Rent Stabilization/Control is Back
With a vengeance.
At least it now is in New York State (and is a growing trend in a few other States as well).
Although tenants love it today, will they still love it … tomorrow (with a bow to Carole King).
Although 2019’s decidedly pro-tenant New York legislation was signed into law only on June 14th, owners of rent-stabilized properties already have seen real estate values fall … which is the kind of volatility landlords in New York should be used to. Volatile laws and volatile valuations have been part of the rental real estate cycle in New York for the past 100 years. Landlords’ fortunes have waxed and waned with the shifting of the political winds. In the newly-Democratically-dominated New York State legislature, they’ve now waned.
The first rent control laws in New York were enacted in 1920 to protect tenants from New York City landlords who were raising rents monthly during a post-WWI housing shortage. More stringent tenant protections were imposed during WWII and carried forward for several years after the war ended to accommodate returning veterans. New York slowly relaxed those controls in the 1950s and ’60s – all too slowly as it turned out –, which squeezed new construction and led to a housing shortage in the 1970s and ’80s. The consequence of restrictive rent control, according to the Rent Stabilization Association (which represents 25,000 landlords [don’t you love the name they’ve chosen for their pro-landlord lobbying group?]), was that landlords allowed buildings to fall into disrepair, leading to abandonment of older buildings and in many cases decimating low-income neighborhoods. A more balanced pro-landlord flexible policy was adopted in 1984. The winds thereafter blew favorably for landlords, and for construction and renovation, although those winds left a significant number of lower-income tenants out in the cold.
The rationale for the 2019 imposition of stronger rent stabilization laws was lauded by NYS Senate majority leader Andrea Stewart-Cousins, who stated that it provides New Yorkers with “the strongest tenant protections in history…. For too long, power has been tilted in favor of landlords and these measures finally restore equality and extend protections to tenants across the state.” Perhaps. The legislature noted that 2.4 million voters people live in nearly 1 million rent-controlled apartments in New York City, that existing rent-control laws had permitted tens of thousands of apartments to become deregulated, and that homelessness in New York State had reached record levels, all of which is true. “We have a long way to go to reach a point where every tenant in New York is protected [ED. NOTE: should that really be the goal?], but this is a big step forward to correct decades of injustice between tenants and landlords,” added Cea Weaver, the campaign coordinator for Housing Justice for All, a coalition of tenant groups [don’t you love the name they’ve chosen for their pro-tenant lobbying group?].
Real estate groups, including Taxpayers for an Affordable New York [you’ve gotta love the names lobbying groups give themselves!], have argued that the “legislation fails to address the city’s housing crisis and will lead to disinvestment in the city’s private sector rental stock consigning hundreds of thousands of rent-regulated tenants to living in buildings that are likely to fall into disrepair…. This legislation will not create a single new affordable housing unit, improve the vacancy rate or improve enforcement against the few dishonest landlords who tend to dominate the headlines.” Again, perhaps.
Was the New York State legislature right in making sweeping changes to the State’s affordable housing laws? Is government-imposed rent stabilization the best way to provide housing for working class and low-income families?
America prides itself on free markets and the practice of an Adam Smith brand of capitalism. Rent control is not part of that brand. It substitutes the visible hand of elected politicians for the invisible hand of the market. And, yet, many Americans (and most Europeans and Asians) believe that the invisible hand doesn’t work appropriately everywhere … that it isn’t working well enough in the modern world, and that some sacrifice of market economics is necessary to maintain fairness and avoid class warfare … or worse. Evidence of that tension lies in the fact that New York City is indeed experiencing an affordable housing crisis with apparently insufficient incentives for the construction of working-class housing … and that a significant portion of the voting public believed that something needed to be done. It’s a supply-demand imbalance problem. New York City has a relative paucity of land and
terribly ov erly–restrictive zoning laws and a great many residents and wannabe residents, a disproportionate number of whom are wealthy. In a market-based economy, the wealthy squeeze out the less fortunate those with less. New York (and other States) have determined that this is a problem that, over time, undermines faith in the system and in the ability of government … and the economy as well … to operate successfully.
Boom and bust cycles are the inevitable consequence of invisible hand economics. In the 21st Century, Central Bankers have been using modern monetary tools to eliminate mitigate the bust portion of the current inevitable economic cycle (as addressed in a number of prior TLRs). It’s not yet clear to what extent their efforts will be successful. Although government actions were not effective in doing so previously, there is a newfound belief that modern tools, whether economic or legislative, may be are likely to do better. That is what New York State is attempting with respect to its affordable housing legislation. New York has legally rebalanced the economic scales because, it determined, those scales created a public detriment for tenants and disproportionately benefited overly-powerful landlords. The pattern of past real estate boom-and-bust cycles, however, has not been legislatively repealed. That may have been the goal, but there is a significant question whether the new law can effect that sort of change. That may depend on whether those old patterns can be better adjusted more finely tuned. At bottom, it’s all about dealing with the money, with the tension being between landlords who, as capitalists, want to make more money – or is it truly only about their making enough money to turn a reasonable profit? – and tenants who desire is to pay less money – or is it about their paying only as much as they truly can afford? Those are difficult questions that require drawing very fine lines … for both landlords and the working class. The New York State legislature believes that it has properly drawn those lines … and that it was required to do so since the invisible hand had not. The prior century of experimentation by landlords, tenants and governments hadn’t found the appropriate balance. It won’t be known for quite some time whether New York’s current government has improved on that track record. The best guess, however, is that, much like the Central Bankers who have been fiddling with their macroeconomic levers, New York’s legislative assistants will have to be open to digesting complex economic housing data and recommending periodic fine-tunings of the legislation. Whether New York’s legislators will be amenable to such fine-tuning is another question.
With that said, the two most serious risks in New York’s new affordable housing law appear to be that it encourages landlords to neglect their properties, thereby potentially eroding the real estate tax base and leading to a decline in New York City’s ability to satisfy its budget needs – creating the potential for a reprise of New York City’s mid-1970’s budget crisis –, and that it will discourage the construction of the precise affordable and subsidized low-income housing that it’s intended to encourage. Ongoing legislative action may be able to successfully address those issues if such action is taken quickly enough.
While there can be no question that the invisible hand of capitalism has created short-term inequities that have prevented inhibited New York’s teachers, nurses, plumbers, electricians, shopkeepers and young professionals from realizing the level of prosperity that Americans call finding affordable housing that would provide them with greater access to the American Dream, there is no magic in trusting that government attempts to level the housing market will somehow succeed. If rent reform can provide New Yorkers with enough housing to satisfy growth and development and incentivize the construction of housing at all levels of income, it will have satisfied the goals of all possible constituencies – New York State’s legislature as well as the landlords and tenants who have lobbied it for change. If not, one can only hope that it doesn’t exacerbate New York City’s existing economic problems and economic divisions.
Finally (from a good friend who read the 6/21/19 TLR)
*┬® Copyright 2019 by William Natbony. All rights reserved.