The Real Control in Rent Control

Truth. (zerohedge)

Truth. (zerohedge)

NYC Housing Policy Tools Series

Over the next few weeks, as we prepare for the Trump Era, I will spend time on various housing policies in NYC in order to help frame the the affordable housing crisis.  I have picked four topics related to NYC housing laws: rent regulation, zoning, occupancy, and property taxes.  I concede that there are other policy tools that could be included (particularly around financing) but these four tend to have an immediate impact on the most people.  The hope for this blog series is to explain the current policy tool kit in New York, but also to show why questioning the underlying assumptions about housing policy might be able to expand it. 

Part 1 of 4: The Real Control in Rent Control

NYC has over 2 million rental housing units and about half of them fall under some form of rent law protection. Rent control policies originated temporarily in many American cities during WWII, but the modern origins of this policy in NYC go back to 1969 during another extreme affordable housing crisis caused by runaway inflation.

A lot of complicated economic and political thinking went into this and it’s fascinating but too much to get into here. The basic idea was to create temporary price controls to protect tenants until the vacancy rate across the city surpassed 5% (the rate has never come close; it was 3.45% as of 2014).

Despite powerful pressure from landlord lobbyists and developers, the policy has been too politically dangerous for politicians at the city or state level to revoke entirely even though it was supposed to be temporary.

Rent Control + Rent Stabilization

Rent controlled apartments are extremely rare and account for about 1% of all apartments. Basically, unless you moved into a place before 1947, you'll never see one (they aren't supposed to pass from tenant-to-tenant.)  Rent-stabilized units make up 47% of all NYC units, and they can have their rent raised each year, but landlords must offer a renewal. Rents for 1 or 2 year leases are based on guidelines established by the Rent Guidelines Board, made up of people representing various housing interests.  In theory they can also elect to decrease rents, but never have (they've only voted not to increase rents once, last year.)

The major thing to understand about these (and all) rent laws is that they aren't permanent and NYC doesn’t control them – Albany does. The laws periodically come up for renewal and always spark massive fights and organizing efforts. 

Vacancy Decontrol

The most transformative change to rent laws since 1967 has been vacancy decontrol, which allows any vacant stabilized apartment's rent to be increased by 20% and when they go over $2000/m to return to market rate.  This policy has erased several hundred thousand units since it came into effect in 1994 (ProPublica has been running a wonderful series on this history.)

There have been a few cases over the last decade (including the Roberts Case that affected me in Stuyvesant Town) that have actually resulted in reclaiming previously decontrolled apartments over issues of tax abatements, but this has been rare. 

The big thing to know about decontrol is that it gives landlords some perverse incentives to evict tenants or slowly increase their rent through dubious means.  These tactics can be fought and get a lot of press attention when they are, but they hide the much larger story of vanishing units. (We'll cover more about this in the tax part.)

Major Capital Improvements

In addition to vacancy decontrol, another way for landlords to increase the rent in stabilized units is to pass along costs to tenants in the form of major capital improvements.  If a landlord adds something significant to their building - replacing the roof or installing AC for example -  they are legally allowed to pass along a percentage of those capital costs to each unit.  At some point they have to do these types of things and it's not entirely unfair to pass along some of that added value to tenants. If you ever check your rent statement and see a MCI line item, that’s what it means. 

There are clear regulations that a landlord must follow to qualify for MCI surcharges, but some landlords sometimes try to force through items that don't qualify. Many tenants simply don't know about challenging them. Naturally this creates a lot of tension and fights between landlords and tenants, though there have not been many tenant ‘wins’ in this department legally because tenants don't have much say in when a project is justified or not.

How Rent Laws Divide Tenants

Rent control laws have obviously been a big win for some tenants.  They have demonstrably maintained affordability for many New Yorkers, particularly as the market has exploded over the last 20 years and rent pressures have transformed the entire city.  These laws have allowed many New Yorkers, particularly older ones, to live and work in the city when they would have been forced out years ago. That's a virtue of rent control for sure.

They have also provided a rare policy tool for (again, at least some) tenants to organize through collective action, which helps broker better (if not equal) political power against wealthier, more concentrated interests. The political system in Albany is stacked against tenants on the macro-level, so this is no small thing.

However, I would argue that rent laws have been better for landlords overall because they function as a way to keep all tenants divided in the city.  Even though half of all New Yorkers fall under some protection, very few of these residents are politically active, so the group punches well under their collective weight.  Landlords certainly lose some income because of current rent laws, but imagine what concessions they would have to make if 5 million renters were a cohesive political group.

This political impotency is compounded by the lack of organization from market-rate tenants.  Whether its resentment, ignorance, or apathy, the majority of NYC renters at market-rate don’t participate in housing politics at all - because they don't think it applies to them.

Some of this is demographics. Rent-stabilized residents tend to be older, while market-rate tenants tend to be younger.  I see this where I live in Stuyvesant Town. I'm a rare "youngish" tenant that is (sort of) rent-stabilized, while most of my contemporary neighbors are market-rate. The Tenants Association struggles trying to attract younger market-rate residents as a result, even though they share many of the same needs and would love to see more involvement.

On the other hand, many younger tenants have even expressed an interest to me in participating but feel reluctant to because they don't think they have a right to - maybe they have only lived there for a little while or might move out in a few years. This happens all over the city.  It's a huge lost opportunity for tenant advocates. Some of this can be addressed within local organizations and how they message, but a lot of it is simply market-rate tenants not thinking the rent law fight applies to them. They aren't wrong right now.

Imagine a world where all renters viewed themselves as equals and organized as such.  It’s likely that the rental market would be vastly different and more dynamic. What if there was a city-wide rent-stabilization system that put all tenants in the same broad category? It wouldn't look anything like our current system and would likely have different (perhaps means-tested) structures, but undeniably it would create more incentives for politicians, developers, and landlords to work with tenants to find out better, long-term solutions for the housing market.

How Better Rent Laws Could Help Landlords

Don’t expect me to say much about how rent control ‘warps’ the rental market. That’s true, but more complicated than opponents claim.  Plenty of things warp the rental market in NYC (which I'll cover in the rest of this series).  We will never live in a world with perfect market efficiency. What that even means says more about political ideology than economic reasoning.   It's a foolish argument to rely on and ignores the larger argument about how a city should function to maximize utility and equity.

I would argue that landlords stand to gain in the long-run with better, more comprehensive rent laws. As I mentioned above, picture a world where there is one blanket rent-stabilization system for all renters in the city.  Landlords wouldn't have to spend time and money tracking multiple classes of tenants, wouldn't have to track annual changes from the RGB, wouldn't have to struggle with MCI programs, and wouldn't have to fight potentially expensive, lengthy eviction battles - it would radically simplify basic management structures.  

It would also make it a lot easier for smaller landlords to enter the market and compete with bigger landlords who previously relied on gaming the system to prevent more competition. A shockingly small amount of people control the real estate market in NYC, which has led to the slow, opaque market we currently have.  Fresh actors with fresh ideas is healthy for any market.

Finally, it would create a lot more opportunity and, indeed, incentive for landlords and tenants to cooperate on shared priorities. Removing perverse incentives in the market, such as vacancy decontrol, would remove a lot of the distrust that prevents more systemic dialogue and innovation.  There will always be tension between landlords and tenants, but the current market thrives on (and prices in) distrust and asymmetry of information which is absurd in today's technological age. Simplicity and transparency don't just make markets 'more efficient' - they make them more equitable for everyone.

I stress that a city-wide system would not look like our current three-tiered system.  There would be trade-offs from current tenants overly benefiting from the system to enter into the new one (perhaps with the city helping means-tested tenants with the transition). There would need to be broad guidelines and discretion for local communities rather an a one-size-fits-all policy. There would need to be new, more technologically advanced ways to share data and monitor compliance. These are complicated details for sure, but no more complicated than what the RGB or Albany does now. If anything, a reinvention of the rental market would allow for new, cheaper technology to simplify much of our current byzantine system. That starts with re-examining what current rent laws were meant to achieve from a public policy standpoint and not from a political standpoint. Both sides will have to be convinced that they stand to gain from such an exercise, but it's not a hard argument to make if we try.