Should We End Rent Regulation in a Big Bang?

Adam Davidson walks through might happen to New York city’s rental housing market if rent regulation were to come to an end:

[A]dvocates for continued rent regulation and those who oppose it largely agree on what would happen if the programs were eliminated. It would be win-win-lose: great for landlords and the middle class and awful for people who benefit today. [Christoper] Mayer [a housing economist at Columbia Business School] walked me through a likely result. Many of the people receiving some sort of government subsidy would have to leave their apartments, probably for the outer boroughs. The landlords of those units would invest in upgrades and charge higher rents. At the same time, the subset of apartments that had been market rate would see their rents fall, because there would be, suddenly, twice as many apartments in the market.

For Mayer, as for many economists, this is proof that rent regulation is an incredibly expensive program, preventing billions of dollars of development. It also creates an odd lotterylike system in which those who are lucky enough to have a rent-regulated apartment can live in the best parts of the city for next to nothing and everyone else is shunted aside. Eliminating rent regulation would be such a huge windfall for landlords, Mayer says, that he could imagine a sort of grand bargain. The programs go away, but landlords have to pay higher property taxes. The extra city revenue could go to a fund to help poor people afford market-rate apartments. In theory, this could be designed to make the shift win-win-win. The city could stay socioeconomically diverse without any six-bedroom apartments renting for $225.

Vicki Been, the director of N.Y.U.’s Furman Center, says most rent-regulation advocates acknowledge some of Mayer’s criticisms but want to keep the programs anyway. “We can’t just say, ‘Let’s get rid of rent regulations and replace them with the optimal system,’ ” she says. “The political forces that would get rid of rent regulation would not be the forces looking for optimal legislation.” It would be landlords and developers. In the political battles that define New York’s real estate market, she says, the poor rarely come out ahead. And rent regulation — however inefficiently — does help many poor people.

Rent regulation is very likely to go away, eventually, even without any explicit effort to kill it. Some 231,000 units have been deregulated over the last 30 years. Every year, thousands more leave the program or are torn down, replaced by new condo buildings serving the wealthy. The number of market-rate units has been going up more quickly lately, and the pace will, most likely, only increase. Barring some unlikely shift in the economy or policy, Manhattan will have fewer and fewer poor people each year and almost none whatsoever in a few decades. What happens if all the rich people are on one island and the poor but creative are somewhere else? It might just destroy the strange admixture that makes Manhattan so appealing in the first place.

First, the reason new condo buildings primarily serve the wealthy is that local land-use regulations severely constrain the amount of new construction. If there were more housing built in New York city, we would eventually see market-rate housing aimed at middle-income and low-income households. When the cost of navigating the regulatory maze is extremely high, developers have little choice but to cater to the wealthy, as that is the only way for them to recoup their investment. Moreover, incumbent developers prefer the regulatory maze, as it creates a high barrier to entry to competitors. There’s nothing shocking about this landscape. Rent regulation is closely related to broader local land-use regulation, and it is important that we relax both in tandem. 

Second, Davidson neglects the role of public housing in New York city, which serves over 400,000 authorized residents. There an additional 225,000 residents in Section 8 housing units. Manhattan is home to 102 public housing developments, which include 53,890 housing units, most of which house families. Mireya Navarro has recently described the enormous appetite for public housing in New York city, the quality of which has greatly improved in recent decades. Many public housing developments have become naturally-occurring retirement communities, as residents are often very reluctant to leave. Most of these developments use their footprint very inefficiently, and there have been a number of recent proposals to develop this underutilized land. As Davidson explains, rent regulation benefits large numbers of nonpoor people and only a handful of poor people. Targeted subsidies are a far more efficient strategy for aiding the poor, and, contra Been, there is no reason to believe that developers who oppose rent regulation would also oppose housing subsidies. People who own real estate generally like housing subsidies very much, for obvious reasons. But we might also leverage existing public housing developments to encourage the construction of new housing on publicly-owned land that would combine market-rate and subsidized housing. Indeed, there are already some modest moves in this direction. Right now, NYCHA sees leasing some of its space to developers as a way to patch up funding shortfalls. Ending rent regulation will tend to increase tax revenues, thus alleviating that challenge and generating new resources with which to pursue more ambitious social housing efforts. A win-win-win scenario is entirely within reach.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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