Saturday, September 13, 2008

Rent Control Is the Real New York Scandal

Economic theory predicts that rent control laws will result in these effects (from the Gwartney textbook):

1. Shortages and black markets will develop for housing.
2. The future supply of affordable housing will decline.
3. The quality of housing will deteriorate.
Non-price methods of rationing housing will increase in importance (discrimination).
Inefficient use of housing will result.
6. Long-term renters will benefit at the expense of newcomers.

From today's Wall Street Journal:

Today, there are 43,317 New York City apartments where tenants (or their heirs) pay rents first frozen in 1947. There are another 1,043,677 units covered by rent stabilization. All told, about 70% of the city's rental apartments are either rent controlled or rent stabilized. And because the system has been in place for more than six decades, many residents see their below-market rents as an entitlement.

This system is destructive to the city's housing stock, because landlords who own rent-controlled apartments have less incentive to pay for repairs and upkeep (see #3 above). It also warps the housing market, and forces many new arrivals to occupy the least desirable apartments (see #6 above).

Many renters who pay below-market rents are reluctant to move -- because it's too difficult to get as good a deal elsewhere in the city (see #5 above). Thus, economists Ed Glaeser and Erzo Luttmer estimate that 21% of the city's renters live in apartments that are bigger or smaller than they would otherwise occupy. The controlled rents certainly don't increase the number of affordable apartments (see #1 and #2 above).

MP: As Swedish economist (and socialist) Assar Lindbeck asserted, "In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."


At 9/13/2008 1:24 PM, Anonymous Anonymous said...

I have owned an apartment building in Santa Monica since 1984,
radical rent control!!!
however, several years ago a state law mandated vacancy decontrol
now it is liveable for a landlord
recently I had a long term tenant move
she had been paying $700 for a two bedroom
I easily rented that unit for $2200
One benefit of rent control to landlords is that rents for available units are higher than they would otherwise be.
rent control lowers the supply thus increasing the price
another benefit to landlords is less turnover
it is expensive to refurbish and rent a unit
so it is good to have long term tenants
the bottom line of course is that rent control is a negative for the community as a whole
and it is a big negative
all rent control should be eliminated

At 9/13/2008 1:57 PM, Anonymous Anonymous said...

I have lived in a rent rent stabilized two bedroom apartment for 20 years in lower Manhattan. Nine of those years were without air conditioning. My rent is $1,800 base plus MCI rent increases and about $600 a year to run two air conditioners. I have a 62 year old kitchen with 20 year old appliances and a 62 year old bathroom. I buy my own air conditioners, the very expensive models permitted by management, defrost my freezer, clean my oven and wax my wood floors. Once fully renovated, I believe my apartment would rent at $4,000, most likely to students or young professionals who pay for pressurized walls to divide the apartments for 3 to 4 tenants so that they can afford the market rents. I will be forced to move with the 8.5% increase for a renewal lease, at a time when I am facing retirement. I inquired about a non renovated one bedroom apartment. I was informed that I could rent a one bedroom apartment for $2,500 to $3,000 per month. Should $3,000 or more a month really be considered a fair market rent if that rent needs to be supported by two or more incomes? Is it realistic to assume that market rent tenants should not be surprised to have their rent increased up to 30% a year? If these are appropriate considerations and assumptions, then perhaps NYC should be designated as appropriate housing only for those whose incomes or combined incomes exceed $150,000 a year, or for students and young professionals who can divide the rent for three or four tenants and are satisfied with dorm living. Have we considered that without affordable housing in Manhattan that this will become a city populated by the rich and poor? What do we think the crime rate will be under such circumstances?

At 9/13/2008 7:50 PM, Anonymous Anonymous said...

Rent control is about protecting incumbent renters, and not at all concerned about newcomers. This can be regarded as the flip side of zoning (supply control) which protects incumbent homeowners from oversupply or missupply (undesirable land uses such as apartments) - without regard to newcomers adversely affected - and the resulting dilution of their property values.

Both are misguided and both distort the market, but there should be symmetry:

While both should be rejected; where supply controls exist, rent controls should also be permitted. Those who would end rent controls should first end the supply controls which are precursors to rent controls.

At 9/13/2008 8:28 PM, Anonymous Anonymous said...

Assar Lindbeck described rent control as "the best way to destroy a city, other than bombing"

Quote courtesy of Greg Mankiw

At 9/14/2008 3:56 AM, Blogger OBloodyHell said...

Anon 1:57 --

1) For a time after a relaxation of rent control, things would necessarily get out of hand, especially when it has been going on so long and the prices-as-is were so utterly out of line with the natural price which supply-and-demand would bring. Prices will heead up and probably overshoot the proper mark as the system reestablishes equilibrium.

2) If the prices zip up across the board, then you can bet that
a) landlords will be fixing the apartments up substantially -- they'll need to do that just to compete with anyone else who does it.
b) lots of borderline buildings will be torn down for new structures which make more effective use of the land area.

3) item 2b above will, over time, drive prices back down.

Yeah, this doesn't necessarily help you all that much, but I can only say, you probably should not be living in NYC anyway. NYC is not a place to retire in, it's a place for people with steadily rising incomes (or the rich).

I live in Florida. The rent in my mid-sized town (metro pop 250k) for apts (Central AC, frostfree fridge) historical as follows:

750 sq ft, 10 yrs old -- $260 in 1980, to $290 in 1983
850 sq ft, 12 yrs old -- $320 in 1984, to $350 in 1986
710 sq ft, 8 yrs old -- 350 in 1987 to $380 in 1991
1100 sq ft (2 bdrm townhouse), 15 yrs old, newly refurbed -- $425 in 1992 to $530 in 2004
1050 sq. ft (1 br townhouse), 30 yrs, newly refurbed -- $525 in 2004 to $550 now.

In all cases, vermin-free, parking within 100ft of the door, usually a patio on the apt., and a pool available, and none of the above have been in "bad" neighborhoods (although two of them "border" on less than spectacular ones, less than 1/2 mile away)

No rent control of any kind.

Rents have roughly doubled in the course of almost 30 years, despite (or because of) the steadily rising market price of land in FLA.

I'd lay odds in most "flat" states that they'd have increased notably less. And that is within the bounds of retirement.

Hell, for $1800 a month you can BUY one hell of a damned nice house in FLA, and ditto in a lot of other states.

At 9/16/2008 10:34 PM, Anonymous Anonymous said...

The other side of rent control is that almost all other businesses do BETTER in a rent controlled area.
for example in Santa Monica California after rent control was established land lords stopped sucking up every increase in income renters had. As a result the renters disposable incomes grew and the shops did extremely well. Main street, 3rd street promenade and on and on owe a huge part of their success to the fact that the renters didn't have to put every extra dime into ever increasing rents.
Now Santa Monica eliminated rent control and prices have gone through the roof and disposable incomes have gone down and guess - retail sales taxes suffered as retail sales went down.

Don't forget too that while rent control does slow new development it also prevent OVER DEVELOPMENT which can also devastate a city as anyone who lived through the 1980's remembers.

So remember there are some very positive things about rent control.


At 9/21/2008 11:22 AM, Anonymous Anonymous said...

good post

At 9/21/2008 11:50 AM, Anonymous Anonymous said...

Barron's 9.8.08
Out of Control

A SERIES OF AGGRESSIVELY UNDERWRITTEN Manhattan apartment-complex deals completed in 2006 and 2007 are emerging as the most troubled part of the $860 billion U.S. commercial-mortgage market, which generally has sailed through the economic downturn with few woes, at least compared with its residential counterpart.

The most prominent potential trouble spot is Stuyvesant Town and Peter Cooper Village, a giant complex with 56 buildings and more than 11,000 apartments along the East River. It was sold by longtime owner MetLife (ticker: MET) for $5.4 billion in 2006 to two prominent real-estate investors, privately held Tishman Speyer and BlackRock Realty Advisors. At the time, the sale was widely viewed as an extremely rich, top-of-the-market transaction. That view is being borne out.

The new landlords put up $1 billion in cash and borrowed $4.4 billion -- a $3 billion first mortgage and $1.4 billion of junior, or "mezzanine," debt -- from lenders willing to accept very optimistic assumptions about future rental revenue and the ability of Tishman Speyer and BlackRock Realty, part of publicly traded BlackRock Inc. (BLK), to convert thousands of low-rent apartments protected by strict New York City rent-control laws to much higher market rents.

Mario Tama/Getty Images
The financial haze is thickening around several big apartment complexes, including Stuyvesant Town/Peter Cooper Village, shown here.
In fact, rental income at Stuyvesant Town/Peter Cooper Village last year fell to $108 million from $112 million in 2006, owing in part to slower-than-anticipated conversion of apartments to market rents. Rental income -- rental revenue less expenses -- covers just 35% of estimated annual interest costs of $300 million.

A WEAKENING NEW YORK economy, led down by Wall Street, may make it tough for Tishman Speyer, the complex's manager, to get $3,000 monthly rents for one-bedroom apartments or $4,000 for two-bedrooms in what originally amounted to a middle-class housing project, built by MetLife for returning World War II vets and their families. "Middle-class" meant no-frills: For decades, tenants sweltered in the summer because the wiring in most buildings didn't support air conditioners. But "middle class" also meant that blacks initially were barred as tenants -- a policy that began to change in the 1950s.

Tishman Speyer, armed with a large renovation budget, has tried to reposition the apartments as luxury rentals. But that effort is being undercut by the complex's housing-project look and the landlord's willingness to rent apartments to New York University for graduate housing, which reportedly has prompted complaints from long-time residents about frat-house antics. The neighborhood lacks the cachet of the nearby East Village or of Murray Hill and, unlike many luxury rentals in Manhattan, the buildings have no doormen.

A pre-funded interest reserve of $400 million designed to tide over bondholders until the project could meet interest expenses is now down to about $175 million, meaning that Tishman Speyer and BlackRock may have to pony up more cash by 2010 or risk losing control of the 80-acre project and their large equity investment. When the new landlords arranged the financing in 2006, they projected that rental income would triple, to $336 million, by 2011. To reach that goal, rents would have to double from their current average around $1,800 a month -- an unlikely scenario.

Determining the value of the $3 billion first mortgage is difficult because it was chopped into pieces that, in turn, were pooled with other commercial mortgages to back securities that Wall Street sold to institutional investors. The mezzanine loan was placed privately.

IT'S TOUGH TO SAY what Stuyvesant Town/Peter Cooper Village is worth now, but it's probably less than the $5.4 billion purchase price. If the complex were resold today, the buyers might not get enough to pay off the project's $4.4 billion of debt, wiping out their equity of $1 billion and some $900 million of additional funds, including the $400 million interest reserve, that were contributed to the deal. Assuming they're willing to continue pumping in money if needed, Tishman Speyer and BlackRock do have the luxury of time; the first mortgage doesn't mature until 2016.

Roger Lehman, a commercial-mortgage strategist at Merrill Lynch, says he has some long-term concerns about the $3 billion first mortgage. But he tempers that by saying that the buyers' huge equity contribution bodes well for the bondholders, as does the buyers' long-term orientation. Total debt equals about $400,000 per apartment.

Despite insufficient income to service debt, the $3 billion first mortgage won "shadow" investment-grade ratings from Moody's Investors Service, Standard & Poor's and Fitch Ratings. A shadow rating means that a deal, while unrated, met the agencies' criteria for a barely investment-grade notch.

In a statement issued to Barron's, Tishman Speyer said that Stuyvesant Town/Peter Cooper Village "is a long-term investment. Even seen in this context, its current performance in a down economy is very strong and promising for the future." Some 1,000 new leases have been signed in the past three months, and the overall vacancy rate in the complex is just 2%, the firm says, without making any reference to financial performance.

At 1/06/2009 6:12 PM, Blogger Dan Paul said...

Are you Milton Friedman lovin' econs' ever right about anything. Seems like right now you're batting .000. So much for free markets. I was subjected to an $800 rent increase. Why cause my landlord can raise the rent as easily as he can scratch his ass.

In a place like NYC where so many people are forced to rent due to the high price of buying Rent regualation should be put into place. I heard all the arguments about how much better it will be without stabilized or controlled apartments and so far, they were all wrong, save one -- the landlord will be richer. As far as improvements go I have seen doll houses better constructed than my apartment. It's cheap, cookie cutter BS done by illegal immigrants. How much more will we have to put up with from these world destructors! Long Live Keynes!


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