RENT REGULATION IN NEW YORK CITY: A Briefing Book =============================================================== 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.) ----------------------------------------------------------------- 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. ----------------------------------------------------------------- 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.