Earlier this month New York State enacted a new rent regulation bill. The bill applies to the entire state but has a significant impact on New York City where 2.4 million people live in close to a million regulated apartments. The City’s two regulatory frameworks, rent control and rent stabilization, differ on which units qualify and the rules that govern rent increases, but in general they both cap the amount that a landlord can increase rents each year leading to rents that are much lower than the market rate. The new law creates permanent regulations that severely limit the ability of landlords to raise rents in special circumstances (for example, after tenants move out or landlords invest in building improvements) and to deregulate units.
As my colleagues have argued time and time again, rent regulations are counterproductive. Though the rules aim to address a lack of affordable housing, setting the rent below market rates creates a supply shortage that exacerbates the problem. Traditionally, economists have understood rent control to benefit current tenants, who pay lower rents, at the expense of future tenants, who have more difficulty finding affordable apartments.
This view accurately captures the future supply shortages created by rent controls but misses the negative impact the rules have on current tenants. In the winter 2018-2019 issue of Regulation, Richard McKenzie and Dwight Lee explain how current renters are made worse off by the strategies landlords use to respond to the decreased rent and reduced competition as demand outpaces supply. Without any rent regulations, landlords balance the rent they receive with the features and amenities they offer to tenants, including things like maintenance and air conditioning, in order to compete for prospective tenants. Limiting the amount landlords can charge and the competition they face incentivizes them to reduce the amenities and features they offer.
In the longer-term, this means landlords may allow apartments to deteriorate and newly built apartments will be of lower quality. Even in the short run, landlords can institute new rules (such as limiting the number of tenants in each unit), withhold maintenance, remove or restrict access to amenities, or convert units to condos to offset their lost revenue. The value of the diminished apartment quality nullifies tenants’ reduction in rent and, accounting for the decrease in quality, tenants may end up paying a higher effective rent than they would have paid without rent controls.
A shortsighted response to this could be to prohibit these sorts of strategies. But this discounts the ability of landlords to find creative ways to recoup their losses. They can always create new fees (such as charging for repainting or the use of amenities like a pool or gym) or find opportunities to reduce costs, even in ways that no regulation can address (for example, saving time by being less responsive and helpful to tenants). Even if a particular prohibition does succeed in limiting landlords’ ability to make up for their reduced rent revenue it simply further compounds the supply shortage.
Proponents of rent controls don’t anticipate both the supply shortages the rules create and the ability of landlords to make up for lower revenues by reducing quality. The best way to address the need for affordable housing is to loosen regulations to allow more housing units to be built and encourage increased competition, not to introduce more counterproductive regulations.
Written with research assistance from David Kemp.