More Excitement In The Air In New York: Rent Regulation To Be Expanded And Tightened

A couple of months ago I wrote about the excitement in the air in New York City as the newly elected state legislature, with large progressive Democrat majorities in both houses for the first time in many years, looked set to pass a “pied-à-terre” tax for New York City on high value condos owned by non-residents. Finally, we were going to get even with those evil out-of-town mega-billionaires for their sin of coming to our city and spending their money. The idea was that the state legislature would authorize the City to impose special real estate tax surcharges thought sufficient to raise some $650 million per year from just 5400 super-wealthy people who owned very-high-value residences. That would be some $120,000 per year from each one of them. Take that, billionaires! One guy — a hedge funder from Chicago named Ken Griffin, who had just bought an apartment on “billionaire’s row” for $263 million — was theoretically going to get socked for about $10 million per year.

And then, as quickly as it had arisen, the excitement dissipated. Somebody noticed that the high end condo market in Manhattan was already in sharp decline. This tax threatened to kill it off completely, along with the jobs of the people building and selling the apartments. Meanwhile, the tax looked to be relatively easy to evade, as by a mega-billionaire renting his apartment to a New York resident and switching to a big hotel suite for himself. The originally-$650 million estimated annual tax take started to drop like a stone. Today, the pied-à-terre tax idea seems to have died, although with the legislature still in session anything could happen.

But suddenly a new excitement is rising up. A key progressive agenda item, tighter and stricter rent regulation, long blocked by the formerly Republican-controlled state Senate, now looks set to sail through before the legislature winds up in June. Finally, we will be able to achieve perfect justice and fairness in rental housing prices, through the magic of government command and control.

You may think that New York City already has about the strictest rent regulation that it is possible to have. And the City certainly does have among the most extensive and complex rent regulation regimes out there, the main parts of which date back to the 1940s through 70s. However, during the 1990s — a time when the State had a Republican governor (Pataki) and Republican-controlled state Senate, and the City had a Republican mayor (Giuliani) — some substantial changes got made that made it possible for property owners gradually to take meaningful numbers of apartments out of the system. These changes included provisions for partial deregulation upon vacancy, and for deregulation of apartments rented to wealthy people (recently meaning income above $200,000 per year). Also over time, landlords have figured out how to make systematic use of programs that allow rent increases upon substantial capital investments being made in the apartments.

The result of these changes has been an explosion of investment into the rent regulated apartment sector over the past 20 years. In the 1970s and 80s, investment in these buildings had visibly stalled. Since the changes of the 1990s, investment has notably revived. For just the one year of 2018, the New York Post cites something called Urbanomics Consulting Group for a figure of $13.3 billion of capital investment in the rent regulated buildings.

Needless to say, the 1990s-era vacancy and luxury decontrols, along with the provisions for rent increases after major capital improvements, have become prime targets for progressive “reform.” After all, how can we achieve perfect justice and fairness in housing if landlords are allowed to raise rents when buildings are upgraded, let alone tell tenants that their leases will not be renewed?

The exact form that the new proposals will take is currently in flux, but we can get a good idea of the main ideas being considered by looking at the website of the principal advocacy group promoting changes, something called the Upstate-Downstate Housing Alliance. Their motto is “Housing Justice for All.” Natch. The main proposals would rescind the 1990s-era changes that opened up investment into the regulated housing in the last two decades, including the ending of all vacancy decontrol, and the ending of rent increases based on major capital improvements by the landlord. Another proposed change would essentially extend a form of rent regulation to all non-regulated apartments (currently about half the New York City rental housing stock) by allowing eviction only for “good cause.” In other words, a landlord of a non-regulated apartment would suddenly no longer be allowed to simply decline to renew the lease when the term is up.

And then there is the proposal to extend rent regulations and the “good cause” eviction restriction beyond New York City to the entire state. That means to places like Utica, Syracuse, Rochester and Buffalo that already suffer from shrinking populations, low housing prices, and extensive disinvestment and deterioration of the housing stock.

Some observations. In unregulated housing rental markets in the U.S., the average “turnover rate” (percentage of tenants leaving each year) is around 50%, the average tenure of a tenant is about 3 years, and apartment vacancy rates range from about 5% to as much as 10%. When a tenant leaves, a landlord must consider making upgrades in order to avoid an extended vacancy and try to keep the rent as high as possible. In a rent-regulated market, where each protected tenant by definition has a bargain deal on the apartment, very few tenants ever leave. An NYU study in 2014 found that in New York City, 23.1% of rent regulated tenants had been in their apartments for more than 20 years (versus only 7.1% for market rate tenants). The landlord does not need to upgrade the apartment in order to keep the tenant or get a new one. With the now-proposed elimination of rent increases for capital upgrades, and of rent increases on vacancies, why would any landlord ever invest a dime in the property? I can’t think of a reason.

Back in the 1980s and 90s in New York, you could look at the buildings on the street and immediately spot the rent-regulated properties. They were run down. Decades of restricted rents had very slowly taken their toll. Today, the former pervasive decline and decay have mostly been reversed, but there is no reason why they cannot return. Writing at City Journal on May 20, Howard Husock of the Manhattan Institute predicts the “shabbification” of New York if the current rent regulation proposals take effect:

The opposite of gentrification—call it shabbification—would emerge, as city housing stock becomes more and more degraded. Middle-class and working-class neighborhoods, where rents are often not that high (in some outer-borough neighborhoods, market rents are lower than permitted by law) would be at particular risk. 

And that is indeed the result to be expected from socialist-model programs of every sort: not immediate economic collapse, but rather, just gradual, almost imperceptible decline and decay. On the other hand, when the new controls take effect, there may well be a sudden drop-off in the $13 billion or so of current annual investment in these properties. And that drop-off would fall right upon the 50,000 or so people who are currently employed working on the ongoing upgrades. They stand to be the collateral damage of these thoroughly misguided proposals.