The perpetual tragedy of rent control in New York

Last week (June 21), at its biennial circus, New York City housing regulators again decided how much landlords could raise rents. Despite having a 40-year high of 8.6%, they have decided to increase to 3.25%. In fact, it estimates the cost of building a rent * reduction * of 5.35% (3.25% minus 8.6%), in line with inflation.

It is a tragedy on multiple levels. Owners of rental property in New York must face the challenge of managing a building because costs such as labor, supplies, and taxes (yes, taxes are never limited) increase at a much faster rate than landlords can legally rent. We have been on this path before. The last time inflation was at this peak was in the 1970s, when annual inflation averaged 7%. The cost of operating buildings increased much faster than the legal rent and the result was catastrophic.

Take a look at these two pictures. One of these is Warsaw, Europe’s most devastated city since World War II in 1945. The other shows a neighbor in the South Bronx of New York City in 1977. Which one? Read to the end for answers. *

In a frequently quoted quote from Milton Friedman, Swedish economist Asar Lindbeck says, “In many cases rent control seems to be the most effective strategy to destroy a city at the present time – without bombing.” Judging from the photographic evidence, he is correct.

The tragedy of rent control goes beyond the visible devastation caused by high inflation and backward rent increases, although we can go there again.

Every day a quiet tragedy happens in the life of everyone who suffers from the stunts of the New York housing market due to rent control. Landlords suffer, who have unjustly reduced the value of their property and even destroyed it economically, when their legal rent cannot support the maintenance of their building. An example of this tragedy is given in an episode I read a few years ago at a biennial rent increase hearing. In an exciting hearing where dozens of “pro-tenant” activists demanded rent refrigerators and rent rollbacks, the owner of a small building approached a jar who would determine his fate. He said, “You are killing me.” I may have to leave my building, and with that, my family’s savings, which it bought to pay for retirement. ” [landlords] There are twenty of them [tenants]”

The hearing ended with a 2% approved rent increase. The fate of that landlord and his building is not known, but the fate of thousands of landlords in similar positions whose property has been completely destroyed under rent control is known.

Tenants also suffer, although many tenants understand their immediate situation and scream for lower rents. Landlords suffer when their buildings cannot be properly maintained. For thousands of tenants in the 1970s, they suffered losses when their landlords were forced to vacate their buildings. They have completely lost their homes. They suffer in other ways as well, because their garbage is “tied up” in poorly maintained rent-controlled apartments because they can’t afford to move. In Manhattan, more than a third of rent-controlled tenants have lived in their home for 20 years or more, compared to less than 3% of tenants living in market-priced housing. These extra years are spent in horrific, soul-destroying years, often controlled tenants clinging to their downstairs-market apartments, living alone after a spouse dies and children leave.

The other group who are suffering are all newcomers to the city. Rent control puts future New Yorkers at odds with existing ones, as much more “market” rent offered by newcomers partially subsidizes low-market controlled rent. It is not uncommon for two tenants living across the hall in the same apartment to pay separate rent, say A 5,000 / month for two bedrooms in Apartment A and $ 700 / month for multi-decade-long rented tenants. Apartment b. The transfer of these government-directed assets is unfair and unreasonable.

The result of the rent control fiasco

Due to rent control and violations of landlords and tenants rights, New York has experienced a serious lack of new rent construction. For many years in the 1970s and 1980s, more units were * abandoned * than were built each year by landlords. This coincided with a decline in New York City’s population of about 1 million people from 8 million to 7 million. There were other reasons for this decline, such as sky-high and fancy taxes, which typically pay New Yorkers the highest combined city / state / federal income tax in the country. But rent control had a particularly devastating effect on the city. It effectively “bombed” a vast area of ​​New York in a Mad Max-style wasteland.

Another consequence of rent control is the rapid occupation of the government and the seizure of the housing market, as the city tries to fill the gap of private construction in an expensive and coercive fashion. These include:

  • City, state and federal construction of public housing and subsidized housing,
  • Indicates that builders set a high percentage of up to 50% of new units for vulnerable tenants (resulting in higher construction costs), and
  • Government-directed housing “lottery” for lower-market units.

New Yorkers face a catastrophe that could only get worse if the government does not reverse these policies. This will be especially bad if inflation rises. If the city continues to reduce actual rents by capping growth below the inflation rate (as it is doing now), and if inflation continues for more than a few years, we will see the building abandoned again. But while the situation in the city may not be dire enough for a repeat of the 1970s rent-control “bombing”, landlords and tenants will remain quietly frustrated. Landlords will keep an eye on the value of their investments and tenants will become destitute in dilapidated, dilapidated apartments as soon as they feel the “benefits” of rent control.

This New Yorker offers some advice for those locals who have recently imposed rent control or are considering doing so: Before the problem becomes more political, cancel it as soon as you can. And if you’re thinking of imposing it: don’t.

*The picture on the left shows the South Bronx in 1977. Pictured right is Warsaw in 1945, after the devastation of World War II.

Raymond C. Niles

Raymond C. Niles is a Senior Fellow at the American Institute for Economic Research. He holds a PhD in Economics from George Mason University and Leonard N. from New York University. He has an MBA in Finance and Economics from the Stern School of Business. Prior to beginning his academic career, he worked on Wall Street for more than 15 years as a senior equity research analyst at Niles Citigroup, Schroeders and Goldman Sachs and a managing partner of Hedge Fund, an investor in energy securities. Niles has published a book chapter and numerous articles in scholarly and popular publications.

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