Mobility

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.

Regional Growth and Adaptation

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.

Tax Revenues

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.

Development

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.

Gentrification and Class Conflict

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.

The post Rent Control Part 3: Mobility, Regional Growth, Development and Class Conflict appeared first on Market Urbanism.

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

Black Market and Deceptive Acts

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.

Deterioration of Existing Housing Stock

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”:

Discrimination

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.

The post Rent Control Part 2: Black Market, Deterioration and Discrimination appeared first on Market Urbanism.

Opposition to rent control among economists spans the political spectrum, including over 90% of American and Canadian economists.  In fact, Swedish socialist Economist Assar Lindbeck famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing it.” (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39)

Without getting into the morality of restrictions on property rights, I will discuss the more subtle consequences of rent control over a series of posts.

Quick Microeconomics Lesson:

As stated by the National Multi Housing Council:

Rents serve two functions essential to the efficient operation of housing markets:

• they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
• they provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing — the amount producers supply is directly related to the prevailing market price.

Those of us who have studied microeconomics understand the near-universally accepted supply/demand consequence of rent-control: a decrease in the quality and supply of rental housing over time. But, for those who need a refresher or quick intro lesson, Professor Alex Tabarrok of George Mason University and the popular Marginal Revolution blog explains the microeconomics of rent control in this video:

When you have some spare time, watch this more in-depth lecture on price controls. (windows media) The first 45 min of the [1:25:30] is dedicated to rent control. Includes segments on how a landlord became a “serf” to his tenants, “Bomb Damage or Rent Control?”, and celebrity beneficiaries of rent control.

93% of economists agree that rent control reduces the supply and quality of affordable market housing as the videos explain. But that’s not all! The burdens of rent control only increase exponentially the longer they are in place. Let’s look at some of the more subtle aspects of rent control:

Hoarding:

Just as price controls on gas in the ’70s caused long lines and hoarding of gas, the same thing happens with housing. The tenants of rent-controlled units are not stupid. They know that the supply is limited and will become more limited in the future. They know that if they stay put, they’ll be able to pay about the same rent forever, in real terms. They know that if they were to look for another apartment, and they were fortunate enough to find one, the rent would be significantly greater than what they pay where they are.

So, they don’t move. Ever. Well, almost never. Even if their family grows or shrinks. The incentive to stay is just too great, and the wealthy and well-connected are better equipped to take advantage of the situation.  As Peter Salinas and Gerard Mildner wrote in Scarcity by Design: The Legacy of New York City’s Housing Policies:

To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment is vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy (in order to sublet) when they must move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment.

When rent-controlled apartments become available, family and friends often know about it first and rent up the apartment immediately, knowing that rent-controlled apartments are so hard to come by and the opportunity to rent other vacant apartments may not come for some time.

Of course, this hoarding by existing and new tenants worsens the problems, because those who are shopping for apartments have very few, if any to choose from. The longer this goes on, availability declines further and the incentives to hoard grow exponentially, as do the negative effects.

In fact, one study found that rent control tripled the expected duration of residence in New York City.

The ones who suffer the worst are those who are trying to relocate to the area for job opportunities as vacancies become more rare.

Continue on to Rent Control Part 2: Black Market, Deterioration and Discrimination To make sure you don’t miss future parts, subscribe to the feed or sign up to receive posts in your email.

The post Rent Control Part 1: Microeconomics Lesson & Hoarding appeared first on Market Urbanism.

The governor of New York pays about $1,250 a month for a two-bedroom, rent-stabilized apartment in central Harlem, even while owning a home upstate in Guilderland and having unfettered access to the 40-room Governor’s Mansion in Albany.

Governor Paterson and his wife, Michelle, made about $270,000 last year, according to their tax returns.

This is a classic example of hoarding. He should be ashamed of his Lenox Terrace apartment that someone would gladly pay market rate to rent, but seems to think it’s ok.
Can’t we at least deregulate apartments when the inhabitant can afford to live in a market-rate apartment? I hope the media pays attention to this, and properly scrutinizes the dark-side of rent regulation.

The post NY Gov. Patterson’s Rent-Stabilized Apartment in Harlem appeared first on Market Urbanism.

New York Times: Questions of Rent Tactics by Private Equity

Rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, the Guidelines Board says.

There’s a long way to go. Phasing out the free ride won’t be painless or popular, but New York needs to let the marketplace decide what rents should be and where people locate. By freeing-up units to the marketplace, much of the current supply constraints can be alleviated and rents won’t skyrocket as drastically on the market-rent payers. Not only that, the beneficiaries of the regulation have had a disincentive to relocate closer to better jobs and affordable areas since they don’t want to give up their sweet deal. Rent price control and the resulting supply constraint is more guilty than zoning restrictions in driving up market rents throughout New York.

Under the current regulations, some landlords pay more to their lenders than they collect from tenants of rent-regulated apartments. This helps explain the scale of the wealth transfer to each renter:

Vantage’s debt service is an estimated $1,098 monthly on each unit, almost 50 percent more than the average rent.

Learn more about the consequences of rent control in a informational series here: Rent Control Part 1: Microeconomics Lesson & Hoarding

The post Release Us From Rent Regulation appeared first on Market Urbanism.

New York Daily News:
Tenants say rent-regulated apartments threatened by investment firms

Curbed:
Predatory Investors

The post Investment firms try to de-regulate apartments. Are they so evil? appeared first on Market Urbanism.