30 Jan The Failure of Rent Control*

The Failure of Rent Control

Rent control as a policy has failed. It is a primary cause of the urban housing shortage.

The New York Times in December ran an editorial praising New York State’s recently-enacted tenant protection laws: “Evictions are Down. Thank New York’s Voters.” The editorial reported that the new law had resulted in 35,000 fewer tenant evictions in 2019 than in 2018. That’s a good thing. Prior to enactment of the Housing Stability and Tenant Protection Act of 2019 evictions had been increasing as owners of apartment buildings used every available means to force tenants out so that they could raise rents or convert their buildings into coops or condos to maximize their value. That was because of rent control. Nearly half of New York City’s apartments are rent-controlled with leases substantially below market rates. It simply was good business for landlords to force tenants from their apartments. That result had not been foreseen by New York’s legislators when they enacted and preserved the rent control laws. Whereas those rent control laws had been intended to create a reservoir of affordable apartments for lower-income New Yorkers, it instead had morphed into the opposite – providing the incentive to evict them. The Housing Stability and Tenant Protection Act of 2019 was intended as a band aide fix. Tenants who had challenged their evictions or fought their rent increases had been out-gunned by landlords’ deeper pockets and hampered by the time-consuming judicial process. The Times editorial triumphantly concluded that the new law removed the perverse landlord incentives that had forced tenants from their apartments. “Landlords are no longer allowed to raise the rent on regulated apartments by 20 percent each time a new tenant arrives, for example, and apartments remain regulated regardless of the monthly rent.”

The Times is correct that landlords should not be incentivized to throw-out their tenants. That was an unintended consequence of rent control. It happened because of laws that were well-targeted when enacted to protect vulnerable tenants. However, as times changed, rent control remained when the rationale that led to its creation ceased to exist. Economies change and targets move …, and the benefits targeted by rent control have moved quite a bit over the past 75 years. The Times also is correct that the Housing Stability and Tenant Protection Act of 2019 successfully protects tenants from being unfairly evicted under New York’s rent stabilization laws. The fact is that tenant protection laws have enabled lower-income workers, as well as many well-off grandfathered tenants, to be able to continue to live in the most expensive city in America. And, yet, New York continues to grapple with totally inadequate housing to meet a growing demand …, as well as totally inadequate low-income housing. As a magnet for business and as an employment generator, New York has to find ways to provide more housing, and more affordable housing, to its residents and workers. It has not been doing so. Rent control is neither providing nor encouraging an increase in housing of any kind to accommodate existing New Yorkers, yet alone the influx of new workers. It is worth noting that adding affordable housing would meaningfully reduce the number of those forced out of their homes and onto the street – it is no secret that the lack of affordable housing has been a primary reason for New York’s expanding homeless population.

Unfortunately, lawmakers have addressed all housing problems in the belief that enacting laws, and stacking new laws on older ones, can cure almost any problem. New York has done so by regulating the construction, location and specification of housing projects and enacting zoning laws that restrict the height, light, and size of buildings. A variety of those laws provide an approval process for even minor exceptions to the zoning and construction processes, while other laws require the use of local labor. That adds to costs and takes time, otherwise known as red tape, a great deal of red tape. When older laws have been seen as hampering existing government policies, little effort has been given to repealing and replacing those laws with better-targeted ones. Instead, new laws invariably have been added on top of the old ones in an attempt to fix the perceived economic, social and political inequities …, and that process has continued adding to an already complex building process … which is precisely what has happened with respect to New York’s rent control laws. There is a natural reluctance on the part of legislators to repeal laws that are no longer working as intended and starting over. Wiping the slate clean and beginning anew upsets existing constituents. Instead, the practice has been to add a patchwork of legal “fixes.” New York City’s housing laws therefore resemble a battered 1946 Chevy with tape holding together the side-view mirrors, the trunk tied down with rope, the wrong-colored paint covering deep scratches, and new black safety belts carefully embedded in the body and on the red-vinyl bench seats.

Which brings us back to the crucial phrase in the Times editorial’s conclusion: “apartments remain regulated.”

That is the principal reason why there isn’t there more affordable housing in New York City. New York’s governments have done their best to micromanage the real estate development process …, all with the best of intentions as well as with an eye on voters …, but without an accurate awareness of the long-term consequences. As The Economist recently editorialized, the soaring cost of housing “has created gaping inequalities and inflamed both generational and geographical divides. In 1990 a generation of baby-boomers, with a median age of 35, owned a third of Americans’ real estate by value. In 2019 a similarly sized cohort of millennials, aged 31, owned just 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} … [which] helps explain their drift towards ÔÇÿmillennial socialism.’” New York City housing is unaffordable to all but the wealthy. Rent control and zoning regulation in New York City are the proximate cause …, and therefore a prime example of what has gone wrong and needs to be righted.

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 to accommodate returning veterans. New York slowly relaxed those controls in the 1950s and ’60s, but continued rent control limited new construction and led to a foreseeable housing shortage in the 1970s and ’80s. Restrictive zoning laws further limited apartment construction. The consequence was that landlords allowed buildings in certain “zones” to fall into disrepair, leading to abandonment of older buildings and in many cases decimating low-income neighborhoods.

The first zoning regulations in New York date back to the 19^th Century when it was critical for health reasons to separate residential and manufacturing spaces. New York’s zoning laws were codified in 1916 (in a total of 12 pages that now number 1478!) to regulate the types of buildings that can exist in any given neighborhood – residential, commercial or manufacturing – and also to regulate the height and size of buildings in each such zone. These laws were directed at the problems of those times, including overcrowding and the absence of natural light, air, ventilation, sidewalks, etc., exacerbated by the construction of skyscrapers that towered over tenements. Prior to enacting the new zoning laws, medical authorities had declared certain districts’ streets to be a public health menace and a potential source of disease.

Times indeed have changed.

The origin of zoning was “to encourage the right building in the right place.” While “the right place” was initially a flexible concept, it gradually evolved into government planning.

America prides itself on free markets and the practice of market-based capitalism. Rent and zoning control are not market-based. They substitute the visible hand of elected politicians for the invisible hand of the market …, and in the case of urban housing the consequences have become all-too-apparent. Boom and bust cycles are the inevitable consequence of invisible hand economics. Governments make every effort to insulate citizens from the bust part of that cycle. What history has shown, however, is that the visible hand of government also creates booms and busts … and that government efforts to manage that cycle often are counterproductive. The urban housing crisis shortage is a serious cyclical bust brought on by government efforts to manage the real estate market and prevent a housing shortage — a housing bust. Government policies instead have caused that shortage. A lobbying group calling itself Taxpayers for an Affordable New York has argued that the Housing Stability and Tenant Protection Act of 2019 “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.” History supports that conclusion.

Many Americans (and most Europeans and Asians) believe that the invisible hand doesn’t work well enough, that it isn’t working well in the modern world, and that some sacrifice of market economics is necessary to maintain fairness and avoid class warfare … or worse. New York City is indeed experiencing an affordable housing crisis with apparently insufficient incentives for the construction of working-class housing. There’s a supply-demand imbalance. New York City has a relative paucity of land with a great many residents and wannabe residents that it has been seeking to manage through restrictive rent control and zoning laws. It hasn’t worked. Had there been a market-based New York City economy, more housing would have been built. The consequences of rent and zoning control are all-too-apparent. Other cities and countries have had greater success using different legal structures. The templates used by Tokyo, Switzerland and New Zealand might provide an excellent starting point for municipal governments to study.

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 has been no magical outcome from the trust that voters placed in New York City’s government to level the housing market. Rent and zoning control have failed New Yorkers as well as residents of other major urban areas. It’s time to look at alternatives.

Finally (from a good friend)

In a small American town, a band of squirrels had become quite a problem.

The Presbyterian church called a meeting to decide what to do about their squirrel infestation. After much prayer and consideration, they concluded that the squirrels were predestined to be there and they shouldn’t interfere with God’s divine will.

At the Baptist church the squirrels had taken an interest in the baptistery. The deacons met and decided to put a water-slide on the baptistery and let the squirrels drown themselves. The squirrels liked the slide and, unfortunately, knew instinctively how to swim, so twice as many squirrels showed up the following week.

The Lutheran church decided that they were not in a position to harm any of God’s creatures. So, they humanely trapped their squirrels and set them free near the Baptist church. Two weeks later the squirrels were back when the Baptists took down the water-slide.

The Episcopalians tried a much more unique path by setting out pans of whiskey around their church in an effort to kill the squirrels with alcohol poisoning. They sadly learned how much damage a band of drunk squirrels can do.

But the Catholic church came up with a more very creative strategy! They baptized all the squirrels and made them members of the church. Now they only see them at Christmas and Easter.

And not much was heard from the Jewish synagogue. They took the first squirrel and circumcised him. They haven’t seen a squirrel since.

*┬® Copyright 2020 by William Natbony. All rights reserved.