Thinking About Rent Control
It appears the New York State legislature is moving toward an expansion of rent control. I want to lay out some basic thoughts, possibly in preparation for a more detailed post later, we'll see. Throughout this post I use the term "rent control" to mean a legal prohibition on charging more than a specified amount for leasing a residential unit (so in other words, I use the term to include "rent stabilization"). I also assume that tenants in rent-controlled apartments have perpetual renewal options—that is, the landlord cannot choose to rent the unit to anyone else or to move into the unit at the termination of the lease. Instead the landlord has to continue to rent the unit to the tenant for as long as the tenant is in compliance with the lease. This is not a necessary feature of rent control, but I believe it is true in New York.
Rent control is sometimes presented as a left-right issue, the assumption being that leftists will favor rent control while conservatives will oppose it. I think it's important to resist that framing for a variety of reasons, the most important being that the winners and losers from rent control don't neatly correspond to "the rich" and "the poor" or whatever.
Instead I think the right way to think about rent control is to consider (A) its direct consequences, (B) its political consequences, and (C) basic principles of fairness.
The main pragmatic problem with rent control is that it leads to under-provision of housing and leads to inefficient use of existing housing. Taking the second issue first, in general rent control will encourage people to consume more housing than they need where it is scarcest. Here are two examples:
1. A family lives in a 4-bedroom apartment in NYC with a maximum legal rent of $1,400. The children move away, and the parents would prefer to downsize to a 1-bedroom apartment in NYC. But they can't afford to—the rent for a 1-bedroom apartment would cost at least $2,500. As a result, an apartment that could house an entire family is used by two people. If they get divorced, maybe the apartment will end up being occupied by one person, a tremendous waste of space.
2. An individual lives in a 1-bedroom apartment in NYC with a maximum legal rent of $1,000 (on the free market, the apartment would cost $2,500). This individual is offered a job in Chicago that pays just as well as her job in New York, and she is inclined to take the job because she prefers Chicago to NYC. Also, the cost of living in Chicago is lower than in NYC (there is less of a housing shortage there). However, the market price of a 1-bedroom apartment in Chicago is $1,700, far more than she is paying in NYC. As a result, she stays in NYC, unwilling to take what would amount to a $700/month pay cut.
In both cases, people had preferences that, if acted on, would have freed up housing in NYC (where it is especially scarce), but rent control prevented it. Now in fairness, rent control can cut the other way—imagine a couple that has a baby and wants to move to a bigger apartment, but can't afford to give up the rent-controlled studio that they are occupying. But that's not great either, even if (unlike our earlier examples) it reduces observed demand. In an ideal world, the price of housing would reflect its social cost, and people would make decisions according to their needs. In a lot of cases, that would involve economizing on space or moving to a different city, which would increase the available supply and lower market costs.
Rent control also tends to suppress supply, although there is a tricky question here involving how landlords and developers form expectations about the future. One thing you can theoretically do is impose draconian rent control on existing units, while leaving all units built in the future totally unregulated. In that case, if developers believe that rent control will never be imposed again, their incentives to build new units are not necessarily reduced. However, I think it's somewhat unrealistic for expectations to work this way, particularly if the legislature periodically imposes new rent controls. Certainly if the topic being debated is "Should we impose new rent controls on top of the ones that already exist?" it seems as though developers should not expect the pro-rent-control side of the debate to win just this once and then lose forever after.
To the extent developers expect rent control to be imposed in the future, it obviously affects the buildings that are built today. In particular, no one has ever suggested imposing rent controls on owner-occupied units, so developers will tend to build condos rather than rental units in expectation that rental units will lose lots of value in the future. Or developers will focus on luxury units that are likely to have tenants who are not likely targets of the legislature's sympathy. All of this will decrease the construction of affordable rental units, exacerbating the shortage of rental housing in the city. (To the extent developers simply build condos one-for-one instead of rental units, possibly the housing shortage wouldn't be worsened too much, but of course a lot of people can't afford a down payment and so the affordability of the city's housing would still take a hit.)
Zoning politics are complicated, but I think it's fair to say that people are more likely to support construction of new housing units when they will personally benefit. Of course the main beneficiaries of housing construction are (A) people who don't live in the city yet but would like to move here (but who definitely don't vote here yet), and (B) renters who live in the city and would like rents to fall. Obviously people who don't vote in the city aren't going to exert very much electoral power, but market renters are a natural constituency for more building. Expanding rent control shrinks this constituency and makes it less likely for pro-building policies to be enacted. This, in turn, exacerbates the housing shortage.
Finally, fairness is obviously debatable, but rent control has a few features that are particularly obnoxious. It amounts to a tax imposed on some landlords and not others, rather than a broad-based, equitable tax. Property taxes in New York are shockingly low for some kinds of housing (mostly single-family houses, I believe), and it would be possible to raise taxes and use the revenues for housing vouchers targeted at low-income people. Instead we picked random landlords and stripped them of most/all of the value of their property and bestowed it on random renters (not necessarily low-income). Those incumbent renters are now paying vastly less rent than poorer people who happened to move to the city more recently.
So this is my basic framework for thinking about rent control. Rent control reduces the supply of housing, increases effective demand, reduces support for upzoning, and is much less fair than a broad-based policy that benefits people proportionately to their current circumstances. But all of this has been fairly broad-brush, and I hope to drill down on a few variants of rent control in future posts.
Rent control is sometimes presented as a left-right issue, the assumption being that leftists will favor rent control while conservatives will oppose it. I think it's important to resist that framing for a variety of reasons, the most important being that the winners and losers from rent control don't neatly correspond to "the rich" and "the poor" or whatever.
Instead I think the right way to think about rent control is to consider (A) its direct consequences, (B) its political consequences, and (C) basic principles of fairness.
The main pragmatic problem with rent control is that it leads to under-provision of housing and leads to inefficient use of existing housing. Taking the second issue first, in general rent control will encourage people to consume more housing than they need where it is scarcest. Here are two examples:
1. A family lives in a 4-bedroom apartment in NYC with a maximum legal rent of $1,400. The children move away, and the parents would prefer to downsize to a 1-bedroom apartment in NYC. But they can't afford to—the rent for a 1-bedroom apartment would cost at least $2,500. As a result, an apartment that could house an entire family is used by two people. If they get divorced, maybe the apartment will end up being occupied by one person, a tremendous waste of space.
2. An individual lives in a 1-bedroom apartment in NYC with a maximum legal rent of $1,000 (on the free market, the apartment would cost $2,500). This individual is offered a job in Chicago that pays just as well as her job in New York, and she is inclined to take the job because she prefers Chicago to NYC. Also, the cost of living in Chicago is lower than in NYC (there is less of a housing shortage there). However, the market price of a 1-bedroom apartment in Chicago is $1,700, far more than she is paying in NYC. As a result, she stays in NYC, unwilling to take what would amount to a $700/month pay cut.
In both cases, people had preferences that, if acted on, would have freed up housing in NYC (where it is especially scarce), but rent control prevented it. Now in fairness, rent control can cut the other way—imagine a couple that has a baby and wants to move to a bigger apartment, but can't afford to give up the rent-controlled studio that they are occupying. But that's not great either, even if (unlike our earlier examples) it reduces observed demand. In an ideal world, the price of housing would reflect its social cost, and people would make decisions according to their needs. In a lot of cases, that would involve economizing on space or moving to a different city, which would increase the available supply and lower market costs.
Rent control also tends to suppress supply, although there is a tricky question here involving how landlords and developers form expectations about the future. One thing you can theoretically do is impose draconian rent control on existing units, while leaving all units built in the future totally unregulated. In that case, if developers believe that rent control will never be imposed again, their incentives to build new units are not necessarily reduced. However, I think it's somewhat unrealistic for expectations to work this way, particularly if the legislature periodically imposes new rent controls. Certainly if the topic being debated is "Should we impose new rent controls on top of the ones that already exist?" it seems as though developers should not expect the pro-rent-control side of the debate to win just this once and then lose forever after.
To the extent developers expect rent control to be imposed in the future, it obviously affects the buildings that are built today. In particular, no one has ever suggested imposing rent controls on owner-occupied units, so developers will tend to build condos rather than rental units in expectation that rental units will lose lots of value in the future. Or developers will focus on luxury units that are likely to have tenants who are not likely targets of the legislature's sympathy. All of this will decrease the construction of affordable rental units, exacerbating the shortage of rental housing in the city. (To the extent developers simply build condos one-for-one instead of rental units, possibly the housing shortage wouldn't be worsened too much, but of course a lot of people can't afford a down payment and so the affordability of the city's housing would still take a hit.)
Zoning politics are complicated, but I think it's fair to say that people are more likely to support construction of new housing units when they will personally benefit. Of course the main beneficiaries of housing construction are (A) people who don't live in the city yet but would like to move here (but who definitely don't vote here yet), and (B) renters who live in the city and would like rents to fall. Obviously people who don't vote in the city aren't going to exert very much electoral power, but market renters are a natural constituency for more building. Expanding rent control shrinks this constituency and makes it less likely for pro-building policies to be enacted. This, in turn, exacerbates the housing shortage.
Finally, fairness is obviously debatable, but rent control has a few features that are particularly obnoxious. It amounts to a tax imposed on some landlords and not others, rather than a broad-based, equitable tax. Property taxes in New York are shockingly low for some kinds of housing (mostly single-family houses, I believe), and it would be possible to raise taxes and use the revenues for housing vouchers targeted at low-income people. Instead we picked random landlords and stripped them of most/all of the value of their property and bestowed it on random renters (not necessarily low-income). Those incumbent renters are now paying vastly less rent than poorer people who happened to move to the city more recently.
So this is my basic framework for thinking about rent control. Rent control reduces the supply of housing, increases effective demand, reduces support for upzoning, and is much less fair than a broad-based policy that benefits people proportionately to their current circumstances. But all of this has been fairly broad-brush, and I hope to drill down on a few variants of rent control in future posts.
posted by James | 6:56 PM
1 Comments:
The fairness point is the least compelling, as one should really be comparing rent control to the status quo rather than to some hypothetical alternative plan for which there is no constituency/language. (I deeply resent the people who opposed cap and trade on the grounds that a carbon tax would be better.) The efficiency point is not wrong per se but only applies when the discrepancy between stabilized and market rents gets really large. Some rent control will have this feature but really it is a case for better designed rent control policies, e.g., allowing reasonable (but capped) increments, and not having full vacancy decontrol (which does indeed create strong perverse incentives).
The key thing is the effect on supply. I agree with the concern that developers will start building condos instead of rentals (I think there is some evidence for this from Toronto). I also agree that worried middle-class renters are a major YIMBY constituency and might not be if their rent were stabilized. But (1) that sort of middle-class person is also mobile, and probably has friends who are moving to NYC or might realistically move to a different city, so likely will remain somewhat YIMBY regardless, (2) it isn't as if the YIMBY constituency has meaningful political power in NYC anyway, so maybe the marginal effect is negligible, (3) luxury developers are figuring out how to game rent controls by listing exorbitant rents and adding sweeteners until they are affordable, so maybe the controls are not that binding a constraint, (4) relatively few renters in NYC are actually close to indifferent between renting and buying, the market can only take so many condos. So maybe this isn't so bad after all.
On balance I am ambivalent about the law, since it is clearly a first-order improvement for a large number of tenants, but there are obvious downstream concerns that might be serious.
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