New York's Housing Market: Rent Asunder
The Economist Newspaper Limited
Fifty years may sound like an age in the property business, but in New York, at least, time has stood still. After the second world war -- during which little new housing was built -- the city retained its "temporary" wartime controls to stop rents from soaring as demand outpaced supply. Then, in 1969, the city passed a "rent-stabilisation" law to limit rent rises on homes built since 1947. The result, according to Michael Schill and Benkamin Scafidi of New York University, is that 56% of the city's 1.9m rented homes are still regulated. On average, their tenants pay less than $600 a month in rent, 20-30% less than free-market rates. In plush parts of Manhattan, where unregulated rents have soared, some lucky protected tenants pay less than a quarter of the going rate.
Rent control may have long outlived its temporary status, but that has not prevented a spirited battle to scrap the laws when they come up for renewal every three years. This year's fight is being led by Joseph Bruno, Republican majority leader of the state senate, who has threatened to let the rent-control laws expire on June 15th if the Democrats do not agree to overhaul them. That his stance has resulted in death threats is hardly surprising: protected tenants enjoy the right to occupy their homes until they wish to leave (or until they die) -- at which point their relatives can take up residence. For some families, the financial well-being of several generations is at stake.
The usual argument for rent controls is that New York has a very low housing-vacancy rate (4%) and that the only way to ensure the availability of affordable homes in such a tight market -- and to prevent tenants from being evicted in favour of new, higher- paying occupants -- is to regulate rents. In reality, however, it is those very regulations, along with arcane zoning and building laws, that help cause the shortage of affordable rental homes. Few regulated properties come to market, and even fewer end up in the hands of the poor (the main beneficiaries of regulation are affluent white Manhattanites). With little profit incentive, landlords often neglect rent-regulated buildings; many abandon them, cutting even deeper into the housing supply.
Over the years, too, rent regulations and other building restrictions have discouraged developers from constructing new rental properties -- especially as more than half their potential market is cosily ensconced in subsidised housing, with which developers cannot compete on price. At the same time, regulation has discouraged New Yorkers from buying homes: the home-ownership rate in the city is half that in many other metropolitan areas. All this has resulted in a sharp fall in the number of housing units built, from almost 30,000 a year in the early 1970s to around 5,900 in 1996.
On May 12th George Pataki, New York's Republican governor, unveiled reforms he hoped would please everybody. These would abolish rent regulation for tenants earning more than $175,000 a year (at present the limit is $250,000), apart from the old and disabled -- a move that would affect some 10,000 homes. Family succession rights would be protected, but when a dwelling was vacated, it could be re-let at a market rate (such "vacancy decontrol" already applies to homes letting for $2,000 or more a month). Mr. Pataki also proposed stiff new laws to stop landlords harassing tenants to force them out. All this, he says, amounts to a "responsible long-term transition."
True, and that is why the governor has found himself under attack from the likes of Mr Bruno, who wants to see all rent regulation abolished within five years, not the decades it would take for Mr Pataki's plan to end the practice. The Democrats who control the state assembly, meanwhile, are attacking the governor's plan as fiercely as they have pilloried Mr Bruno: Sheldon Silver, the assembly's speaker, says that the rent laws must be reinstated, unchanged.
But would rents really soar if regulation were scrapped? True, rents on deregulated homes would rise, but not universally. A new study by Edgar Olsen of the University of Virginia found that in much of Brooklyn and Queens market rents are no higher than regulated rents, whereas on Manhattan's fashionable Upper West Side, deregulation could raise rents by a median of 30%. But in the long term, as deregulation boosted the supply of rental properties, the balancing of supply and demand would start to cut market rents. This, after all, is what is happening in states such as Massachusetts, where deregulation has already taken place. But New Yorkers, as ever, like to think they are different.
Copyright © 1997 The Economist Newspaper Limited.