Ending rent control may not lower prices for non-regulated units

That’s one takeaway from a paper sent to me by one of its co-authors, Andy Garin, at MIT, on the effects of the end of rent control in Massachusetts in 1995 on property values in Cambridge. Fascinating topic, and much thanks to Andy for sending it to me – it’s always nice when other people write my blog posts for me!

Andy assures me that they “went through great pains to make sure our results do, in fact, have a causal interpretation, and meaningful,” but as always, I don’t have the statistical background to fisk its methods, so feel free to go at it in the comments.

Here’s the abstract of the working paper, available on NBER, called “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts”:

Understanding potential spillovers from the attributes and actions of neighborhood residents onto the value of surrounding properties and neighborhoods is central to both the theory of urban economics and the development of efficient housing policy. This paper measures the capitalization of housing market spillovers by studying the sudden and largely unanticipated 1995 elimination of stringent rent controls in Cambridge, Massachusetts that had previously muted landlords’ investment incentives and altered the assignment of residents to locations. Pooling administrative data on the assessed values of each residential property and the prices and characteristics of all residential transactions between 1988 and 2005, we find that rent control’s removal produced large, positive, and robust spillovers onto the price of never-controlled housing from nearby decontrolled units. Elimination of rent control added about $1.8 billion to the value of Cambridge’s housing stock between 1994 and 2004, equal to nearly a quarter of total Cambridge residential price appreciation in this period. Positive spillovers to never-controlled properties account for more half of the induced price appreciation. Residential investments can explain only a small fraction of the total.

Here’s an earlier (?) version of the paper. If you’re sufficiently motivated, you can find one of their email addresses online and ask for a copy of the latest version, and I’m sure they’d be happy to oblige.

Trying to make a bad policy worse in NYC

In New York, lawmakers are currently debating a compromise between New York City and upstate interests to change the policies that shape residents’ housing costs. New York City lawmakers are fighting for an extension and expansion of current rent control laws, while Governor Cuomo wants to tie this extension to a two percent cap on yearly property tax rate increases.

Legislators voted against a temporary extension of the current policy on Wednesday. The Wall Street Journal reports:

The Senate Democrats had been urged by tenant advocates to reject even a short-term extension in an attempt to ratchet up attention on their efforts to expand protections for existing tenants.

“Our members have said from the start: extension is not enough—we need to strengthen regulations,” said Austin Shafran, a spokesman for the Senate Democrats.

Senate Republicans, meanwhile, blamed the Democrats for the defeat, noting that they are acting against a bill pushed by Gov. Andrew Cuomo, a Democrat who supports expanding regulations.

City lawmakers ignore that in fact rent control laws make housings costs more expensive for many residents and would-be residents in order to appease the fervent interest group of tenants who currently live in apartments priced below market rates.

In 1972, the Swedish socialist economist Assar Lindbeck famously wrote, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.” Why then, are New York City politicians  — politically to the right of Lindbeck — fighting to protect rent control today? The policy is detrimental to all those unable to find housing at rent  stabilized or controlled prices as well as landlords.

Rent control has not had the dire impact in New York that it has in other cities because the number of apartments that are fully rent-controlled is a small portion of the total. A much larger number are rent stabilized (about 50 percent according to Wikipedia). Rent stabilization laws dictate the rate at which landlords can raise rents,] rather than permitting housing prices to equilibrate supply and demand. The tightening of the current price ceilings that city lawmakers support will further limit the rental market from serving middle class and lower income tenants who are not lucky enough to secure rent-controlled or rent-stabilized units.

All of the evidence against rent control begs the question: Why does such a detrimental policy persist with many favoring expansion? On Wednesday, pro-rent control protestors in Albany were arrested for blocking lawmakers’ access to the capitol, and clearly most democratic lawmakers think the current laws do not go far enough.

Rent control has some classic aspects that make it an enduring policy.  The costs are dispersed across all city residents while the tenants in rent-controlled buildings reap the concentrated benefits. Additionally, the harm of rent control is a classic case of unseen costs. Residents may see only the benefit of reduced rent without seeing the policy’s negative impacts.

 

“The Joys of Staying Put,” or “The Joys of Rent Control”?

The New York Times is unusually good at ignoring economic forces at play in land use and transport markets, but I think this piece called “The Joys of Staying Put” by Constance Rosenblum takes the cake. Here’s a quote:

New Yorkers typically move a lot. Prompted by the arrival of a partner or a child, or money that buys more space or a nicer neighborhood, or simply an appetite for change, some New Yorkers move house every year or two. According to census estimates for 2009, 650,000 New Yorkers lived in a different house or apartment within the city than in the previous year.

But a few stay put, immune to the call of a larger apartment or a swankier neighborhood. They plant themselves in the same place for decades or for their entire adult lives. Some have been in the same apartment since graduating from college. Shortly after sinking roots in the city, they find a place that suits them and don’t budge.

Are they really “immune” to anything, or did they just make a good call a couple decades ago by not moving out of their rent-stabilized unit and are now responding rationally to price incentives? While the author does admit that a lot of the people have rents fixed by law (“you hear the words ‘rent-stabilized’ a lot”), the whole implication seems to be that there’s something about these people beyond the rent controls, like they’re some sort of special breed of über-New Yorkers. And while anyone who knows anything about real estate will realize that the places she’s describing must be rent stabilized (under $1,000/mo. for a 1-bedroom in Greenwich Village, for example), she never mentions anyone in particular as being rent stabilized.

So for example we hear about Esther Cohen, who’s paying “just about $1,000″ for a two-bedroom on the Upper West Side “overlooking the American Museum of Natural History”:

Ms. Cohen found a roommate named Harry, and at one of many parties held in the apartment — Ms. Cohen was wearing a blue wig and Harry had made blanquette de veau — she met a filmmaker named Peter Odabashian. Nearly four decades later, Ms. Cohen can still remember what his face looked like in the shadowy hallway. Within days Mr. Odabashian moved in, and the two have been together in the apartment for 37 years. Their son, Noah, whom they adopted from Chile in 1986, is currently living under the family roof, sometimes with his girlfriend, Chesray Dolpha, a student at New York University.

Ms. Cohen, a writer, acknowledges that the kitchen and bathroom are in need of renovation and that the rooms are small and sometimes dark. But good karma keeps her rooted.

Uh, good karma keeps her rooted? You sure it’s not the law that compels her landlord to offer her, her Emmy-winning filmmaker husband, and her offspring an ever-more-valuable apartment at 75% off in perpetuity? It doesn’t even sound like she has a job – but then again you wouldn’t want to brush up against that $175,000/year income limit, would you!

This article reminds me of a Woody Allen quote told to me by Cap’n Transit: “What do years matter, particularly if your apartment is rent controlled?”

Links

1. A shameless story of rent control in NYC. Glad to see that the city is forcing developers to subsidize wealthy Manhattanites’ Eat, Pray, Love-like dreams of moving to Paris.

2. The travails of getting a bus lane on a busy LA street where “[m]ore people already travel by bus than by car along the route during peak hours.”

3. Here is what appears to be another example of bad zoning creating blight, and the city using said blight to seize the property via eminent domain and hand it over to favored developers. NYC zoning maps are shockingly difficult to read – can anybody tell me what is allowed to be built, as of right, in the area bounded by 125th and 127th Sts. and 2nd and 3rd Ave. in Manhattan?

4. NYC’s new zoning lite handbook. No code should be so complicated that a 168-page handbook can’t even contain a zoning map.

Links

1. Systemic Failure praises Gov. (again) Jerry Brown’s efforts to do away with California’s redevelopment agencies and “enterprise zones” (there’s a euphemism if I’ve ever heard one), which the author claims promote autocentric development with public funds. He then cites a few examples of redevelopment agencies pushing such plans in San Jose. If he can come up with that many in one city, I can’t even imagine how much damage they’ve done throughout the whole state. So far I’m liking Jerry Brown’s second act.

2. A very interesting Wikipedia article about a controversial Brooklyn-based developer.

3. One Staten Island councilman wants to use the dreaded environmental review against bike lanes.

4. An article about the Toronto condo boom. I’d like to know more about this:

But perhaps the biggest demographic that will continue to drive sales this year is the investor market, both local and international. Mr. Lamb says there are few developers building rental towers any longer, in part due to the city’s rent control laws, so investors hold the key to rental accommodation. He says it’s not uncommon for 40% of a building to be owned by investors, with most rentals situated below the fifteenth floor because they are less expensive than those with a brighter view. Mr. Myers estimates 50% to 60% of downtown condo units are owned by investors who rent them out.

New Years link list

Behold, your first link list of 2011!

1. The automobile may officially in decline (very good article!).

2. Interesting parallels between China and its HSR intellectual property disputes and post-WWII Japan and Korea. More here.

3. Fred Barnes writes a stupid article for the Weekly Standard (“The road to hell is paved with bike baths”), and Jarrett Walker responds with a treatise on “coercion” (“We are the libertarians!”).

4. I forget that although rent control has been thoroughly discredited in the real world, NYC developers are still grappling with it. Vornado and another developer had to shell out tens of millions to break the rent control grip on a Central Park South building they bought, with 15 rent controlled tenants receiving payouts of around $1.5 million each.

5. Vancouver is loosening its grip on the street food market, while Stephen Goldberg is trying to create a one-stop shop for getting NYC restaurant permits/licenses/certificates/inspections.

6. The market-defying schemes that liberals come up with would be amusing if they weren’t so horrifying. Read here as they puzzle over why excess luxury condos built in NYC during the boom couldn’t easily be used as affordable housing (Vancouver redux), and watch out for the part on the third page where an organization called “Right to the City” advocates “using eminent domain to seize vacant residential buildings and turn them into affordable housing.”

7. Niagara Falls’ decades-long megaproject failures. The article ends on a positive note, citing federal money for a new train station and grants for a wine bar and a concert hall, but I wonder if anyone in Niagara Falls ever bothered trying to loosen up the parking restrictions and maybe upzone a few blocks.

Weekend links

1. Lydia DePillis responds. I’m all for upzoning only(/mostly) poor neighborhoods if that’s all the extra density we can get (though here at Market Urbanism we’re kind of utopians – we don’t care much about political feasibility), but I’m not nearly as optimistic about inclusionary zoning as she is. At its worst it’s a tool for anti-growth suburbanites to kill new dense development while seeming like they care about the poor, and at it best it’s a misguided tax on developers of multifamily units that helps only those resourceful and connected enough to get themselves a rent controlled apartment, which is then subsidized by the neighbors who didn’t manage to get one.

2. Philadelphia eases up on the parking minimums, but parts of Center City and (all of??) Old City, both of which have incredible transit access, will still require 1 off-street space for every three units of new construction, which seems like a lot more than they have now.

3. Vancouver contemplates raising its height limits. Of course, all new towers will have to meet higher-than-LEED Gold standards – god forbid anyone should acknowledge that density is, in and of itself, good for the environment.

4. Jersey City looks like it will get its High Line, but the question now is, how much development will be allowed around it?

5. One NYC councilman wants to impose rent controls on commercial landlords. The “Small Business Survival Act,” he likes to call it.

6. Tysons Corner scores a huge new development with a 33-story tower and a “European styled esplanade” in front of the new Tysons Central Metro station, while the Lower East Side debates kinda sorta maybe thinking about developing seven acres of parking lots near the foot of the Williamsburg Bridge.

7. Hipster Runoff, the hipster blog of record, takes on food trucks.

Enlightened blogspam

I’ve always said that some day spammers are going to become so creative in their filler content that it actually becomes better than the median good-faith commenter. Well, that day has finally arrived!

From some Romanians spamming for a Bucharest car rental service on two articles on rent control from a few years back:

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.

…and this one:

The best way to end it is to phase it out gradually, by only ending rent control for future rental units. this will increase incentives to build new housing units while not increasing incentives from current renters to oppose the legislation.

Both snippets appear to be cribbed from Adam’s article on rent control on FreedomPolitics.com. Pretty impressive for automated blog spam! So if you’re ever insane enough to want to rent a car in Bucharest, here’s your place!