WHITE PAPER: Rent Regulation Does Not Make Housing More Affordable

By: James Nelson

It has become a popular movement for cities and states to regulate residential rents. St. Paul just voted to institute rent control, joining New York, California, and Oregon. Given the pandemic, a quick response  to help tenants might be to freeze or control rents. However, regulating rents does not make housing more affordable, according to studies found in Michael Hendrix’s latest white paper. This trend is very damaging as it deters the private sector from improving existing housing, and worse deters the creation of new housing. Adding new housing is ultimately the way to make all housing more affordable.

Let me be clear – NYC no doubt has an affordability crisis. Our population is still rising with the 2020 census showing a 629,000 population gain, over a 7% increase. Meanwhile, we are adding only one housing unit for every 2.3 jobs created, which even includes the metro area. “Growth” cities like Houston are at a 1:1 ratio, per the U.S. Bureau of Labor Statistics. 

With this all in mind, we need to figure out smart policies that will encourage public-private partnership to address this housing crisis. There are two major issues in Albany which need to be closely watched next year – Good Cause Eviction and the Affordable New York Program. They will determine if private operators and developers continue to create new housing here in New York or look to invest elsewhere in more business friendly states. 

Good cause eviction would prohibit landlords from raising an existing free market tenant’s rent more than 3% of 150% of CPI. It has already been passed in Albany and Hudson and there is a push to institute Statewide. There could be a vote as early as the spring, but more likely wait until next year’s gubernatorial election in June.

Meanwhile, Affordable New York expires in June of next year.  This tax abatement has been a very popular program that incentivized developers to build new rental buildings including 25-30% affordable housing in exchange for a 35 year abatement. As of June 2020, the City’s current administration had financed 50,656 affordable homes.

But with the deadline approaching, developers have already pulled back in purchasing rental sites unless they are shovel ready, as they aren’t willing to take the risk to build without an abatement as full taxes make it prohibitive especially when hard and soft costs have risen so dramatically. 

To discuss this topic further, I interviewed Michael Hendrix, Director of State, & Local Policy at The Manhattan Institute. I have borrowed the title of his white paper that he wrote back in January of 2020 for mine. Here is a summary of what he had to say:

As we look at the title of this white paper, Michael shares with us that in fact, rent control is not the way to increase the amount of affordable housing, nor is it the solution to poverty, inequality or segregation, but instead it acts to restrict the supply of housing, transferring wealth to current tenants at the expense of future and market rate tenants. He shares with us that rent control leads to the actual decay of a property or building because owners have less revenue to spend on maintenance and improvements.

The topic around rent control mainly focuses on making it easier and more affordable for renters, but Michael shares with us that this in fact is not the case. He points to three main reasons:

1. Rent control makes it harder to find an apartment because in the actual availability of rental housing, people become locked in existing rental units. Some may not need as many bedrooms as they once had, but the mentality is that they’re not giving up what they already have and this causes people who actually could use the full unit, to sit on waitlists that could last a lengthy time period.
2. Rent control does not increase diversity as it solely looks to keep stability in a community. It mainly benefits the insiders and people who have lived there for quite some time and does not bring in new tenants or diverse tenants looking to make a change.
3. Rent control actually degrades properties and causes the decay of the buildings and owners’ properties. This, in return, causes property taxes to be hurt and ultimately, causes the source of revenue for many cities, to become tarnished and lower.

Our discussion then dived into taking a look at other cities such as San Francisco, one that is similar to ours in terms of pricing. Michael examined and shared with us that their rent control departments and tenants that had rent control, did in fact save money on rent, however this $2.9 billion dollars in savings that the tenants received from 1995 to 2012, was entirely offset by the $2.9 billion dollars in extra housing expenses that was paid by excluded residents and future residents who could have otherwise gotten that housing, leading to their rents going up drastically. What this means is that, in San Francisco, there was essentially a gigantic wealth transfer from one group to another.

As we looked at New York City specifically, a bill that is being supported right now by Julia Salazar and Attorney General Tish Warren, would allow tenants to challenge property owners in court for any rent rises and it also disallows all evictions without a court order to do so. If we dive into this bill, what it truly does is create a mandate for decline in New York City, a mandate for small mom and pop property owners to lose money and lose value in their properties, and it becomes a vehicle for risky renters.

Michael then shares with us that he believes New York City is in a housing crisis, with demand off the charts and the fact that the past decade, there has been a jobs/housing mismatch. The one group that could fix our housing crunch is the private, for-profit developers, yet they are being disincentivized and penalized or targeted by those in office.

To fix this housing crunch and move forward, we need smart policies from the City and State, for them to be working together in a coordinated way, not for just tenants, but for landlords and property owners that contribute massively to the budgets of both. It’s time to stop disincentivizing the private sector who are ready and able to contribute in a meaningful way, and look at the examples of failed rent control and disincentivizing programs in cities like St. Paul and San Francisco.