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Rent Control’s Self-Defeating Effects

eye on the news

Rent Control’s Self-Defeating Effects

New York’s expanded version of the policy is already depressing the city’s housing market. November 5, 2019
New York
Economy, finance, and budgets
Politics and law

When New York State’s legislature passed a bill strengthening rent controls on apartments in June, New York City mayor Bill de Blasio crowed that the legislation “will halt displacement . . . and keep working families in the homes they love.” Yet one of the biggest eras of displacement in Gotham’s history happened decades ago because of rent control. Enacted during World War II, controls squeezed landlords unable to increase rents for maintenance, repairs, and fuel prices until owners began abandoning buildings by the thousands during the late 1960s, driving out middle-class residents, stranding the poor in deteriorating apartments, and creating immense tracts of poverty in formerly stable blue-collar neighborhoods.

Billed as tenant-protection legislation, New York’s latest rent regulations, which make it more difficult for landlords to raise prices on apartments that they upgrade or that become vacant, mark a return to the disastrous policies of the displacement era. But because New York’s progressive legislators can’t repeal the laws of the marketplace, the effects have already begun to show. Two owners of large portfolios of buildings with rent-regulated apartments have already started falling behind on mortgage payments. Sales of rental apartment buildings in New York plunged 50 percent in the first quarter after the legislation was enacted, and now some owners face the prospect of being saddled with buildings operating at a loss, with a value less than their mortgages.

None of this should be surprising. Decades of bipartisan research tell us that controls on rent suppress real estate values, diminish property taxes, and reduce investments in housing. A 1988 Peat Marwick study estimated that rent controls resulted in a $4 billion loss of taxable assessed residential property in New York, depriving the city of $370 million in annual property taxes—the equivalent of more than $800 million in today’s dollars. A 1994 study in Berkeley, California, a city of 110,000 residents that had rent regulations for more than a decade, found that the city lost some $1.6 million a year in property taxes, the equivalent of $3 million in today’s dollars.

Rent regulation has insidious consequences. Unable to recoup their costs, landlords invest less. Conditions in buildings, especially those with lower-income tenants, worsen. Higher-income renters spend their own money on upkeep, and the additional costs wipe out much of the money they save from cheaper rent. “The benefits of rent control, from the tenant’s standpoint, are likely to decline steadily over time,” a 1997 study by the Department of Housing and Urban Development found.

Fallout from rent regulation accelerates during recessions, suggesting that the effects in New York will become worse when the economy slows. That’s what happened in the sixties and seventies, when the city faced a bloated budget, business-killing taxes, and a worsening national economy. Landlords, charging rents that hadn’t kept up with costs for 20 years, were buffeted by escalating inflation and soaring fuel costs. Thousands of owners, many of them small landlords, lost their buildings to lenders, or simply walked away from them. One former Bronx landlord, Gertrude Schneider, told City Journal in 1990 that she and her husband had accumulated 15 small rental buildings that they hoped to use for their retirement. They lost all but one. Values declined to the extent that one of their buildings—carrying a $65,000 mortgage—could sell for only $12,000. The city took control of more than 100,000 units of abandoned housing, spending $5 billion to rehabilitate many of them.

By contrast, after Massachusetts voted to abolish rent regulations in 1994, property values soared in Cambridge, which had had controls for decades. A 2014 study published in the Journal of Political Economy estimated that deregulation boosted values some $2 billion over 10 years, thanks in part to a 45 percent increase in the worth of deregulated properties. The study found that values rose even in buildings not subject to regulation because of the spillover effect of higher values in neighborhoods.

New York legislators justified re-imposing strict regulations because median rents have been rising for years in the city—though they declined by 3 percent in 2018. The new law, they claimed, will make housing affordable again. But regulating rents accomplishes the opposite. Rents in buildings not covered by regulation will soar, and tenants in regulated apartments will stay put even when they outgrow their units because their rent is artificially low. Newcomers will find it virtually impossible to find space at affordable prices.

Rent regulation will also undermine construction of new rental buildings because investors worry that the city might someday impose controls on them. New York regularly produced tens of thousands of new housing units annually until the late sixties, when the city expanded rent regulations to hundreds of thousands of previously exempt apartments. Output fell drastically, often averaging less than 10,000 new units a year, until the state began loosening rent regulations in the mid-nineties. That produced a sharp uptick in construction. In 2018, builders completed 27,000 new units in New York City. But since June, real estate investors have begun to flee to nearby cities such as Philadelphia.

After a decade of economic expansion, rents have risen robustly around the country, leading left-leaning states like California and Oregon to impose unprecedented statewide controls. All the evidence suggests that these laws will make housing less affordable at best and, at worst, may spark a new era of abandonment. When that happens, regulation advocates like Mayor de Blasio will find someone else to blame.

Photo: krblokhin/iStock

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