Rent (Out Of) Control

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I’ve lived in eight different states. Without question, the worst place to rent an apartment is where I grew up: New York City.

In theory, New York should be the best place to hang your hat. New York City has more laws benefiting tenants than anywhere (except perhaps San Francisco.) Instead, we have government bungling leading to the highest rents (and property prices) relative to after-tax income in the country.

The recent outrage and call for government action over the $1.3 billion sale of Starrett City — the country’s biggest government-subsidized rental housing complex — should come as no surprise. Politicians have been making hay out of housing regulations in New York since before it was called “the Big Apple."

It’s hard to keep track of all the various rules and government subsidies going on at Starrett City in Brooklyn. The Federal Rental Assistance Program (RAP) subsidizes a couple thousand units. Another thousand are Section 8 units. Then there are over a thousand units that are Section 236.

These are programs where the State and Federal government pick up the tab in one way or another to keep rents affordable for lower income residents. President Bush is asking for a $1.6 billion increase in the HUD (Housing and Urban Development) budget for 2008, taking it to $35.2 billion, so there is little worry small government Republicans are going to pinch programs like these anytime soon.

While poorly run and expensive, relative to the benefits actually received, these subsidies are not the heart of the problem in the New York rental market. Rent control is.

Rent control is a simplistic political solution to an economic problem — rising rents. With one swipe of the pen, bureaucrats decreed rents shall not climb more than a small amount each year — that they should dictate yearly increases in rents, not landlords and tenants. The idiocy of the move took years to become apparent. The system was eventually killed, but rent stabilization remains, which is almost as stupid. To this day, thousands of landlords have to wait and see what the government says they can increase their rents to next year.

In theory, rent control doesn’t cost the government any money — unlike actual subsidies, which do more to help the poor than artificial ceilings. In practice, rent control leads to a whole mess of side effects.

Rent control doesn’t benefit the working class as much as other polices could. In fact, rent control really only benefits those lucky enough to snag a rent-controlled apartment. Today, there are millions of New Yorkers in rent controlled or rent stabilized apartments, paying far below market rents. They are not all poor.

Many are now retired and should be living in a cheaper place than midtown Manhattan. Some are wealthy and own home(s) in other states, yet are paying $250 for an apartment that would normally rent for $2,500 or more. That’s right, they are paying 1/10 of what an actual working person, who moves to New York City to get a job, has to pay.

Rent control laws turn landlords into slumlords. Why take care of a building half-full of tenants paying $250 a month rent? They sure aren’t going to move (you lose rent control protection when you move). The state and local governments had to cook up a slew of tenant friendly laws to deal with the fact that landlords really, really want somebody paying under market prices out. Rent control creates illegal black markets. New Yorkers sometimes have to pay cash bribes to move into a below market rent apartment.

It’s not uncommon for a real working person to live an hour-plus commute away from New York to get a semi-affordable apartment, so a retiree can watch Matlock in a $200 apartment steps away from where the actual commuter works. This discourages people that work (and pay more taxes and spend more money) from moving to New York in the first place, and is an environmental disaster, increasing traffic and energy consumption. It discourages companies from locating or starting in New York.

Rent control (and related tenant protection rules) make moving to New York a major pain. It’s not just they sky-high rents; it’s the resulting nonsense. Landlords can’t kick out non-paying (or just troublesome) tenants like they can in most other parts of the country. So moving into an ordinary 600 square foot apartment in New York will require credit checks, proof of employment, proof of earning 50-100 times a month’s rent, and often first and last months rent upfront, along with a months deposit. Oh and then there are the broker’s commissions of 15% of a year’s rent because salespeople can snap up the few apartments that are on the market. I remember getting funny looks from buildings and landlords in other states when I asked what the commission was to move in. They just didn’t understand what I meant. But then, they don’t have strict rent regulations.

When I lived in Georgia, a police officer once dropped by looking for a previous tenant. I asked why. Unpaid cable bills. In New York, a tenant can stall paying rent for six months and still not get kicked out easily. In Georgia, the cops show up if you miss a few payments on your cable bill. Sounds unfavorable to tenants, but it makes moving in a breeze (because moving you out is just as easy).

With so many millions of apartments with artificially low rents, the remaining semi-free market apartments are artificially overpriced. If all rent controlled apartments went free market price, we’d see perhaps a 25 percent - 50 percent decline in rents (and home prices) in New York City.

This big real estate transaction is on the heels of another giant New York Apartment complex getting bought out — Peter Cooper Village/Stuyvesant Town for $5.4 billion.

These big real estate deals are now taking place in New York for two reasons:
1) too much money looking for real estate investments
2) the days of rent regulated apartments are numbered.

Many of the longtime rent controlled tenants are dying or moving. Some of rent regulations are expiring in the near future. Suddenly there is enough investment capital to buy out of some programs. Anyway you slice it, rent increases (and housing prices) are going to finally slow down in New York. The skyline has the cranes to prove it. The end of rent regulation will result in what politicians couldn’t achieve in decades — smaller rent increases.

It’s true that a totally free market could change the character of New York. More areas would become TriBeCa-ized (a formerly down-and-out commercial area now home to hedge fund managers and other wealthy tenants looking for something a little hipper than Greenwich, CT.) Of course, New York has already lost most of its character, some good, some bad.

New York should not exclusively exist just for the wealthy, but rent regulations are not helping the working class live in and around the city and it's not helping the poor. Lower taxes on lower incomes, rent subsidies, child credits, subsidized low rate mortgages, and other government benefits work much better than rent by decree.

Jonas Ferris is a regular contributor to "Cashin' In" and is co-founder of

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