Loyal reader, Bill tipped me off to this blog and I’ve subscribed to the feed ever since. Today’s post was particularly relevant:
Isn’t this photo classic?
The comments on the blog are always fun to read too…
It’s easier to look at the symptom: corruption, than treat the disease: government over-regulation:
The unsung and highly specialized role these private individuals play in the workings of city government gained notoriety last week when investigators revealed that for the last year, an expediter had been secretly recording conversations to help build an ongoing bribery case that so far has led to federal charges against 15 people.
Expediters have multiplied and become fixtures at City Hall in recent years. During the height of the building boom a few years ago, the permit process stretched for many months, creating a cottage industry of people offering their expertise in the byzantine ways of the city’s zoning and building codes.
These expediters will be made out as the bad guys, though most serve a valuable roll: wait in line, deal with city staff and other menial things professionals don’t want to waste valuable time doing. These guys are not squeaky clean – many expediters are people you wouldn’t want your daughter dating, but dig deeper to find the real bad guys: the bureaucrats who thrive on bad bureaucracy. The harder it is to do your business, the more it’s worth to hire someone to “expedite” the approval process. They get their kickbacks, campaign contributions, and SkyBox tickets just because they are not competent enough to get the job done quickly, and/or aren’t properly funded to do the job properly. Meanwhile, important projects are delayed, investment capital sits idle, materials wait in a warehouse, and people wait for their homes, offices, or stores to be built. Dig deeper below the surface, and you’ll see the whole crooked system of patronage, political contributions, payoffs, and deal-making fueled by government regulation, lobbying, and machine-building.
With the referendum approaching, the debate over rent control is heating up in California. This video is pretty balanced in showing both sides. There are some memorable quotes, like “social security and pension plan would not pay the market rent, so I just wouldn’t eat.” I guess this guy values his $375/mo apartment over food. Or the pro-rent-control activist who says, “If you can’t find a place now, what will it be like if we lose rent control?” Another says, “Economically, this would be devastating.” I encourage them to take microeconomics, but I think economics was banned in San Francisco. Was that Proposition 76?
Part One of this series was a refresher on the Microeconomics of Rent Control and touched on how it encourages hoarding Part Two discussed rent controls influence on the black market for apartments, rental property deterioration and housing discrimination. Here in Part Three, we will discuss how rent control hampers mobility, regional growth, tax revenue, apartment development, and becomes a catalyst for class conflict.
As mentioned in Rent Control Part One, duration of residence in a rent-controlled apartment has been observed to be three times as long as duration at market-rate apartments. One can see that the incentive to hoard rent-controlled apartments is also disincentive to relocate.
The mobility of both the tenants and newcomers are drastically hampered by rent control. Unless the tenant has the money to rent a second apartment (or Governor’s mansion), it will be difficult for him to relocate closer to better employment. The tenant may rather endure a very long commute in order to maintain the rent-controlled apartment. As Walter Block put it, "They are, in a sense, trapped by the gentle and visible hand that keeps them where they are rather than where they might do better."
Difficulties are multiplied if the local economy takes a turn for the worse. A downturn in local employment would not be relieved by people relocating for jobs, thus making the unemployment and poverty situation worse.
Employees looking to relocate in the city with rent control are hurt the worst as they will have a difficult time finding available apartments. The drawbacks to the local economy are discussed in the section on regional growth and adaptation.
The reduction in mobility is especially burdensome on families with children, since public schools tend to be local. If the local school is under performing, a family under rent-control will lose it’s reduced rent if it makes the difficult decision to relocate to an area with better schools. To relocate to a better school, a family would also have to find a new apartment, which would be much more expensive and almost impossible to find.
The hoarding of rent-controlled apartments makes finding an affordable apartment in the the city with rent-control. Not only is this a burden on the newcomer, this makes it harder for a city’s businesses to attract skilled workers. Employers may decide to relocate to other cities, if their recruits consistently can’t find decent housing.
Often times workers who’s industries have relocated will not relocate in order to maintain the rent controlled apartment. In the long-run, this worker’s family may become a burden on the public assistance system as they may not have the skill sets to quickly pick up another profession that pays as well.
Rent control reduces the market value of regulated rental property. Typically, this negatively effects the assessed property value relative to unregulated properties, decreasing overall property tax revenues and burdening market properties disproportionately. A study of rent control in New York City in the late 80s estimated reduction in taxable assessed property values attributable to rent control at approximately $4 billion, which costs the city approximately $370 million per year in property tax revenues.
Developers would have very little incentive to build affordable housing if they knew the rents they charge were to be restricted by rent control, or were at risk of being regulated in the future. Thus, almost no new stock of middle and lower class housing is built. Instead, developers may only build "luxury" buildings that are often not regulated.
Thus, affordable housing stock will decrease as older buildings become uninhabitable (or are burned to the ground for insurance money) and no new stock is created. Over a long time, the effects the shortage is devastating.
As a side effect, rent control’s effect on development decreases employment in building trades that would have been needed to build housing.
As mentioned in the section on discrimination, landlords may choose unsavory methods to choose their tenants, since price cannot be a factor. Often, landlords will discriminate against persons of certain ethnicities or religions. This type of discrimination can often be widespread through an area causing tensions between religious or ethnic groups, and in the long-run drive out certain types of people from those areas.
The shortage of affordable housing, and development of only luxury housing a huge gap in the income of a city’s residents. Over time, luxury developments will be confined to certain areas less blighted by rent control, causing segregation and rapid gentrification.
As housing in cities have become less plentiful under rent control and market-rents vary drastically with regulated rents, the incentive grows for landlords to deregulate apartments to market-rates. These tactics have become aggressive as the incentive is extraordinary. A recent NY Times article describe the tension between tenants and management at Stuyvesant Town and Cooper Village in New York:
More than a year after buying Stuyvesant Town and Peter Cooper Village in Manhattan for a record-breaking $5.4 billion, Tishman Speyer Properties has accused hundreds of rent-stabilized tenants of living somewhere other than their apartments, a tactic that residents and their lawyers say is part of an aggressive attempt to drive out low-rent tenants to make way for high-rent ones.
…about 800 rent-stabilized leases have been denied renewal because the landlord believed the tenants had a primary residence elsewhere, according to the company. More than 4 in 10 of those cases were later dropped, while 3 in 10 ended with tenants giving up their apartments.
Another example of class conflict caused by rent control discussed in the Market Urbanism blog is an apartment building owner in Manhattan who’s rent controlled tenants tried to prevent his family from living in their own building.
Continue on to Rent Control Part 4: Conclusion and Solutions , which concludes the series on rent control and discuss different policy solutions.
For more reading, see the section on Rent Control to the Links to Articles and Academic Papers page.
With New York’s new Governor’s rent subsidized by his landlord and California debating the best ways to end rent control through Proposition 98, I thought it was a good opportunity to discuss the negative aspects of rent control.
This post is the second in a four part series on the rent control. Read all four posts:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent Control Part 4: Conclusion and Solutions
As current renters hoard their rent-controlled apartments, it is rare that new apartments become available. Sometimes, tenants would illegally sublet their units at higher rents.
Landlords do under-the table deals or rent to friends and family. New York had to crack down on landlords charging “key fees” as high as several thousand dollars to new renters.
Landlords will often find loopholes that will let them de-regulate a building, just to be released of the financial burdens. For example, in NY landlords will take their rent-controlled building and deregulate it by using the entire building as a residence for a certain number of years. This is space that could otherwise have been rented at a market rate.
Because of the disincentive to improve and maintain the property, landlords will often become slumlords and allow unhealthy conditions or activities to take place in the apartments. This lack of improvement not only is unpleasant to the current renter, but accelerates the end of the usable life of the aparment building. The Rand Corporation studied Los Angeles’ rent control law and found that 63 percent of the benefit of lowered rents was offset by a loss in available housing related to deterioration and disinvestment.
The burdens of rent-control could become so heavy on a landlord that he may find it beneficial to burn his building down to collect insurance. Of course, this is dangerous to tenants and neighbors, but happened regularly in the Bronx. The Bronx’s arson epidemic led sports announcer, Howard Cosell to proclaim “‘There it is, ladies and gentlemen, the Bronx is burning”, as the TV camera panned over the neighborhood during a 1977 Yankees World Series Games.
Professor Joseph Salerno’s lecture called “Bomb Damage or Rent Control”:
The free-market typically disincentivises any discrimination based on factors other than price, quality, and quantity because of the self interest of the participants. However, rent control removes this disincentive.
Since under rent control the price is set and there are many applicants, a landlord has the incentive to choose tenants based on other factors. A landlord will more carefully examine applicants’ credit history and income, which a good landlord should do, but lends toward biases against younger applicants. A landlord may decide renting families is less desirable, or may prefer to rent to attractive young females. Often times, racial preferences have influenced renting decisions, which typically worked against minorities. Thus, rent control can exacerbate segregation problems because landlords choose not to rent to people who would change the demographics of an area.
Continue on to Rent Control Part 3: Mobility, Regional Growth, Development and Class Conflict. To make sure you don’t miss any of the series, subscribe to the feed or sign up to receive posts in your email.
For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.
NBC5 has an update listing the people involved and video here: New Corruption Charges Hit Building, Zoning Departments
Chicago Tribune: U.S. to announce charges against 15 in city bribe-taking probe
(thanks to Dan M. for the tip)
Federal authorities are set to announce charges Thursday against 15 people, including seven City of Chicago employees, after an investigation into bribe-taking at the city’s Zoning and Building Departments.
City Hall’s zoning process is the subject of the Tribune’s ongoing “Neighborhood for Sale” series. The stories detail how millions of dollars in campaign donations greased zoning changes that transformed the city during the real estate boom of the past decade.
What’s scary is that land use is so regulated and the stakes are so high, that developers have to bribe government employees in order to exercise their own property rights. But, that’s how it works: politicians downzone areas, knowing that developers will have to scratch the politicians’ backs to build what the market tells them. There’s often the added political bonus of downzoning to pander to NIMBY factions.
The downzoning creates a barrier to entry so that only the developers who are politically savvy can get things done. (see Tony Rezko) It makes the whole planning/development system corrupt. Should we be a bit surprised bribery is happening?
Developer, Al Friedman plans to build a “green” parking garage in Chicago’s Streeterville neighborhood, where development has replaced many surface lots. (Crain’s)
Environmentally speaking, it’s probably better than a surface lot and frees up more space for productive development. But, can the structure itself being green offset the environmental effects of the cars using it? Is this a lesser of evils? Or is making a parking structure “green” a wasted effort?
What do you think?
photo by flickr user paytonc
The National Trust for Historic Preservation announced that New York City’s Lower East Side, famous for it’s history of tenements and slums, is one of 11 architectural, cultural, and natural heritage sites that are most at risk “for destruction or irreparable damage.” By “damage”, they mean new luxury towers filled with wealthy people, replacing aged tenements filled with yuppies and hipsters.
From the NY Sun: ‘Endangered’ Is Designation as Lower East Side Waxes
Professor of Urban Policy and Planning at New York University, Mitchell Moss:
“The overall neighborhood is witnessing a transformation. And just as young people move into that area, I certainly hope they are not planning to bring back historically dangerous conditions like cholera, typhoid, and open sewers,”
Of course, this comes with downzoning, which will limit supply, drive up rent and land prices, and increase the incentive to tear down more buildings. Thus, quickening demolitions and gentrification. I can understand protecting a few particular locations or buildings, but to downzone the entire area will put a huge burden on the City’s housing supply.
Also, Curbed: The Lower East Side is an Endangered Species