Briefing Book:
Common Myths About Rent Regulation


RENT REGULATION
IN NEW YORK CITY:
A Briefing Book

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Chapter Four

COMMON MYTHS ABOUT RENT REGULATION


The preceding analysis has illustrated that, despite shortcomings
in the system, rent regulation improves the status of tenants in
New York City while at the same time assuring a reasonable level
of return for owners. There remain some outstanding
misconceptions about rent regulation, however, which over the
years have grown to mythic proportions.

These myths must be addressed in light of the age-old criticisms
of rent regulation. that it stops new construction, causes
abandonment, erodes the tax base, and serves the rich. The
evidence suggests that far more determinants than rent regulation
are at work in each of these claims.

Due to the use of a new sample, drawn form the 1990 Census, for
the 1991 HVS, recent data on some important issues are not
available. Despite the absence of recent data, there is no reason
to believe that previous findings no longer hold true. Hence,
this chapter draws heavily on the works of other analysts who
have studied rent regulation.


MYTH #1: RENT REGULATION IMPEDES CONSTRUCTION OF NEW HOUSING

One of the most frequently heard criticisms of rent regulation is
that it discourages new construction of housing, keeping the
owners of regulated buildings from collecting adequate rental
income needed to support new construction. This is a vital
question, considering that all New Yorkers, particularly tenants,
suffer from a housing shortage.

Perhaps the most recent and compelling evidence on this score
came from a panel of housing experts at a discussion convened by
the Rent Guidelines Board (RGB). The comments of Elizabeth
Roistacher, an economist who has studied rent regulation in New
York City and elsewhere for the past two decades, represent those
of the panel in general.

     [M]y own belief from examining the new
     construction data is that it's hard to read as
     evidence that rent control itself is much of a
     retardant. There are a great many more
     explanations for why new construction rates have
     changed in New York City.... [W]hen I compared new
     construction rates in New York City to other older
     cities without rent control -- and this was only
     one piece of cross-sectional information -- the
     rate of new construction as a proportion of the
     total stock was not very different for other
     cities without rent control that were older and
     larger.(1)

This assertion is corroborated by other researchers. A study by
Anthony Downs commissioned by the Urban Land Institute states:
"[R]epeated studies of temperate rent controls(2) in the United
States provide no persuasive evidence that such controls
significantly reduce new construction here."(3) Several factors
lead to such a finding.

First and most important, most moderate rent regulations, like
those in New York City, exempt newly constructed units from rent
regulation.

Second, according to John Gilderbloom and Richard Appelbaum,
moderate controls that work to ensure a "fair and reasonable
return" do not tend to deter builders whose units may come under
control at a later date(4) (this in answer to some builders who
have argued that despite exemptions from controls at the time of
construction, they are deterred by potential future regulation of
their units). Regulatory provisions allowing for rent increases
to cover changes in operating costs and capital expenses
effectively address any concern potential builders may have.

Third, virtually all New York City builders elect to submit their
newly constructed rental apartments voluntarily to rent
regulation in exchange for tax abatements. Newly constructed
units therefore fall under regulation solely due to owner
acceptance of regulation as a condition for tax abatements such
as those offered by the 421a and J51 programs. This willingness
of owners to subject their otherwise exempt units to regulation
advances the argument that controls are not a significant
deterrent to new construction activity.

Finally, empirical studies indicate that there are far greater
determinants than rent regulation in rates of new construction.
According to Kenneth Baar, chief among these factors are national
economic conditions and land use controls.

Based on the four areas of evidence mentioned, we may conclude
that rent regulation is not a deterrent to the construction of
new housing units.


MYTH #2: RENT REGULATION CAUSES ABANDONMENT

One prominent aspect of New York City's housing crisis is
property abandonment: a large number of housing units have left
the housing stock. The causes of abandonment vary from fire to
competition with better housing to landlords' nonpayment of
property taxes. Yet historically, rent regulations have been
cited as the primary cause for the high level of housing
abandonment that plagues New York City.

However, a multitude of empirical investigations has concluded
that there is little or no causal relationship between rent
regulation and abandonment. In truth, housing abandonment is far
more complex and involves the interplay of many factors, such as
the tax structure and assessments, the income levels of tenants,
neighborhood conditions, and the investment objectives of an
individual owner/investor, among others.

An investigation of the relationship between rent regulation and
abandonment in New York City conducted in 1986 found:

     The presumed relationship between rent regulation
     and abandonment is, in the main, a symbolic one,
     developed in the midst of landlord opposition to
     continued controls. The evidence is strikingly
     clear on one point: the removal of regulations is
     not likely to affect the levels of abandonment,
     and the institution of controls is unlikely to
     produce abandonment to any significant extent.(5)

Perhaps the best way to substantiate this finding is to examine
the extent to which those cities with rent regulation suffer from
widespread abandonment. A comparison of abandonment in New York
and other cities illustrates the prominence of abandonment in
municipalities without rent controls. From research conducted in
1981, Peter Marcuse found that only one of eight cities where
abandonment was a serious problem had rent regulation. He also
found that levels of abandonment tended to be highest in New York
City neighborhoods with the fewest units subject to rent
stabilization, while levels of abandonment tended to be lowest in
neighborhoods with a high portion of regulated apartment
units.(6) In a 1972 study, Elizabeth Roistacher found very little
difference in rates of abandonment between the regulated and
unregulated stock in New York City.(7) Thus, both national and
local investigations have found that rent regulation is not a
cause of abandonment.


MYTH #3: RENT REGULATION ERODES THE TAX BASE

Several studies of rent regulation's effect on the tax base in
various cities have been conducted. Not surprisingly, just as
rent regulation does not affect rates of new construction or
abandonment, it does not appear to greatly affect the valuation
of rental property and, hence, does not affect tax revenues.
Gilderbloom and Appelbaum reviewed pertinent information and
found the following: "A report by the Massachusetts Department of
Corporations and Taxation found that rent control had no
systematic effect on property valuation." From a larger study
they summarized:

     [A] study by the California Department of Housing
     and Community Development of rent control in New
     Jersey (Gilderbloom: 1978:28) found virtually
     identical increases, about 25 percent, in assessed
     value for three years preceding and following the
     enactment of rent control-increases that were
     identical with those in non-rent controlled
     communities over the same period.(8)

Aside from assessment levels, which have been found to be largely
unaffected by rent regulation, Peter Marcuse argues that by
helping to maintain a middle-class residential base, rent
regulations enhance revenue generation from income taxes.
Additionally, Marcuse argues that there is reason to believe that
neighborhoods strengthened and stabilized by rent regulation
generate more revenues than those not experiencing the
stabilizing benefits of regulation.(9)

In recent years, real estate and business groups have advanced
proposals to decontrol rents, holding out the promise of
increased tax revenues for New York City as the justification.
The theory is that by allowing rents to increase, the city will
see real property assessments rise, and therefore landlords will
pay higher real property taxes that can be used to enhance
municipal services.

It is true that higher rents lead to higher assessments and thus
higher real property taxes. This, in fact, is what occurs under
rent regulation as rents go up over the years through authorized
rent hikes. Decontrol would no doubt accelerate this process.

But the various decontrol proposals ignore their negative
impacts. The social and economic dislocation resulting from
decontrol would have enormous repercussions for New York City's
residents and neighborhoods. It is highly debatable whether the
increased revenues would be worth the price to the city's social
and economic fabric.

Furthermore, the fiscal benefits may be illusory. As buildings
are assessed only periodically, the gain in property tax
collections would be gradual. The effect on tenants' pocketbooks,
by contrast, would be immediate. The magnitude of rent increases
that would be necessary is also staggering: In order to produce
$100 million in additional property tax revenues, rents would
have to be raised by $500 to $600 million. This massive transfer
of funds from tenants to landlords would have a negative impact
on the city's economy. As tenants would have significantly less
disposable income, small businesses would suffer and the sales
tax revenues they produce would lag. Many higher-income tenants
would undoubtedly relocate out of the city, resulting in a loss
of income taxes. The net result might be a reduction in municipal
revenues rather than the promised gain.


MYTH # 4: RENT REGULATION ONLY BENEFITS THE RICH

Perhaps the most contentious aspect of rent regulation debates is
the whole issue of who benefits. Particular concern has focused
on whether the tenants who are most in need receive the most
protection from rent regulation. There are several issues to
discuss within this context.

First, rent regulation is progressive with regard to income
despite claims to the contrary. Even though Mia Farrow and a
handful of other high-income New Yorkers live in rent regulated
apartments, the largest number of New Yorkers protected by rent
regulation are those with the lowest incomes [see Chapter 2,
Table 5]. The lion's share of tenants who receive the protections
of rent regulation are low- and moderate-income residents.

Second, while noting the effects of rent regulation on individual
households, it is important to note that regulation was designed
as a market-wide system to minimize profiteering and flagrant
abuses in the housing market as a whole. It was not designed to
be a policy initiative targeting only needy households. Unlike
programs that do target those most in need, rent regulation
creates ground rules for all players. By moderating rent levels
and providing protection from eviction, the system attempts to
minimize market failure so that more households do not fall into
a need for subsidy.

To further the public interest of stabilizing the entire rental
housing market, all units should be regulated (and therefore all
renters should be protected).


MYTH # 5: ALL OF NEW YORK CITY'S HOUSING IS RENT CONTROLLED

There is a popular notion that all of New York City's rental
housing is rent controlled. This misconception is misleading in
two ways.

First, rent control is increasingly a minor system in New York
City: only 6.4 percent of all renter households are protected by
rent control. This number will continue to shrink because rent
controlled units are subject to vacancy decontrol.

Second, rent control is confused with rent stabilization or rent
regulation in general. In New York City, rent control is not rent
stabilization; they are two different systems. (Elsewhere in the
United States, rent control is used as generic name for rent
regulation.)

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                            Table 19
    Distribution of Occupied Rental Housing by Control Status
                       New York City, 1991

Control Status               Number          Percentage

Controlled                  124,411                6.4%
Stabilized                  971,076               50.0%
Mitchell Lama                83,183                4.3%
Public Housing              174,254                8.9%
Other*                      598,652               30.7%

TOTAL                     1,951,576              100.0%

Source: 1991 HVS Tabulation Package, Series IA

* The unit of analysis "Other" refers to in-rem, HUD federally
subsidized, Article 4, Loft Board regulated, and unregulated
housing.
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Third, when both rent controlled and rent stabilized units are
combined, only 56.4 percent of New York City's rental housing
stock falls under regulation [Table 20].

Thus, all of New York City's rental housing is not rent
controlled, and only half is rent stabilized


MYTH #6: NEW YORK CITY RENTS ARE FROZEN AT WORLD WAR II LEVELS

Despite the fact that World War II was a long time ago and World
War II-style rent regulations-rent freezing-went out with the
Edsel, editorial boards and the real estate lobby denounce the
supposed icy effects of regulation on rent levels.

But the fact is that landlords of rent controlled apartments are
granted 7.5 percent rent increases annually-plus a surcharge for
fuel costs. Owners of rent stabilized apartments have been
granted rent increases that appear to have exceeded changes in
operating costs and definitely have outpaced the general
inflation rate. Rent freezes are not the modus operandi. Regular
rent increases are.

Notes to Chapter 4

1.   Rent Stabilized Housing in New York City: A Summary of Rent
     Guidelines Board Research, 1991, New York City Rent
     Guidelines Board, September 1991, Appendix N, "Housing
     Disinvestment and Rent Regulation: Reality or Rhetoric, A
     Discussion with Five Distinguished Housing Experts," pg.
     127.

2.   Temperate controls are generally categorized by analysts as
     those controls that pass along operating and capital costs
     to tenants. These are often referred to as moderate controls
     as well. Both rent control and rent stabilization in New
     York City are generally considered to be temperate/moderate.

3.   Downs, Anthony, Residential Rent Controls: An Evaluation,
     Washington DC, Urban Land Institute, 1988, pg. 4.

4.   Gilderbloom, John I. and Richard P. Appelbaum, Rethinhng
     Rental Housing, Philadelphia, Temple University Press, 1988,
     pp. 134 135.

5.   David Bartlett and Ronald Lawson, "Rent Control and
     Abandonment in New York City: A Look at the Evidence," in
     Bratt et al., eds., Critical Perspectives on Housing, Phil.
     Temple Univ. Press, 1986, pg. 180.

6.   Marcuse, Peter, 1981. Housing Abandonment: Does Rent Control
     Make a Difference? Washington, DC, Conference on Alternative
     State and Local Policies, Policy Report Number 4.

7.   Gilderbloom, John I. and Richard P. Appelbaum, Rethinking
     Rental Housing, Philadelphia, Temple University Press, 1988,
     pg. 138.

8.   Gilderbloom, John I. and Richard P. Appelbaum, Rethinking
     Rental Housing, Philadelphia, Temple University Press, 1988,
     pp. 138-139.

9.   Marcuse, Peter, 1981. Housing Abandonment: Does Rent Control
     Make a Difference? Washington, DC, Conference on Alternative
     State and Local Policies, Policy Report Number 4.