New York City Pols Should Stay Out Of Its Apartments
Pressure built for months in New York City for the Rent Guidelines Board to freeze rents on all the thousands of rent controlled apartments in the city. Rents which the board controls are supposed to rise by consideration of the increase in landlord costs and the ability of renters to pay. New Mayor Bill de Blasio promised a rent freeze and now his followers wanted to see a promise kept. In a 5-4 decision Monday night, the Rent Guidelines Board voted to allow rents to rise by 1 percent for one-year leases and 2.75 percent for two-year leases. This was a compromise that made neither side happy.
Landlords of rent stabilized apartments believe that their costs have risen more than that and they know the fair market rents are far above what they are allowed to charge. Tenants believe their ability to pay is not rising and they know that the Mayor promised them a rent freeze. Luckily for the renters, the promise was broken Monday night. The problem is that keeping this promise would have hurt more people than it would have helped.
Rent control can seem like the right thing to do if you don't actually think about it too much. Keeping rents lower must surely help the poor, one might think, and keeps a lid on the ability of rich, unscrupulous landlords to overcharge people. Unfortunately, the reality is that messing with markets rarely helps a situation.
Government intervention in free markets is called for when there is a market failure, a technical term economists use to describe the situations in which markets miss something. A company polluting the environment in the absence of regulation is the most common example of a market failure. In New York City, there is no market failure to justify rent control. Demand to live in New York City is simply very high.
Rent control only helps some lower-income renters (about one million people in New York City) and only in one way: it keeps their rent expense lower. However, this gain does not come freely. Rather, by capping rents-thereby lowering the returns to being a landlord-the City also ends up with fewer affordable apartments and ensures that landlords have less incentive to repair and improve their units. In other words, rent control apartments might be cheap, but they are also rare and low quality.
These costs of rent control explain why as part of the de Blasio administration housing policy, the City is trying to devise ways to increase the number of affordable housing units available in New York City. Government intervention created the shortage and now government will intervene again in an attempt to fix the problem it created.
Mayor de Blasio's favored policy appears to be forced inclusionary housing. Under such a policy, developers are granted higher density (they can build more apartments on the same parcel of land) in exchange for some percent of those units being "affordable." Such a policy artificially inflates the rents on the market rate (non-rent controlled) apartments. Essentially, the city is requiring developers to tax all their non-subsidized renters in order to provide affordable rents to their "favored" renters. This hides much of the cost of the program so that people do not realize how much is being spent to socially engineer the city's population.
An often overlooked feature of rent control is that it is a policy that favors current residents over people who want to move to a city. The interaction of supply and demand would normally mean that those willing to pay the most would displace those who cannot-the process commonly called gentrification when it involves the improvement of a neighborhood. Rent control stops that process and does not allow those hoping to move to the city to gain access. In this sense, rent control works similarly to a union in delivering benefits to those already in the union rather than maximizing benefits for all prospective members.
In cases like New York City, where only some rental units are under price controls, the policy has a particularly odd impact: the rich can move in to the non-controlled apartments, the "poor" or others in possession of a rent-controlled unit can stay, but middle-class people who wish to move to the city cannot (or have to pay unwise percentages of their income for housing). Thus, you end up with a barbell income distribution with few people in the middle because they are too rich to qualify for affordable housing and too poor to afford market rates.
A more interesting question is why do we subsidize housing? Is there a social welfare reason that some people should be able to live in New York City (or San Francisco, or other places with rent controls) even though they truly cannot afford to live there?
The most common answer is that communities should want teachers, firefighters, police, etc., to be able to live in the community where they serve. Absent rent control, there are two possibilities in very expensive locations: these people would commute or their salaries would rise. After all, in places like San Francisco where the commute from more affordable areas can be up to two hours, at some point people will refuse to take such jobs given that time cost which lowers the real wage being offered. To fill openings, salaries would have to rise.
In other words, rent control lowers salaries since it allows people to accept jobs at lower wages. That means that rather than truly helping those people with rent controlled apartments, society is shifting the costs from the employers to the landlords and to market-rate renters. That seems like an odd public policy, but given the fiscal constraints on budgets in many cities, it is perhaps inevitable that politicians look for ways to provide public benefits without requiring direct public expenditures.
Rent control is one of the myriad liberal policies that appears well-intended, but delivers few of the purported benefits. One day, perhaps, we will measure policies by results rather than intentions. However, that day has not arrived yet.
