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Liberalizing Cities From The Ground Up
Rent control has devalued property so badly that you could make a million dollars by tearing down a nice 12-unit building in my neighborhood.
A blog post in Pacific Standard seeks to defend rent control- an idea that, as the author admits, is generally detested by economists. The author writes that “rent regulations give tenants a greater stake in their community and incentivize them to put time, energy, and even money into their homes.” But that’s not necessarily a good thing- in a heavily regulated market, a “stake in the community” means that tenants, like homeowners, have an incentive to engage in NIMBYism. So in a prosperous area rent control hits housing supply with a double whammy- more recruits for the NIMBY army AND less incentive for landlords to invest in housing. He also endorses the “Unlimited Demand” theory, acknowledging the argument that building more market rate housing creates more affordable housing eventually, but responds: “not in tight markets like Silicon Valley and New York City. ” This claim is of course a self-fulfilling prophecy: people use it to justify opposing new housing, which in turn ensures that supply can never meet demand. (I critique the argument in more detail here). However, the article does contain one non-silly argument: that rent-controlled cities do occasionally experience building booms (most notably New York in the 1950s). Rent control is a factor relating to housing supply, but not the only one. So here’s my modest proposal for pro-regulation politicians: a city can adopt rent control to protect existing tenants, as long as they deregulate in other ways in order to promote new construction. So for example, a state law could provide that municipalities could adopt rent control under one condition: no more exclusion of new housing. So if San Mateo County wants to adopt rent control, they can do it as long as all new housing is exempt from all of the city’s use and density restrictions. The […]
When laypeople hear the phrase “rent control”, they typically conjure up one of a few images. Tenants imagine easy street, a world where housing is ridiculously low cost. Maybe they think of rent control in NYC, where they saw the characters from Friends live in large apartments for far below market value. Landlords think of reduced profits, and tenants who live in a unit for years on end, never paying market value. Economists on both the left and right, meanwhile, simply picture bad policy. A prime example is Thomas Sowell, a world-renowned economist who claims both tenants and landlords suffer from rent control. He discusses the economics of rent control in his book Basic Economics, and his arguments have been summarized here. With Rent Control Comes a Greater Demand for Housing In an uncontrolled market, prices vary with the amount of demand. That is, prices rise because the amount of a product that people want exceeds the amount that is available at current prices. Put simply, more people want an item than there are items to go around, so to get that item you go into an indirect bidding process with other buyers. Imagine a fellow named Jerry and a girl named Elaine. Jerry wants a one-bedroom apartment in San Diego, but he can only afford $850 a month in rent. Elaine also wants to find a one-bedroom apartment, but she can afford $1,500 a month. Because there is currently a free market in San Diego, Jerry can’t find a one-bedroom for $850. There are a limited number of units and there are many more “Elaines” who are also willing to pay $1,500, which means rents hover around that value. As a result, Jerry reluctantly rents a 3-bedroom apartment with two roommates. Elaine finds a one-bedroom one at market price. […]
1. This week at Market Urbanism: Nolan Gray‘s latest post, Liberate the Garage!: Autonomous Cars and the American Dream At present, zoning laws effectively prohibit entrepreneurs from using their garages for business. In many Americans cities, hiring employees, hosting visitors, putting up signs, and altering your garage for business purposes are all outright banned. As urban planner Sonia Hirt notes in her most recent book, these regulations reflect American zoning’s dogmatic insistence on separating work from home. These restrictions effectively mandate sprawl by forcing commercial uses and residential uses into segregated districts. More troublingly, these regulations fall hardest on low-income entrepreneurs by significantly raising the cost of starting a business. The article was cited at streetsblog, and Nolan discussed the article on KCBS radio San Francisco Michael Lewyn wrote his first Market Urbanism article, Rent Control: A No-Win It therefore seems to me that pro-rent control municipalities are caught in a no-win situation: if they adopt strict rent controls, they limit housing supply by making housing a less attractive investment. But if they adopt temperate rent controls, they don’t really control rents. 2. Where’s Scott? Scott Beyer is leaving Oklahoma City tonight for Houston to see the rodeo. This week, he delved into foreign policy, writing in Forbes about The Case For Another Cuban Boatlift. Since 1980, Miami has been one of the fastest-growing metro areas by population, and has become one of the best for startup activity and upward mobility. Along with other Latin American immigrants, Cubans have bolstered this, making up over a third of the city’s population…Well into the 21st century, Cubans had among the highest median incomes and homeownership rates of U.S. Hispanic groups. 3. At the Market Urbanism Facebook Group: Michael Hamilton is happy to see good news for once: Arizona Senate Votes to Ban Cities from Banning Airbnb, Couch-Surfing Nick […]
In an otherwise excellent article on NIMBYism and luxury housing, affordable housing consultant Rick Jacobus writes: “economist Anthony Downs reviewed the published studies and found that while ‘stringent’ rent control imposed over a very long time had reduced private apartment construction in the UK, there was ‘no persuasive evidence that temperate rent control ordinances inhibit the construction of new rental housing’.” Since I am familiar enough with Downs’ work to know that he is not a flaming radical, I was a bit surprised to read this. So I looked at Downs’ paper. Downs is generally critical of rent control, writing that while rent control transfers resources from owners to tenants, “the total net amount of benefits received by the tenants is usually smaller than the total net amount of costs imposed upon the owners; hence, rent controls are not efficient.” (p. 26). Downs adds that “the experience of the United Kingdom strikingly confirms that stringent rent controls reduce new construction of rental units in the long run…the share of all housing in the United Kingdom provided through privately owned rental units dropped by about 85 percent from 1950 to 1986.” (p. 18). Then he discusses the U.S. experience, contrasting New York City’s stringent rent controls with the more moderate controls of Los Angeles. Downs cites a Rand Corporation study that “estimated that 1968 rents under New York City’s stringent ordinance averaged 57 percent below what they would have been without controls [while] 1990 rents under Los Angeles’ temperate ordinance would average only 3.5 percent below what they would have been without controls.” (p. 25). This small gap “helps explain why Los Angeles has not experienced many of the adverse effects generally associated with more stringent rent control ordinances.” In other words, “temperate” rent control ordinances don’t do very much to […]
To someone ignorant of economic reasoning, rent control seems like a great policy. It appears instantly to provide “affordable housing” to poor tenants, while the only apparent downside is a reduction in the income flowing to the fat-cat landlords, people who literally own buildings in major cities and who thus aren’t going to miss that money much. Who could object to such a policy? First, we should define our terms. When a city government imposes rent control, it means the city makes it illegal for landlords to charge tenants rent above a ceiling price. Sometimes that price can vary, but only on specified factors. For the law to have any teeth — and for the politicians who passed it to curry favor with the public — the maximum rent-controlled price will be significantly lower than the free-market price. The most obvious problem is that rent control immediately leads to a shortage of apartments, meaning that there are potential tenants who would love to move into a new place at the going (rent-controlled) rate, but they can’t find any vacancies. At a lower rental price, more tenants will try to rent apartment units, and at a higher rental price, landlords will try to rent out more apartment units. These two claims are specific instances of the law of demand and law of supply, respectively. In an unhampered market, the equilibrium rental price occurs where supply equals demand, and the market rate for an apartment perfectly matches tenants with available units. If the government disrupts this equilibrium by setting a ceiling far below the market-clearing price, then it creates a shortage; that is, more people want to rent apartment units than landlords want to provide. If you’ve lived in a big city, you may have experienced firsthand how difficult it is to […]
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 […]
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? Rent control 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 […]
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 […]
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.
