New York vs New Supply

New York vs New Supply

Last month, New York State responded to the affordable housing crisis by enacting a host of tenant protections.  The law implements a wide range of changes from added eviction defenses to beefed-up rent controls.  While there are many important considerations in housing policy, increasing housing supply must be the cornerstone of any strategy to reduce rents and expand access to dynamic labor markets.  Unfortunately, on this all-important metric, the new policy falls flat.

Writing for City Journal, Howard Husock explains that the law limits “rent increases after owners make major improvements” and increases “even after units become vacant and the rents have not been raised for years.”  By potentially preventing landlords from recouping their upfront costs, expanded rent controls reduce the incentive to build, maintain, or refurbish units. Price controls mean quantity shortages.

Additionally, Husock explains that the state’s rent control law could directly hamper the city’s inclusionary zoning strategy.  He writes:

De Blasio is betting that he can reach a signature goal of “building or preserving” 300,000 affordable units, in part through “inclusionary zoning.” In exchange for generous tax abatements and the easing of height and density restrictions on their buildings, developers set aside 30 percent of units in new buildings and subsidize them as “affordable” for lower-income tenants. Those units become rent-stabilized; the rest can be priced at market rates, though the new legislation could be interpreted to mean that those market-rate apartments fall under rent regulation, too.  Developers who specialized in affordable-housing deals had been managing to build through a combination of incentives and the possibility that rent-stabilized units might not remain that way forever. Higher-rent subsidized units could be deregulated when they became vacant, and developers assumed that market-rate units would never be rent-regulated. All that’s now changed. With the stroke of a pen, Governor Andrew Cuomo has turned new affordable buildings into depreciating assets. There is no longer any possibility that subsidized units will gradually fall out of regulation as their rents rise or as the tenants move out.

At its most basic level, inclusionary zoning operates by allowing developers to build market-rate units on the condition that they set aside units to be rented out at below market rates (BMR).  Thus, in areas where housing costs are high, as is the case in New York, developers need to charge high prices on those “normal” units to subsidize the losses they take on BMR units. That means for inclusionary zoning to work the “normal” units need to be more expensive than they otherwise would be, making inclusionary zoning a tax on housing.  However, many of those units intended to be “normal” may fall under the state’s new regulations, further taxing new developments.

Inclusionary zoning is a policy with limited benefits, based on current research.  Jenny Schuetz and Lance Freeman find that “Local IZ [laws]… have produced relatively small numbers of affordable units and are therefore unlikely to substantially mitigate the effects of rising housing costs.”  Matthew Yglesias has criticized inclusionary zoning for conferring windfall benefits on the lucky few who get special apartments while hampering the construction needed by the city at large.  We should have even less confidence in the city’s IZ policy now that there are even more limitations on building market-rate housing, in addition to the requirement that 30% of apartments be set aside. (For comparison, California’s SB 50’s IZ requirements would have mandated a maximum of 25% of units.)

To correct the effects of artificially constrained housing supply in New York City, some subsidies for rent-burdened households are necessary–but only if supply can expand and only if these policies don’t end up restricting further development. New York’s new laws fail on both fronts.

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By |2019-07-29T08:10:37-07:00July 29th, 2019|Blog, Land Use Regulation|