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Real Estate Economics • January 31, 2010

Rent outta shape from NEW YORK POST

 

Rent outta shape

What the Stuytown and rent ruling fiascoes mean to New York City

January 31, 2010

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Getty ImagesStuyvesant Town
Getty Images

Stuyvesant Town

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* “In many cases, rent control appears to be the most efficient technique presently known to destroy a city except for bombing.”

* “Rent control has in certain western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”

* “That great sacred cow — Rent Control — is a textbook case of Economic stupidity.”

It is no surprise that free market economists would oppose rent control, root and branch. It is, however, a bit “man bites doggish” that even economists with sterling left wing credentials would oppose it too, and about as bitterly. The sources of those three quotes? Assar Lindberg, from “The Political Economy of the New Left”; liberal Swedish economist Gunnar Myrdal; and the New York Times’ own Paul Krugman.

Why the consensus? It’s because this law, which supposedly helps impoverished tenants, actually does the opposite.

Every so often, saner elements in government try to repeal rent stabilization’s stranglehold on New York City. But they inevitably fail. Just this week, two frightening developments further cemented its place. First, Tishman Speyer walked away from their investment in Stuyvesant Town, mainly because it was not allowed to increase rents. Second, a State Supreme Court ruling said that some 300,000 rent-stabilized residents had their rents “illegally” raised. We’re talking an extra $45-$85 a month, on rents under $1,000.

Wouldn’t we all like such protections? Alas, the court ruling simply illustrates the benefits certain New Yorkers get from winning the housing lottery — and how the rest of us pay for it.

If you’re just moving to New York City, big dreams and ideas in your head, living in Manhattan will cost you, on average, $2,253 a month for a studio and $3,026 for a one bedroom. Pricey. If you’re in the middle class, you’re probably railing against the rich Wall Streeters and greedy landlords who are keeping you from making it in Gotham.

Except the average rent for the city in 2008 was only $950 a month.

How is this possible? Because 48% of rental housing is stabilized, meaning increases are regulated, and another 2% are rent-controlled, meaning increases are almost non-existent. Another 14% of units are public housing and other projects.

That leaves only 36% of apartments on the open market, in a city as attractive and competitive as this one. Rent control may keep the average artificially low, but it also makes the rents on the small number of available units artificially high.

It is not for nothing that landlord-tenant relations have soured in the Big Apple, and, indeed, wherever rent control has been adopted. When a financial premium is placed not on consumer sovereignty, but on moving tenants out in order to raise rents, it should occasion no big surprise that a different type of landlord attains a competitive advantage. Chances are the residents of Stuytown are going to be suing to get their plumbing fixed in a couple years.

Meanwhile, there are probably more than a few families crowded into apartments too small for them — or single people in apartments too big for them — because rent stabilization means they are terrified to move.

Some people fear market rents on the ground that only the rich will end up living in Manhattan. Unlikely; though rents would go up for those with rent-stabilized apartments, an increase in the vacancy rate (now at an engineered 3% or less) would cause other rents to fall. That would provide an opening for those who usually can’t get by in New York — the middle class.

Advocates of rent controls are celebrating this weekend, pleased that a million or more residents have been saved a few dollars in Stuytown and elsewhere. But they — and we — will pay the price later, in lawsuits, atrophy and decay. It’s a tale of two cities, the glistening towers of the rich, and the stabilized apartments treated with contempt by their landlords.

We won the ideological war against the Soviets fair and square. Why do we allow their foolish ideas to guide us in the housing market?

Walter E. Block is Professor of Economics at Loyola University in New Orleans. Originally from Brooklyn, Block earned his Ph.D. in economics from Columbia University with a dissertation on rent control.

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