New Research: Markets Can Keep Housing Affordable (And Available)

New Research: Markets Can Keep Housing Affordable (And Available)

In advance of the New York gubernatorial primary next week, the editorial board of The New York Times published an editorial in support of rent control.

After a number of decades with strong rent control laws, the New York legislature took measures to roll back local controls more stringent than the state’s on rent during the 1970s. Beyond this interesting history of deregulation, the editorial board includes the familiar lamentations on NYC’s gentrification, increased rents, and a call to support Democratic candidates who support rent control.

Notably absent from the editorial is any discussion of how land-use and zoning regulations have increased the housing costs for New Yorkers. Though real estate developers and landlords had a hand in the Albany-style rent-seeking that came with rollbacks on rent control, The Times is mum on how entrenched interests at the local level restrict development for their benefit.

Just in time to rebut the Times’s misguided call for greater intervention is a new paper from the Fisher Center at the University of California, Berkeley on the negative consequences of rent control in California, and how repealing the Costa-Hawkins law (on the ballot in California this November), which places some restrictions on rent control, would be detrimental to the California housing market:

Specifically, rent control ordinances reduce rental supply in several important ways: 1) Rent control incentivizes property owners to convert rental units to other uses, such as for-sale housing units or non-residential buildings; 2) Rent control reduces the effective supply of available rental units through an inefficient allocation of housing; and 3) Rent control limits the creation of new rental supply by discouraging development activity, especially without guaranteed exemptions for new properties and assurances that property owners can adjust rents to market level upon tenant vacancies. All of these factors combine to decrease the supply of rental housing in markets with rent control, which ultimately lowers apartment availability and raises rents.

The paper provides an excellent summary of the literature related to the effects of rent control, and this review verifies the basic theoretical problem with rent control: if you limit the potential return on investment for property owners, they will look elsewhere to make money.

Property owners will pursue other opportunities such as converting their properties to commercial use, occupying the rent-controlled property, or creating co-ops where tenants are able to purchase individual units. Based on a study of the effects of rent control in New York City, the paper concludes that by encouraging co-ops, rent control decreased the available housing supply.

Indeed, the number of co-operative units in New York City ballooned to 255,000 units as of 1999, up from 106,000 in 1976, an increase of 140%, with many of these new co-operative units converted from formerly rent-controlled apartment buildings. In New York, the long-term effect of rent control significantly reduced the overall rental supply and dramatically hollowed out the number of units in some neighborhoods, particularly affluent parts of the City.

After Costa-Hawkins in California, despite the growth of restrictive zoning codes, there was a significant increase in the number of new multifamily building permits in major Golden State Cities.

 

Housing affordability is a serious issue that New York’s paper of record should be discussing, but rent control isn’t just an imperfect solution, it’s actively harmful. Instead of encouraging greater distortions and inefficiencies in the market, a wiser course for New York would be to liberalize its zoning codes (which as of 2016 would prevent 40% of the buildings now in Manhattan from being constructed today), increasing the supply of housing to make market-rate housing affordable.

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By |2018-09-12T13:15:26+00:00September 12th, 2018|Blog, Land Use Regulation|