A Way Out of New York City Rent Regulation Impasse

The merit of rent regulation is a recurring debate in New York City. On one side are tenant advocates arguing that rent regulation is desperately needed to help poorer households, maintain socioeconomic diversity in New York City, and prevent the City from becoming the preserve of the super rich. Real estate interests on the other hand argue that rent regulation deprives property owners of the right to market their apartments as they see fit, causes landlords to under-invest in their properties, and that in many instances the beneficiaries of rent regulation are affluent. What makes the debate so bedeviling and contentious is that both sides are correct.

Tenant advocates are correct that helping poor households afford housing is a noble and worthy goal. Hardly anyone believes that those who cannot afford housing should have to be homeless. Moreover, through building regulations we have outlawed "shacks" and other substandard housing that the poor might be able to afford. Any policy, like rent regulation that helps keep housing affordable is certainly meritorious in some respect.

On the other hand, if we look at rent regulation from an equity perspective, rent regulation does indeed fail the fairness test. If we want to help people who cannot afford their rent, we should target the neediest. Until 1997 rent regulation was not means tested at all. Now anyone earning below $175,000 a year for two consecutive years is eligible for a rent regulated apartment. Does someone earning $100,000 a year really need a rent regulated apartment? Moreover, why should landlords be the only people responsible for providing the subsidy? What about rich investment bankers? Shouldn't they also contribute to subsidizing poor renters?

Rent regulation is a very blunt tool for helping poor renters. Little social purpose is served when households with the means to afford market rents live in regulated apartments. Under this scenario land lords are in effect subsidizing someone who doesn't need a subsidy. It would be better if all those being subsidized truly could not afford their rent. Moreover, by limiting how much land lords can charge for rent, they have little incentive to maintain their properties. New development will also be stifled as landlords may skeptical of the returns they can earn in a regulated market.

New York City has attempted to address some of these problems by exempting new construction from rent regulation and allowing landlords to charge market rents when the tenant moves out (this latter wrinkle gives tenants an incentive to stay put, even when their current unit no longer serves their needs-and landlords an incentive to "encourage" their tenants to move). None of these adjustments addresses the fundamental flaw of rent regulation-it prevents price, or rents more specifically, from serving as a signal to tenants on how much apartment they really want, and landlords how much housing they really should supply. Absent rent regulation some households might decide their money was better spent on housing in New Jersey, say, than exorbitant rents in New York City. In this way rent regulation might actually be contributing to the shortage it is supposed to remedy.

Helping poor renters afford their apartments, however, is good idea as is preventing the displacement of thousands of households that could not afford their apartment if suddenly they had to pay market rents. But surely, we can do better than an inefficient and inequitable program like rent regulation. Indeed we can, for such a program already exists -rent vouchers. Vouchers pay the difference between 30% of the tenant's rent and the market rent, usually capped at the median rent for an area. Vouchers like the Section 8 program are more equitable than rent regulation because they can be targeted to those who are needy. In addition, because rent regulation has little impact on market rents, the operation of the market is not distorted. Moreover, with vouchers tenants could take their subsidy with them and move somewhere else in the city if their circumstances changed. If we want to help only those who are elderly, we could limit the vouchers to those who are elderly. If we thought that we should subsidize rents up to 125% of the median rent in an area, we could do that too. Indeed, we could target vouchers in whatever way we deemed to be "fair" a vast improvement over rent regulation that with few exceptions gives subsidies to whoever is lucky to be living in a rent regulated unit.

But how would vouchers help replace rent regulation? The waiting list for Section 8 vouchers is in the thousands and the federal government shows no inclination to increase funding for Section 8. Where would the city get the money to pay for these vouchers?

Well if we remember that rent regulation is not "free" the difference between what the tenant of a rent regulated apartment pays and what they would pay if they paid market rent, a possible source comes to light. If rent regulation were phased out rents in the rent regulated apartments would rise, and consequently the property values of rent regulated buildings, since the buildings would be more valuable now that landlords were charging higher rents. Rising property values means rising property taxes.

How about this for a grand bargain? We phase out rent regulation, giving landlords what they want. But we provide vouchers to renters living in rent regulated apartments. Increases in property taxes, arising from the increase in property values would be set aside for vouchers. In fact, a portion of all property tax increases in the future could be set aside for these vouchers. Property owners would howl, but a property tax is a more equitable way to fund a rent subsidy than rent regulation. Moreover, the real estate industry might not be so opposed to a property tax hike if they knew rent regulation was being repealed.

What about individuals living in apartments that would still be unaffordable even with a voucher? These individuals could of course move to a cheaper apartment, or if we as a community think it is important for people to be able to stay in their apartment even if it rents for more than the average apartment, we as a community should pay. We could deem that vouchers will pay up $3,000, or $5,000 or whatever amount for that matter. The point is, the entire community should put its money where its mouth is and pay for subsidies we deem important. This would result in higher property taxes that all of us, and not just landlords, ultimately pay.

What are the chances of this happening? Probably slim. But for enterprising politicians this proposal does offer a way of appeasing both sides, helping renters and getting rid of an inefficient and inequitable rent regulation regime.