Rent deregulation, believe it or not, raises market rate rents. The conservative Manhattan Institute, in their study of deregulation in Boston, showed that, following deregulation, landlords invested in improvements to attract market-rate renters. Landlords always seek their highest rent that the renter is willing to pay. Where there is any competition, the result of deregulation is better quality housing but higher market rents.
Market rates only go down if demand goes down -- if people leave the city or excess housing is built. Rent regulation in NY doesn't hinder construction -- new units are typically unregulated anyway. And the city's population increases, not decreases. It's not even certain that in a tight market like NY, landlords would even invest widely in improvements.
Regulated rents actually help to depress market rates, although renters who pay exorbitant rents wish it weren't so. We'd all like to be able to blame the regulated renters because it seems so unfair. But the source of exorbitant rents is not regulation, but the profit motive of landlords and NYers' own desire to live here -- we are the market that sustains those rents.
The market value depends on three general factors: demand, supply, and the aggregate available funds for rents. If regulated renters are paying less than their available rent funds (the excess of which presumably goes into the goods and services economy), when they are forced to pay more, they will increase the aggregate funds available for rents, since most of those renters are tied to the metropolitan area by work or family. Once deregulated, they will raise rents wherever they go in the area and that trickles up to the luxury rents.
Paul Krugman some years ago blamed regulation on San Francisco's tight rental market. He was clearly unaware that inclusionary housing was mandated in San Francisco, hindering construction. Krugman admits in his article that his judgment was cursory and immediate and not a result of any investigation. Had he known that inclusionary housing was mandated there, he would no doubt have come to a very different conclusion.
Inclusionary housing is not mandatory in NYC. I hasten to add that mandatory inclusionary housing in a super-high market like NYC would probably not unduly hinder construction.
"We'd all like to be able to blame the regulated renters because it seems so unfair."
ReplyDeleteIt seems unfair because it is unfair.
"But the source of exorbitant rents is not regulation, but the profit motive of landlords and NYers'own desire to live here -- we are the market that sustains those rents."
Just as you and I earn as much as we're able in whatever our chosen professions, so too do landlords. The same "profit motive" applies to teachers, artists, restaurateurs, whoever.
"The market value depends on three general factors: demand, supply, and the aggregate available funds for rents."
Supply & demand ring a bell, but you lose me with the available-funds-for-rents thingy.
"If regulated renters are paying less than their available rent funds (the excess of which presumably goes into the goods and services economy)"
Or, maybe a second apartment elsewhere? People who have regulated "sweet deals" NEVER give up these apartments-- long after they no longer have a use for them. They keep them as pied-a-terres, storage spaces, their children's sweet-deal inheritance.
"when they are forced to pay more, they will increase the aggregate funds available for rents. Once deregulated, they will raise rents wherever they go and that trickles up to the luxury rents.
Like I said, you lost me with the "aggregate funds" business. I fail to see how it follows that if formerly regulated apartment(s) started to generate market rate rent(s), this would have any influence on the general market rate. What's your evidence, in fact or theory?
Lisa,
ReplyDeleteI gave the factual evidence in the previous post and twice at the Times' City Room, where perhaps you found my blog. The Manhattan Institute studied deregulation in Boston, discovering that *all* market rates rose *steeply* following deregulation.
http://www.observer.com/2007/cambridge-model
The Manhattan Institute is not a liberal regulation-monger. The Manhattan Institute is an arch-conservative think tank responsible for much of Giuliani's policies. So this was not biased towards regulation, but very much in favor of deregulation.
What they found was that landlords invest in their housing following deregulation, and they raise the rents even further. The result is better housing, but higher rents.
Please understand that I did not disparage landlords' profit motive, I merely mentioned it objectively as part of the explanation. One can't explain market rates without the profit motive. The other part of the explanation is the desire to live in NYC. That is also necessary for understanding market rates. I mentioned both.
Yes, it is unfair, as I've stated elsewhere, including the City Room. "Unfair" does not imply "cause." It would be fair for regulated renters to pay market rates, and, equally, it would be fair for all market rate renters to pay regulated rents. It's obvious that landlords should prefer the former, but for renters, preferring the former could only be spite or misanalysis of how the rental market works.
The problem of secondary apartments is an interesting one. Do you have any stats -- both absolute numbers and percents? If many such were lost, there might be a dip in demand, but more likely, for a high-demand location like NYC, it will just bring more outer-borough renters into Manhattan: just as there are some who have more than one Manhattan address, there are many who simply can't find any Manhattan address, and are just waiting to pay those exorbitant rents. Demand remains high in NYC.
The aggregate funds is just an easy way of generalizing over the market. It assumes that deregulated renters won't run off to West Virginia, but will stay in the metro area. Here they will have to pay more than they were paying before. If they move, they will still pay somewhat more, because they will be increasing the demand in the place they go to. The aggregate simply means that the deregulated renters don't just disappear. They maintain a demand. If they are now able to pay more, the demand will rise to meet them. That's why some landlords want deregulation. Others want deregulation because they can't meet their bills. They deserve a real estate tax break (the city and the state give huge tax breaks to big corporate developers, but not the little landlord who truly needs it -- typical politics, power wins all). But larger landlords and developers want deregulation just to bring in the high payers.
So, yes regulation creates an unfairness, but it also moderates market rates as well. To see that, just look at the Manhattan Institute's empirical study.
http://www.observer.com/2007/cambridge-model
Thanks for reading!!
You imply another argument that I neglected in my previous response: isn't regulation unfair to landlords?
ReplyDeleteThis issue is much more difficult to assess than the effect of deregulation on market rates. The latter is a straightforward matter of empirical fact -- the Manhattan Institute's study provides the data -- and is predictable by the theory I have detailed on the blog.
But unfairness to landlords is, I think by consensus, a matter of value, not fact. Why shouldn't a property owner be allowed to charge rent through the renter's nose, if the renter offers the nose?
Why should a landlord maintain the apartment and the building rather than the renter, who is, after all, using it and wearing it out? I mean, if I lent you my piano for your tour, and you returned it out of tune, shouldn't you have to pay for the tuning? More to the point, should I have to tune the piano every time you perform, just because it's my piano?
Why then shouldn't renters pay for heat ad hot water, broken windows, missing steps, new wiring and plumbing? Why not leave it all for the market to sift out -- people with money will rent where the landlords maintain the property, while people with no money end up in buildings where the landlords don't maintain? The wealthy who can pay for maintenance, won't have to, and the poor who can't afford maintenance, will have to. That's the market! It's bizarro world, truly topsy-turvy.
If you say, "it's the landlord's property, so it's the landlord's responsibility" then you've just begged the question: why should the owner of the property be responsible?
If you think it's okay to let the market sift it out, then you set the clock back to the time when slums were abhorrent to any conscience.
If the landlord didn't have any legal responsibility, slumlords would be princes -- a free ride 100%.
So the body politic has arrived at a kind of compromise. The landlord must sink labor into property for the good of the weakest members of society. That's called social progress. It's like any regulation -- you can't use lead paint in children's toys just because it's cheap and someone will buy it. There is a useful role for government regulation.
Similarly with rents. The virtue of rent regulation is not just the protection of the weakest, but also for community stability and the prevention of constant transiency. It also allows other rights -- if your rent can be hiked at will, landlords could vacate you just because you complained there was no heat for a week, or just because he doesn't like you. In a tight market, the landlord would have almost unlimited power.
And that would be something to complain about. There should be more regulation -- as much as the real estate economy's growth can sustain. How much that is, is a matter that should be studied.