Rent Control in NYC

February 6, 2007 6:40 AM

Know anything about the economics of rent control/stabilization especially in NYC? Look inside.

A co-worker of mine recently won his rent stabilization case which brought up a conversation about rent control/stabilization here at work. He maintained that if rent control was abolished that the apartments that had been rent contolled would initally balloon in price but then as the supply rose the prices would drop substantially. Thus, if there had never been rent control in the first place he would be paying about the same for his apartment that he pays with rent control now. Is this correct? I understand that the prices would probably drop but by how much? Half? How would this be figured out or estimated?

posted by josher71 to law & government (16 comments total)

I'm taking an exam on this in 12 hours!

To figure out how far down rents would go is beyond my abilities as an intro to microeconomics student. I would guess that average rent would probably be higher than it is now, but only moderately so, and with a greater range of apartments available at just about any price point.

In economics, price floors are artificial caps on how much sellers can sell a good or service for.

Price floors lead to shortages, because there's not an incentive to develop new products -- apartments in this case.

Some disadvantages of price floors, which are seen in NYC:
* Wasted resources -- People spend more time and effort looking for an apartment than they would in a free market.
* Inefficient allocation to buyers -- People who really want an apartment and are willing to pay more to have it sometimes end up struggling to find one, while people who already have an apartment but aren't all that attached to it hold on to theirs.
* Inefficient distribution of quality - Quality of apartments tends to stay low when prices are held down (there's less incentive for a landlord to spruce it up), even when people would be willing to pay more for a nicer place.
* Black markets emerge - as people seek to circumvent laws that predict trades from taking place.

That doesn't necessarily mean that rent would stay the same without price floors. It suggests, however, that a lot more apartments at a broader range of rents would exist without price floors. The average rent per square foot will be a matter of supply and demand. If rent control were undone right now, rents would probably go up because the shortage still exists. Higher rents would create an incentive for new housing to be created, however, and over time average rents would go down from this initial peak.
posted by croutonsupafreak at 7:18 AM on February 6, 2007

That doesn't make sense to me. Your friend is completely ignoring the fact that rents have risen steadily in NYC for a long time. Abolishing rent control would not magically make more apartments available, so I don't see how it would affect that larger trend.

Alternate argument: Those folks who have sweet apartments and pay $450/month because they've lived there for their entire adult life.
posted by mkultra at 7:22 AM on February 6, 2007

croutonsupafreak - if you have a test on this tomorrow, you should probably bone up on the difference between price floors and price ceilings - rent control is a price ceiling. Price floors traditionally cause surpluses, not shortages.
posted by muddgirl at 7:48 AM on February 6, 2007

Thus, if there had never been rent control in the first place he would be paying about the same for his apartment that he pays with rent control now. Is this correct?

No. Price controls do strange things to the economy, but they do control price. There is also no way that planned prices could ever match market prices.

When the most expensive apartments in NYC lost their rent control, the prices shot up, and never came down.

Think about it this way: There is an infinite range of prices, and a pretty large range of 'realistic' rental prices. We know the true market price can't be less then the rent controlled price, or that would be the price they charged. So out of that huge range of possible prices above or at the rent controlled price, what are the odds that the price is actually exactly the same as the rent controlled price?

Pretty low.

The whole point of rent control is to keep apartments affordable not to keep them at or near their market rate.

In some situations, you have apartments that vary wildly in the same building. I remember reading about a guy, paying a reasonable $500 a month for his apartment. The woman upstairs was paying $250, living there for decades. When the upstairs neighbor died, new tenants moved in, one of whom who clunked around noisily in high heels. When the guy complained she said "I pay $2,000 a month rent, and I'll walk around however I want."

How can $250, $500, and $2000 all be the legitimate market rate?
posted by delmoi at 8:18 AM on February 6, 2007

because $2,000 was the legitimate market rate, and the other two were artificially suppressed.
posted by caddis at 8:28 AM on February 6, 2007

My understanding of it is this: rent control may legitimately be said to artificially inflate price if and only if it reduces supply.

Here in SF, I see very little evidence that rent control reduces supply -- condo conversions reduce supply, but otherwise the number of people actually spending years upon years in a rent-controlled apartment is incredibly small. Such people do exist, but I think there a far too few of them to significantly reduce the supply of market-rate apartments. Most SF apartment dwellers move pretty frequently.
posted by treepour at 8:33 AM on February 6, 2007

As for what effect would removing rent controls have, economists have been debating this for eons and I do not believe that any consensus has been reached. Rent controls do artificially limit both prices (directly) and supply (indirectly). Without a fear that rents could fall below expenses landlords would have more incentive to build more units. More units should mean lower prices. However, in a market like Manhatten, it might just be like putting in a highway, it might just mean more renters. I am not sure you could build enough units to satisfy every person who would want to live there and still keep prices affordable.
posted by caddis at 8:38 AM on February 6, 2007

You can test this, no? As fewer apartments in NYC are rent controlled (it drops every year), have prices gone down? Arguments of this sort are inherently stupid, by the way, because economics assumes things that just aren't true. In magical happy land, would your friend have a point? Sure. In NYC? No. (And yes, there are other reasons to be for or against rent control.)
posted by dame at 8:52 AM on February 6, 2007

Another thing to consider is that the vacancy rate in Manhattan is BELOW 1%! Removing rent control on the few remaining apartments won't do jack about that kind of demand. Hence the 55 story "luxury condominium" behemoth being built right behind my apartment, blocking all of my damn sunlight.
posted by lovejones at 8:59 AM on February 6, 2007

One issue here is that some people aren't distinguishing between rent control and rent stabilization.

Rent controlled apartments are a minuscule percentage of the housing stock in NYC. (Controlled = same tenant in apt since 1971 or before.)

Rent stabilized apts are much more common, but their rents are usually much closer to market than in rent-controlled apts. (Stabilized = building built before 1947, six or more units in building, and current rent of apt. in question not over 2000/mo.) Anytime a new tenant moves in, they start at a certain rent which in some cases may be close to market depending on what improvements the mgmt has done, and then their rent can only raise by a certain % each year until they vacate the apt (the city's rent board sets the increase-% each year, and the global average increase over the last 6 years has been about 3.67%).

I'm not an expert (just a renter in a stabilized apt with a casual interest), but I wanted to point out that distinction especially about the percentage of the market taken up by each category.
posted by allterrainbrain at 9:11 AM on February 6, 2007

(If you're really interested, be sure to Google rather than taking my numbers as the whole story, since there are other factors that can remove an apt from rent stablilization & rent control -- such as the tenant making too high an income, subletting without permission or subletting for too high a rent, trying to pass on the apt to a non-family member, etc.)
posted by allterrainbrain at 9:15 AM on February 6, 2007

I don't really know the subject, but here are some items that I recall from the last few years. Oops... The John Tierney and Sam Roberts items are 10 years old. Well, they're a start:

http://www.city-journal.org/html/16_3_nyc_housing_crisis.html

http://query.nytimes.com/gst/fullpage.html?res=9900EED81331F937A35756C0A961958260

http://query.nytimes.com/gst/fullpage.html?res=9B05EED81631F937A35756C0A961958260

dame's observation, and maybe lovejones's, may reflect not only the economics of rent control but also the increased numbers of wealthy tenants over the past few years. There have always been rich folks in Manhattan, but the top 0.5% or 0.1% is now skyrocketing beyond the merely well-to-do. There are suddenly a lot of people who can afford $12,000 per month. That must drive up prices at the "lower" levels as well.
posted by Dave 9 at 9:17 AM on February 6, 2007

Your friend is wrong. As in not correct at all. The fact that there are rent controlled apartments slightly raises the prices of non-rent controlled apartments, but there aren't enough rent controlled apartments for this to be a major factor. And even if it was; the result when all is said and done would be pretty far removed from what he is paying now anyways.

Your friend's prediction is not governed by any economics model that anyone who knows what they are talking about would buy. Unless rent controlled apartments are coincidentily already at the market price (which hardly qualifies as rent control anyways) the price would increase in the short term and stay higher in the long term. Without rent control your friend would pay almost exactly what a similar non-rent controlled apartment in a similar area goes for. It might be a little less, but that's pennies on the dollar less. Your friend would be wrong in life and any economic model no matter how simple. Or magical. He is so wrong.
posted by I Foody at 9:37 AM on February 6, 2007

I think the original idea of the supply eventually matching the demand more equitably if rent controls were removed has several major flaws, some of which have been pointed out already.

A major one I'm thinking of is that Manhatten is an island. As in, no more space to spread outwards. In that case, the only direction you can go is up, and that is much more expensive to do than sprawl. So the incentive to make more units has to be extremely large to actually drive the making of more units. Where does that incentive come from? You've got it, higher rent prices.

Let's not kid ourselves here with our "free market predicated on unlimited resources" ideas.
posted by zhivota at 5:40 PM on February 6, 2007

I Foody: while only two percent of NYC rental units are rent-controlled, 50% of them are rent-stabilized. The end of rent regulation would have a huge effect on rents in the city.

Or at least in the most desirable parts of the city. Assuming that your co-worker lives outside Manhattan and the trendy parts of Brooklyn, josher71, he might be right. In 2005 rent-stabilized tenants on average across the whole city paid $850 per month, and non-regulated renters paid only $1000, not that much more.

Which doesn't justify ending rent regulation, because low rents aren't the only social good. The purpose of rent regulation is to provide housing in our own neighborhoods for native New Yorkers who couldn't otherwise afford it, and without rent stabilization I sure couldn't. It's not my fault that everyone else in the world wants to live where I grew up, and as long as 1/3 of voting New Yorkers live in rent-regulated housing, it's probably not going to be my problem either.

And if you have a problem with that, then I assume you're also for completely unregulated immigration into the US, right?

All statistics from the Selected Findings of the 2005 New York City Housing and Vacancy Survey.
posted by nicwolff at 5:49 PM on February 6, 2007

These answers are great. He lives on the UES, by the way.
posted by josher71 at 6:25 AM on February 7, 2007