and cracks or holes in the walls, ceiling, or floors. Rent-stabilized units are more likely to have three or more measured problems than market-rent apartments. A 2017 survey, however, found that fewer than 20 percent of rent-stabilized units had multiple deficiencies. By 2023, that figure had risen to 24 percent.

However, the main problem with the 2019 rent laws, I wrote, was that “New York’s lawmakers are treating a symptom of the city’s housing shortage without considering the shortage itself. Rent-stabilized rents could be raised so much in the past because the city’s economic growth brought in new well-paid workers, who bid up the price of existing units. But how will a growing workforce be accommodated, when existing tenants receive enhanced protection?”

The city’s report shows how stricter rent regulation distorted the housing market. New York in 2023 had slightly more market-rate than rent-stabilized rental units: 1.14 million vs. about 1 million. Turnover is far more likely in market-rate rental units. Terrible as the overall rental-vacancy rate is, it’s even lower for rent-stabilized units and slightly better for market-rate rentals. That means a disproportionate amount of turnover takes place in the market-rental stock. In 2022, the number of movers into market-rental stock was more than double the number moving into rent-stabilized stock. In addition, the units available for rent skew to higher rent ranges: most are affordable only to households with an income over $100,000. Households that enjoy regulated, below-market rents tend to stay put, and those units rarely become available to anyone else.

In summary, the 2019 legislation was all about keeping tenants in place—and was indifferent both to housing maintenance and the workforce needs of an economically vibrant city. Once New York City recovered from the economic shock of the pandemic, the inevitable, predictable result was deteriorating housing stock and plummeting availability of vacant apartments for rent. This is precisely what has come to pass.

What’s the way out of this mess? Too many households are chasing after too few units. The state legislature and the city council can lower demand for housing or increase supply. Lowering demand means allowing rents to rise to market levels; some households would get the message that New York is not for them and move elsewhere. The emerging housing-maintenance crisis will ultimately force changes to the rent laws, allowing rents to rise more, because the government cannot assume fiscal responsibility for the capital needs of New York’s vast rent-stabilized stock. However, the state legislature will resist. Such reforms will take a long time, and conditions may get very bad before they do.

Most of the attention, in the short to medium term, will focus on increasing supply. Mayor Eric Adams’s administration lists three housing-supply priorities: achievement of its legislative agenda in Albany, including a replacement for the Section 421a tax exemption program for new rental housing and lifting of other state-imposed restrictions; enactment of the administration’s proposed zoning reforms; and federal actions, including Senate passage of the Tax Relief for American Families and Workers Act of 2024, which includes additional affordable-housing aid. These are all helpful, but successful supply-side reforms in response to the housing demand generated by new workers will require far more openness to private investment than the state legislature and city council have shown up to now.

Photo: Busà Photography/Moment via Getty Images


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