Rent Control's Costs
May 21, 2003
by Henry Olsen
THE main rent-control law for New York expires again this year -- and if the state Legislature can he persuaded to not renew it, the city would receive a much-needed economic shot in the arm.
This is not just theory: Two recent studies by MIT housing economist Henry Pollakowski show that letting this law die would increase housing quality and lower housing costs for newcomers, increasing the city's desirability as a location for talented workers and entrepreneurs.
Rent control (technically, rent stabilization) limits both rent and the amount it can be increased for about a million city apartments. Because of these legal price controls, longterm city residents often stay in their places for years, thinking they get a better deal than they would get in the marketplace. So newcomers largely have to rent on the comparatively small unregulated market. .
Most people think this benefits the city by keeping housing costs down, but Pollakowski’s work shows this isn’t true. His March Manhattan Institute study ("Who Really Benefits from New York City's Rent Regulation?") used an econometric model to ascertain the effects of rent control as of 1999, the last year for which data are available.
Taking the data from the city's own Housing and Vacancy Survey, he compared rents for all controlled and uncontrolled city apartments. He also adjusted the comparison to reflect each unit's location, size and quality. This was crucial: Unregulated units tend to be larger, newer and in more desirable locations than controlled units.
Studies that don't take that into account -- like many done by advocates that seem to validate rent-control laws -- are thus skewed by comparing the rents of apartments of different value.
Pollakowski found that rent control provides little benefit to residents of the outer boroughs or the lower and middle-income neighborhoods of Manhattan: residents in Queens, Brooklyn, Staten Island, Upper Manhattan, the Lower East Side and Chinatown save less than $10 a month from rent control.
Only residents of controlled units in the affluent parts of Manhattan -- the Upper East and West Sides, down through much of lower Manhattan -- gain significant benefits, as their rents are about $400 a month lower than their counterparts in the unregulated sector.
In effect, Pollakowski found that rent control mainly benefits those already well off.
Nor would they lose the entire benefit if the rent laws were allowed to die: Pollakowski estimated that the median rent in these areas would rise about $200 a month higher for now-controlled units, while rents would drop about $200 a month for units already on the free market.
This is good news for the city's economic growth, because the high cost of housing for newcomers is a drag on that growth. It's why many don't move to the city proper, but to other, cheaper areas close to Manhattan, like the Jersey waterfront. And why others choose not to take a job in New York at all. Both choices hurt the city's economy in many ways; cheaper housing for newcomers would mean a shot in the arm to the city’s retailers and make it easier for city employers to keep hiring talented people.
Pollakowski's second study takes aim at another side effect of rent control: poor housing quality. Many economists believe that, because the controls make it harder for property owners to recoup any investment in a building, they are less likely to spend on repairs and amenities.
Pollakowski tested this hypothesis by looking at evidence from Cambridge, Mass., which deregulated all its rent-controlled housing in 1994 after a statewide referendum. Constructing an unprecedentedly rich database including the rent-controlled status of every housing unit and building in Cambridge as of the date of deregulation, he used another econometric model to estimate how much housing investment had increased after deregulation. (He also adjusted for background economic activity, to allow for investment that might have taken place anyway in the Boston area's then-hot market.)
Pollakowski found that housing investment in formerly rent-controlled buildings rose by about 20, percent even after factoring in other economic trends. Nor was this concentrated in buildings in higher-income areas; housing investment rose in both high- and low-income neighborhoods.
This suggests that housing quality does suffer under rent regulation, and that New York’s housing quality would improve after rent control is repealed. That too would help the city's economic growth, as it would also make people more likely to live and work in New York.
New York's economy has been reeling for two years. Some wounds were-inflicted by forces beyond political control. Others, sadly, were not. Renewing rent control would be yet another signal that state policymakers care more about appeasing the politically influential than about getting the city's economy back on its feet. State legislators should take heed of the evidence and vote for the future, not the past.
Henry Olsen is executive director of the Manhattan Institute’s Center for Civic Innovation.
©2003 New York Post