U.S. Markets open in 6 hrs 26 mins

New York’s Insane Rent-Reform Package Will Make the Housing Market Worse for Everyone

James Sutton

The New York State Legislature will vote this week on a package of reforms to existing rent-control and tenant-protection laws. Governor Andrew Cuomo has promised to sign whatever the Legislature delivers to his desk. The proposal at issue is disastrous; in a misguided effort to solve New York City’s affordable-housing crisis, Democrats in Albany are threatening to seriously damage the city’s housing supply and the quality of existing buildings.

Lawmakers have essentially decided to further intensify the city’s already dense tangle of regulations and restrictions on landlords. The reforms make it much harder to raise rents on rent-controlled (22,000 units in the city) and rent-stabilized (966,000 units) apartments. They make it harder for landlords to evict difficult tenants, and they disincentivize maintenance and upgrades. They force landlords who sold leases below the rent-regulated price to keep them that way. And they allow tenants making over $200,000 a year to pay below-market prices.

But I’m getting ahead of myself. First, a bit of background on what all these terms mean.

Almost a million units in New York City currently fall under the aegis of “rent regulation.” This category includes both rent-controlled and rent-stabilized apartments. Rent-controlled apartments must have been built before 1947 and been occupied by their current tenants or passed down to said tenants through family members since 1971. Their owners can charge no more than the Maximum Base Rent (MBR), a figure derived from utility charges, real-estate taxes, maintenance fees, and return on investment. They may raise rents once every two years, by no more than 7.5 percent. This is, of course, often subject to lengthy legal challenges mounted by tenants.

Rent stabilization is a whole different kettle of fish. Applying to buildings of six units or more built between 1947 and 1974, or those that opt in for tax benefits, it mandates yearly rent increases set by New York’s Rent Guidelines Board, usually at between 1 and 3 percent. And at least until now, rent-stabilized units whose rent exceeded $2,700 a month or whose tenants made $200,000 a year for two years running were “deregulated,” or taken out of the rent-stabilization program.

If it’s not already obvious, New York City’s housing market is not quite an example of unchecked laissez-faire capitalism.

You wouldn’t know that from hearing “tenant’s rights” advocates talk, however. Cea Weaver, the campaign coordinator of Housing Justice for All, a major advocacy group that has lobbied for the reform package, said in an official statement that the bill takes “back the protections we lost as a result of decades of Republican and real estate control in Albany.”

Of course it doesn’t occur to the Weavers of the world that the “protections” they seek grossly distort housing markets to everyone’s detriment. According to a study of San Francisco’s rent-control program, published by the National Bureau of Economic Research, rent control decreases supply and increases rent in the long term. Professor Rebecca Diamond, one of the co-authors, summed it up as “something of a transfer from future tenants to incumbent tenants.” Heavy-handed rent regulation actually resulted in less rent-controlled housing. Landlords would rather convert standard units into condos or upgrade them to luxury units when rent regulations suppress prices.

So rent regulation creates a market tilted toward the rich. Middle- and working-class people are left competing for fewer, more expensive, units. Progressive groups then call for even heavier regulation to deal with the “crisis.” And the cycle continues.

The Legislature anticipated a few of these problems. Under the reform package, rent-stabilized apartments cannot be deregulated because of rent thresholds or tenant income. They’ll just stay below market rate in most of the city, permanently. And the rule stating that tenants earning over $200,000 a year will see their apartments deregulated was repealed. “Soak the rich” has been replaced with “give them cheaper housing.”

Of course, stopping deregulation will only choke off supply. And yet another change will endanger the quality of whatever is left. Up until now, landlords were able to raise rents up to 6 percent after investing in building improvements, such as a new boiler. The new reforms would cut that cap to 2 percent. According to the Real Estate Board of New York, landlords invest about $10 billion each year in improvements. It will now be harder to use rent increases to help offset those costs. Couple that with the fact that raising rents will now be much harder, and renovating and maintaining buildings will become significantly less lucrative. This process, in which housing stock deteriorates because rents are too low to cover the costs of maintenance and risks of capital improvements, is called “shabbification” by City Journal’s Howard Husock. Those who escape it are the richest tenants, because improving luxury housing stock carries a much lower risk. Detecting a pattern yet?

New York is one of two of America’s ten most expensive cities that saw average rents decrease last year. These “reforms” will almost certainly change that. In their drive to control urban housing markets, progressives will reach regressive ends. The city will become far more expensive, split between luxury buildings able to withstand regulatory costs and a deteriorating, overregulated stock of “affordable” housing.

It is almost certainly a lost cause, but lawmakers truly concerned about those struggling to afford living in the city would vote down this bill.

More from National Review