The Case against New York’s Rent-Regulatory Regime

I s New York State’s rent-regulatory regime unconstitutional? Owners of rent-stabilized apartment buildings believe the answer is yes, and several months ago, together with the Community Housing Improvement Program (CHIP) and the Rent Stabilization Association of NYC (RSA), they filed suit to challenge the state’s rent-stabilization law (RSL) in federal court. After losing their case, they appealed to the Second Circuit, which affirmed the constitutionality of RSL. Now, the U.S. Chamber of Commerce, the Mortgage Bankers Association and other prominent business and real-estate groups, and two leading national think tanks, the Cato Institute and the Manhattan Institute, have rallied behind the plaintiffs, submitting amicus briefs urging the Supreme Court to grant certiorari to their lawsuit. The case, pertaining to New York City and Nassau, Rockland, and Westchester Counties, has the potential to transform a housing system that, as Andrew Pincus, the lawyer representing the group, puts it, is more of a “regressive subsidy” than a reliable safety net for those in need.

Pincus told National Review that the RSL infringes on the constitutional rights of property owners. “The Constitution has certain property protections, one of which is the Fifth Amendment’s takings clause,” he said. This provision, which prohibits governments from taking private property for public use without “just compensation,” is at the core of the landlords’ argument against the RSL.

There are two prongs to the plaintiffs’ case. For starters, in 2021, the Supreme Court ruled in Cedar Point Nursery v. Hassid that a California law allowing union organizers onto private property constituted a physical taking. This was an unwelcome intrusion, much as if a stranger strode into your backyard for a barbecue without your invitation. Pincus draws a parallel with the facts of Cedar Point and his client’s claims: “They can’t choose their tenants freely, nor can they reclaim their property as they wish.”

The plaintiffs also allege that RSL amounts to a regulatory taking. The judicial test used to determine whether this has occurred — from the landmark 1978 Supreme Court decision in Penn Central Transportation Co. v. New York City — involves looking at the economic impact of the regulation, the extent of its interference with investment-backed expectations, and the character of the government action.

Under this standard, RSL critics argue that the rent controls dictate who can live in their property and for how long, and limit how much they can charge for rent and how much they can invest in property improvement — taking away potential earnings and undermining their ability to make reasonable use of their property. New York City officials assert that rent stabilization does not constitute a taking because it does not deprive property owners of all economically beneficial use of their property, consistent with the Penn Central standards.

However, Pincus contends that his clients don’t even need the Penn Central balancing test to prove they were victims of a regulatory taking: In Lucas v. South Carolina Coastal Council, the Court ruled that when a regulation deprives an owner of “all economically beneficial uses” of his property, it’s tantamount to a “taking” under the Fifth Amendment and requires “just compensation.”

Still, apart from questions about the constitutionality of RSL, critics point to practical downsides of the policy. For instance, the RSL inadvertently encourages tenants to stay in apartments that are larger than they need because downsizing could potentially lead to an increase in rent. RSL influences tenants’ behavior in ways that could be counterproductive to the broader goal of housing availability. The law, as Joe Strasburg, president of RSA, explains, “gives people a huge incentive to stay in apartments no matter what.” This “stickiness” of tenancy can lead to a mismatch between housing needs and availability. A family whose children have grown and moved away may continue to occupy a large, rent-stabilized apartment, not out of necessity but because of the financial incentive provided by the RSL. This practice further compounds the city’s housing shortage, as properties potentially suitable for those in search of housing remain occupied by households with lesser needs.

RSL also lacks a mechanism to determine the economic need of tenants benefiting from it. Pincus describes the system as akin to a lottery, where some fortunate tenants, irrespective of their income levels, enjoy the benefits of rent stabilization. While aiming for equity, such a system often misallocates affordable housing away from those who need it most.

A study conducted by the Wall Street Journal revealed that New York’s rent-regulation policies primarily favor wealthier, white Manhattan inhabitants over the city’s lower-income tenants. Manhattan residents living in rent-regulated apartments pay rents that are significantly lower than the market-rate rents in their neighborhood, saving them approximately $1,000 to $2,000 a month, while in several less prosperous working-class neighborhoods, the controlled rents are hardly different from the prevailing market rates, yielding negligible advantages to the tenants residing in these units.

Meanwhile, the groups petitioning SCOTUS to review this case are advocating alternatives. One such proposal gaining some traction is the reformation and expansion of housing vouchers for low-income individuals. Martin, an advocate of this approach, believes that a means-tested housing-voucher program could provide a more targeted approach to supporting those in need while preserving the viability of property ownership and development.

The lawsuit challenging the constitutionality of the RSL — and the potential shift toward housing vouchers — reflects a broader need to reassess affordable-housing policies. If the Supreme Court chooses to hear the case, it could lead to a paradigm shift in New York and across the country, influencing how other local governments address the issues affecting their housing markets — hopefully for the better.

Regardless of what the Supreme Court decides to do, it is clear that the conversation about affordable housing in New York City and beyond must continue. As cities grapple with rising housing costs, the need for comprehensive, free-market, and effective housing policies grows.