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Rent Control’s Resurgence in New York

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Rent Control’s Resurgence in New York

10 Blocks podcast June 19, 2019
New York
Economy, finance, and budgets
Politics and law

Nicole Gelinas and Howard Husock join Seth Barron to discuss New York’s landmark rent-regulation law and its potential impact on housing in the city and state.

Lawmakers in New York recently passed the toughest rent-regulation law in a generation, imposing new restrictions on landlords’ ability to increase rents, improve buildings, or evict tenants. The bill made permanent the state’s existing rent regulations, meaning that future legislatures will find it harder to revisit the issue.

Housing experts like Husock argue that the new laws will discourage landlords from investing in building improvements, causing the housing stock to degrade statewide. And economists across the political spectrum, from Milton Friedman to Paul Krugman, have also maintained that rent regulation can be counterproductive and detrimental to housing quality.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, editor of City Journal. Last week, New York's progressive-dominated state legislature and Governor Andrew Cuomo renewed—and extended--state's rent-regulation laws governing New York City. Rent control is a long-standing feature of New York’s housing market: the state first imposed “emergency rent laws” after World War I. Today, the city, under state law, regulates the rents of more than one million apartments housing two million people. But if economists from Milton Friedman to Paul Krugman agree on one thing, it’s that rent control can stifle a city’s housing market, and New York needs more housing if it’s going to continue to grow. Coming up on the show today, we have three City Journal contributors, Seth Barron, Nicole Gelinas, and Howard Husock, to talk about the new rent control law, and what it means for the city. But before we get started: if you like following politics and policy in the city and state of New York, make sure you subscribe to our newsletter, “The Beat.” You’ll get news and insight on housing, education, homelessness, infrastructure, and lots more, delivered right to your inbox three times a week. You can find it at www.thebeatmi.com.  

That’s it for me, the conversation between Seth, Nicole, and Howard begins after this.

Seth Barron: Hi everyone. Welcome back to 10 Blocks, the podcast of City Journal. This is your host for today, Seth Barron, associate editor of City Journal. New York State has passed some historic far reaching legislation regarding rents and real estate. Joining me now to discuss the issue are Nicole Gelinas and Howard Husock, both senior fellows at the Manhattan Institute and contributing editors for City Journal. So, this new law is supposed to protect tenants from losing their apartments. That seems pretty unobjectionable. What's wrong with it?

Nicole Gelinas: Well, I can start if you like. The problem is it's a very scattershot way of protecting tenants. A person can live in a rent-regulated apartment no matter what their income, and no matter what the price of the apartment below $2,700, so the system shakes out in that 9% of rent-regulated tenants make more than $70,000 a year-- certainly doesn't make them rich, but it doesn't really make them in need of a special government program to protect them-- and 4% of rent-regulated tenants make more than $150,000 a year. And so what rent regulation has always done is it keeps the rent increases to about the rate of inflation every year and your landlord has to give you a renewal lease in all but a couple extreme circumstances. And what the new laws that Cuomo is about to sign reportedly would do is extend these protections. First of all, making them permanent, and second, taking away the very little deregulation that there was for the wealthier end of the rent regulated market. So under the previous law that Governor Pataki signed 25 years ago, units were deregulated once they reached $2,700 and when the unit was empty. So, if you're going to rent a apartment in New York City for $2,700, you have to be making about $80,000 a year. So, this is a protection for newcomers to the city making $80,000 a year, not a very well-targeted antipoverty or pro working class program. And it also removes the provision of the law that said once the tenants are earning $200,000 a year, their rent regulation protection could go away. Now that new law will protect people who could be making $200,000, could be making even more than that. There's not a very good policy reason for protecting people on the wealthier end and effectively giving them a new benefit.

Seth Barron: Howard, what do you think?

Howard Husock: Well, I think it's important for listeners around the country to understand the sheer scale of this in New York City, which is the nation's largest city. There are approximately 1.2 to 1.3 million rent-stabilized apartments-- that's the language that is used here in New York, and that's a third of all the housing stock of all kinds in New York City. So price regulation extends throughout a really large percentage of the rental housing market. The issue of wealthy tenants being the beneficiaries, affluent tenants being the beneficiaries, of rent regulation, as Nicole pointed out, really is a feature, not a bug of this policy which has been in effect since just shortly after World War II. Think about this from the point of view of a property owner. If you're told you can only get X amount, no matter what the market might dictate, that you can only get $2,000 for that apartment. You might think you can rent it for $3,000, but no, you can't do that. Well, what do you want to make sure of? That you'll at least get that $2,000. Are you going to rent to somebody who is poor, who has a poor credit rating, who may have a number of children who are going to inflict wear and tear, you might think, on the unit? No. You want to take care and rent to affluent tenants. You're going to get the money that way. So it's not a coincidence that we see that happening routinely in New York's rent-regulated market, and nothing about this new law will make that any better.

Seth Barron: But, Nicole, according to the statistics you cited about income brackets, it sounds like about 90% of the people living in rent-regulated apartments make less than $70,000 a year, and I assume a pretty substantial number make less than $50,000 a year. So all told it still is a protection for working-class people by and large. So what is the downside with the system of rent regulation? Is there a problem with rent regulation generally?

Nicole Gelinas: Yeah, I think it's important not to oversell the idea that it's only rich people who are benefiting from this. As you know, most people are middle class and working class tenants, but that's also true with the market-rate housing side. The other half of New York's rental market is market-rate rentals. It's a myth that market-rate rentals are the same thing as luxury rentals, whatever luxury even means in this market. But most market-rate rentals are units in smaller buildings because apartment buildings with fewer than six units aren't subject to the rent regulation laws and they're in farther outer borough neighborhoods: Ocean Parkway in Brooklyn, the Grand Concourse in the Bronx, large parts of Queens, just two-family, three-family homes where two of the units are rental units. These are not being rented to rich people. They're being rented to working-class and middle-class people. And if you look at the difference between the market rental rate and the regulated rental rate, the regulated rental rate right now, the average rate, is a little bit less than $1,400, the market-rate rental is $1,800. So yes, there's a big difference there, but part of the difference is because of-- first of all it's not as big as most people might think. It's not a difference between $900 and $4,000 but part of the difference is because of the money needed to maintain the building. If you're renting on the market rate side, you probably have a better-maintained building and a more responsive property owner, and and so forth. It's in certain neighborhoods where there is a much bigger difference, but in some neighborhoods there's really no difference at all between the market rate and the regulated rent. We did a study pointing that out, going back 14 years ago now for City Journal, but The Wall Street Journal just updated the study this week using the same data and essentially came to the same conclusions. For most people in most outer borough neighborhoods, abolishing rent regulation gradually, they would still be able to stay in their apartments.

Howard Husock: Right. And it's worth remembering that a fear of gentrification drives a lot of this momentum toward preserving rent regulation and making it permanent as this law does. But not every neighborhood in New York City is going to gentrify. There's not an unlimited number of bankers, finance professionals, and super lawyers who are going to move into the Mid Bronx. That's just not a likely outcome. And as Nicole points out, a lot of these properties are modest properties, and if rent regulation were abolished overnight, you would have a big effect in a small number of neighborhoods, but not a great effect for many other tenants.

Seth Barron: Well, if they abolished rent regulation, which clearly isn't happening now, what would be the effect? Nicole, I saw somewhere you said that economists on both the left and the right oppose rent regulation, which seems counterintuitive, but why do they all oppose it?

Nicole Gelinas: Yeah, you can go back to old Paul Krugman article saying that rent regulation does not make a lot of sense as a way to get affordable housing into the market. But I think economists, whether they're on the left, right, or nowhere oppose it, partly because of what we talked about. It's not very effective and efficient. You can have a poor mother with children, moves to the city today to find a job, locked out of the rent-regulated market, goes to find a market-rent apartment. She can be below the poverty level-- thirteen percent of market-rate tenants are below the poverty level, whereas 20% of rent regulated tenants are below the poverty level, and you can have a wealthier person making six figures, maintaining a rent-regulated apartment and only staying in it a few months out of the year, and spending the rest of the year somewhere else in retirement. So it's just not a very effective system at all. Although there's a lot of complexities to the supply and demand issue, getting rid of the market signal on the demand side is not a very good way to govern a housing market of 3 million units.

Howard Husock: Right. Price signals are important in all markets and we distort them at our risk.

Seth Barron: One thing that the new law says is that major capital improvements, which is like when a landlord puts in a new roof, or a boiler, say, right now they're allowed to pass that cost on to their tenants, and I believe the new law will get rid of that.

Howard Husock: It will limit it.

Seth Barron: It'll limit it. Okay.

Nicole Gelinas: Two percent a year rather than 6%.

Seth Barron: Okay. Now, why should tenants have to pay for the cost of improving the property that they don't own?

Howard Husock: Well, let me jump in on that, Seth. I think this is, in the near term, likely to be the most deleterious new provision in the law. Remember, the rent-regulated apartments are pre-1974 structures. New structures are actually not rent-regulated except if they're given tax abatements-- in certain situations they are-- but most of this rent regulation, is focused on pre-1974 buildings. These are older buildings. They need renovations. Tenants should want their buildings to be renovated because they live in their buildings. They want heat, they want hot water, they want reliable services of all kinds. We've seen in New York, the public housing system, which was predicated on the idea that the rents of the tenants would cover the cost of maintenance, when that didn't happen, public housing fell apart and it's a dangerous situation. No one wants to live in a dangerous building. At the same time, one has to understand the misplaced ideas of the tenant advocates in these situations who pushed this bill. To them, owning a building is a license to print money. So, if you make a capital investment and you raise the rent, of course you'll get that rent. It's not a problem. You'll get twice as much rent for a 6% increase in capital improvement. Well, maybe not. Maybe you won't get a tenant or maybe you'll be without a tenant for three months. When you run a business, which happens to be rental housing, you have risks. And this law says, we're not worried about your risks. We're not worried about services for the tenants. We're so in fear that you're going to make a profit, that we're going to make it less enticing for you to maintain buildings, which can be a hundred years old.

Nicole Gelinas: And if I may add one thing to Howard's description of the problem, many of these property owners undertook capital improvements with the expectation that some of these units could be converted to market rate once they reached that $2,700 threshold and once they became empty. So if you're a property owner and you're thinking, 'should I upgrade the heating system? Should I upgrade the lobby? Upgrade insulation, new kitchens and so forth?' It's easier to do a whole building at once than to do unit by unit. And if you're thinking, 'well, I've got three units here, they might be empty in a couple of years, they're going to go over the $2,700 a month threshold. Maybe I could fix the building up and I could attract people to pay $3,100 or $3,200 for a one-bedroom. If they don't think they can do that, they may do less of that work.

Seth Barron: So it sounds like you're talking about the possibility of deferred maintenance, that landlords might just let the building go a little bit, as opposed to keeping it up?

Howard Husock: Well, they'll try to put band-aids on rather than do surgery. I have a term for this. It's not gentrification. It's going to be gradual 'shabbification,." The city will get shabbier and shabbier, and where will it happen the most? It will happen in the outer borough lower-income neighborhoods. Already, if you're a small property owner, the sheer bureaucratic burden of having to go every year to the Rent Stabilization Guidelines Board, which exists, and to demonstrate what your expenses are, and to keep track of them, already this is a burden. And there'll be even fewer incentives to take care of property, and that property can get to be in worse and worse shape.

Seth Barron: Now, part of what the new law is going to do is extend rent control outside of New York City to parts of New York State that haven't had it yet. So that sounds pretty good for people, say, in Skaneateles, or Chateaugay, Utica. Aren't people up, there suffering from not having rent control?

Howard Husock: If I might, let's be clear, it doesn't immediately usher in rent control in these places. Those cities and towns have a local option to adopt it. Even having that option, will probably have effects, but it won't be a rent regulation regime right away. It's important, again, for our listeners around the country to know that New York City is a very prosperous place. New York State outside of the metropolitan area of New York City is not a prosperous place. We once had a gubernatorial candidate who compared it to Appalachia; that's an apt comparison. There are ghost towns upstate. There are very high, not rent levels, but vacancy levels in Buffalo, Rochester, Syracuse. These are places that are in desperate need of new population. If their rent started to go up, that would be a sign of health because that means there was more demand. So, the idea that tenants there are in dire straits-- those cities are in dire straits and we have to give a lifeline to those cities, and strangling the property owners there is the opposite of a lifeline.

Seth Barron: So will cities like Utica, or Buffalo, or Cortland impose rent controls?

Nicole Gelinas: I wouldn't want to speculate because I know so little about the politics of these places. E. J. McMahon would know better. I assume some will because of the same pressure from the affordable housing voting blocks. But who knows? I guess we'll see.

Seth Barron: So, back to New York City, we've had rent regulation for a long time here, because I guess there was a rental emergency after World War II, but things still seem to be pretty bad. Does that mean we need more rent regulation? How is rent regulation and vacancy-- how have these things worked together? There was talk about expanding the number of, say, apartments that had been deregulated, people wanted to bring them back into regulation. Would that help the housing crisis?

Howard Husock: Well, it's worth keeping in mind that New York City has more subsidized housing, both in terms of a total and a percentage of its housing, than any other city in the United States. It's the largest public housing system of any other system in the United States, any other city in the United States. And yet we are told that we're in a constant housing crisis. It may be that distorting the price signals and all of that create, rather than resolve the housing crisis. But it is also true that we've had a fair amount of new building in recent years, and the most recent data shows that rents are going down in the city, they've been going down between 2% and 3% on average. So this is an unlikely time to say we're in a housing crisis. We may actually have been starting to emerge from that crisis, and this could make it worse.

Seth Barron: Nicole, any thoughts on that?

Nicole Gelinas: Yeah, we have a rental boom on the higher-end market rate side. The housing emergency, which has actually been going on since World War I: we had a crude version of rent regulation under the Hylan administration because soldiers were coming back, demanding housing, the city was resource-constrained, and trying to recover from the war, it couldn't build quickly enough. And unfortunately a lot of people were left widows with children, and so there was tremendous economic and social pressure to keep their rents down. And it went away for awhile, and then it came back after World War II, and it's been through various iterations since then. But the emergency is defined if the vacancy rate is below 5%, which it always is. Other people might consider that a sign of a pretty healthy market with just frictional changeover of apartments. But at the higher end, if you're going out and you want to rent an apartment for above $3,000 a month, you can go out and you can sign a lease today and you can move in today in any one of hundreds of vacant units, there's no rental emergency. But the problem is, because of the city's construction costs, because of land costs, because of the cost of keeping up a building and everything else, no one's going to build new rental housing below $3,000. The economics just don't work. So the hope is that, as we build more apartments at the higher end, that relieves pressure on the lower and middle ends. But it's just like anything else: to the extent that the prices are artificially kept low, there's always going to be huge demand for below-market-rate housing. You can't find a single family home out in the Long Island suburbs for under $600,000. If, suddenly, someone puts a whole bunch of houses on the market for $150,000, there would be overwhelming demand for that, and you would have a housing emergency in that part of the market.

Seth Barron: I wonder if part of the reason why the vacancy rate is so low is, say you have a two-bedroom apartment and you're only paying $1,200 for it for whatever reason, but you're just by yourself because your spouse died or your kids moved away, there's not that much incentive to move out, is there?

Howard Husock: That's a big factor in rent-stabilized apartments and rent-stabilized tenants do stay longer, on average, than those in market-rate units because they have a good deal. They've hit the rent stabilization lottery and if they were to leave their unit, they'd be out in the cruel world and they don't want to go out there. So they tend to overconsume housing. That means they have empty bedrooms., and that means that young households that want to get a foothold in this city, like those Nicole was describing before, who may be of modest means, are blocked from entry. And their situation differs fundamentally for most people who are aging in place in America. If you're aging in place in that small ranch house on Long Island, as your property taxes go up, because the schools need to be renovated and taxes were raised, you started to say, 'maybe it's not worth it for me to stay in this house anymore. Maybe I'm going to sell it, earn some profit on the sale, and move to a lower tax jurisdiction.' But if you're in New York City, you have none of those incentives. So the healthy turnover that actually keeps a city vital and dynamic is diminished, is capped here in New York. And surprisingly, New York City has the lowest turnover rate of any of the top 10 metropolitan areas of the city. If you can make it in New York, you can make it anywhere, but you can't get into New York. It's hard.

Seth Barron: So, what are all of these changes going to do for the future of New York in terms of, say, new construction, which won't come under rent regulation anyway. Is there going to be an impact? Because I saw in the New York Times that all of the developers are really mad about the new law, but I can't really figure out why.

Nicole Gelinas: I don't think there will be much of an impact on new construction. I think the bigger risk to new construction is if we have a recession and that market just becomes oversaturated, that there are only so many people who can afford higher-end apartments. And once they have finished marketing that segment of the city's population they're just cannibalizing their own tenants and competing against each other, which is healthy, but at some point it gets into a cyclical problem for them. And I think the other risk to new construction is construction costs, for a variety reasons, and also the cost of land.

Seth Barron: So, I just had a good idea. Why don't the developers build housing for low-income people, or young people just moving to the city? Wouldn't that be a good way to offset the problem of people inhabiting these older, rent-stabilized buildings?

Howard Husock: It would be a good idea, and you can't rule that out. Regulation makes that more difficult. We, at the Manhattan Institute, published a really good paper by an architecture here in the city named Mark Ginsburg a few years ago about micro units, talking about how younger people are willing to live in very small apartments with shared kitchens and that kind of thing, but regulation makes it very difficult to build them in New York. If you had a deregulation of zoning and those kinds of rules, it's possible that the private sector would step in. But the combination of high construction costs, restrictive zoning, and what I would call the signal effect of rent regulation. If they did this, what else might they do? It's a little bit far-fetched but you can't rule it out. It does tend to damp down new construction.

Seth Barron: Howard, you've talked about the housing ladder. What is that?

Howard Husock: Well, I have a view of the whole American housing market which sees different structures and different neighborhoods, different types of structures, different types of neighborhoods as a ladder from neighborhoods of modest means to higher income that people can climb as their fortunes improve, or they can be content on a rung of the ladder if that's a good neighborhood and they want to stay there. So the housing ladder always was predicated on there being apartments with small units-- two-family houses, three-family houses, four- to nine- family apartment buildings-- gradually going up to single-family houses on large lots. To the extent that you exclude, make difficult to build, different types of structures that will be priced at different levels, then people are stuck. And we see a lot of people that do get stuck, and that creates the demand for rent regulation as a substitute.

Seth Barron: Well, it looks like New York State is in a bit of a pickle, if I may say, given everything you've said. I'm not sure where we're headed, but it was a fascinating conversation. We would love to hear your comments about today's episode on Twitter @CityJournal #10blocks. If you like our show and want to hear more of it, please leave ratings and reviews on iTunes. This is your host, Seth Barron. Howard and Nicole, thank you so much for joining us.

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