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Monday, September 15, 2008

Rent Control in New York City

All price controls, including rent control, suppress the market mechanism and are prone to corruption (from WSJ):
 

Rent Control Is the Real New York Scandal


 

This week Charlie Rangel -- the New York Democrat and powerful chairman of the House Ways and Means Committee -- gave a news conference in Washington where he admitted failing to report on his taxes $75,000 in rental income from a villa he owns in the Dominican Republic.

[Cross Country]1
 

Just a few months ago Mr. Rangel admitted that he occupies four rent-stabilized apartments in a posh New York City building. It turns out that in a city with a very tight housing market, Mr. Rangel has wrangled himself a pretty good deal, thanks to rent-control laws that are ostensibly aimed at helping the poor and middle class.

But don't cluck too loudly at Mr. Rangel alone. Lots of well-connected New Yorkers have good deals.

New York City has had rent control laws since 1947, on grounds that they were necessary to protect people from rising rents. New York State expanded the regime in 1969, creating a rent stabilization program to cover apartments built after 1947 and before 1974 -- allowable rent increases are set by the City's Rent Guidelines Board.

The restrictions were loosened somewhat in 1971 and again in 1997 because of the realization that the system was benefiting wealthy renters. Under today's rules, landlords can move apartments renting for more than $2,000 a month with occupants making more than $175,000 a year onto the free market.

Today, there are 43,317 apartments where tenants (or their heirs) pay rents first frozen in 1947. There are another 1,043,677 units covered by rent stabilization. All told, about 70% of the city's rental apartments are either rent controlled or rent stabilized. And because the system has been in place for more than six decades, many residents see their below-market rents as an entitlement.

The regime has also incentivized builders to put up more luxury units -- a result met with policy gimmicks such as tax incentives for builders of affordable housing and landlords who keep units in rent stabilization.

This is the world in which Mr. Rangel lives. He uses three adjacent rent-stabilized apartments in Harlem's Lenox Terrace as his "primary" residence. He has a fourth apartment that he has used as an office and which he is giving up. He pays a total of $3,864 a month in rent, which is less than what he would pay for the same apartments on the open market.

His defense, that "They didn't give me anything. I'm paying the highest legal rent I can," is actually true. And that's precisely the problem. Rent control and rent stabilization have increasingly become a tool of the well-heeled and the well-connected. New York Gov. David Paterson, for example, also keeps a rent-stabilized apartment in the Lenox.

According to the New York City Rent Guidelines Board annual report, "Housing NYC: Rents, Markets and Trends," across the city there are 87,358 New York households reporting income of more than $100,000 a year which pay below-market rent thanks to the city's rent control and stabilization laws. A full 35% of all the city's apartments covered by the rent control regimes are rented by tenants who make more than $50,000 a year.

This system is destructive to the city's housing stock, because landlords who own rent-controlled apartments have less incentive to pay for repairs and upkeep. It also warps the housing market, and forces many new arrivals to occupy the least desirable apartments.

New York has a city-wide vacancy rate of just 3% -- and when good rent-stabilized apartments come on the market, you have to either know someone or pay someone (a broker, for example) to get it.

The result is that many renters who pay below-market rents are reluctant to move -- because it's too difficult to get as good a deal elsewhere in the city. Thus, economists Ed Glaeser and Erzo Luttmer estimate that 21% of the city's renters live in apartments that are bigger or smaller than they would otherwise occupy. The controlled rents certainly don't increase the number of affordable apartments.

Of course, to deal with the shortage of cheap apartments, lawmakers nearly always seem to favor more subsidized housing. Mayor Michael Bloomberg is now pushing a $7.5 billion Affordable Housing Plan that offers tax-exempt debt to anyone who builds "affordable housing." And he wants to expand the number of people who qualify for such units by including families earning up to $75,000 a year.

The Manhattan Institute's Nicole Gelinas points out that this will add 5.7 million New Yorkers to the eligibility lists, making it harder still to win the apartment lottery in New York.

There is a better way to address the lack of reasonably priced housing in the city. If Rep. Rangel, Gov. Paterson and all the other well-to-do New Yorkers lost their rent-controlled or rent-stabilized apartments, there would be a loud public outcry to loosen regulation and allow more new construction.

Ms. Norcross is a senior fellow at the Mercatus Center at George Mason University.