No. 3 June 1997
The Effects of Rent Deregulation in Massachusetts
Henry O. Pollakowski is an economist at MIT's Center for Real Estate
With the New York State Legislature debating the merits of deregulating rents, it is useful to consider the Massachusetts example, since it represents the most recent case of a large metropolitan area ending long-term controls. In 1994 Massachusetts voters approved a ballot referendum ending rent controls in the three cities that had them: The measure went into effect in 1995, and by the beginning of 1997 deregulation of the rental housing stock in these three cities was complete.
Even though the the Massachusetts experience is very much in progress, results to date provide encouragement for reform in New York. The news comes in three parts: deregulation has affected the poor less than anticipated, housing construction and renovation have picked up, and property-tax revenues have increased.
Rent control in Massachusetts stemmed from the Rent Control Enabling Act of 1970, a state law that allowed towns to limit rent increases and regulate evictions. The measure was passed as a temporary bulwark against inflation and expired in 1976. However, some jurisdictions passed home-rule tenant protections of their own that extended beyond that time.
History of Rent Control in Massachusetts
Boston adopted rent control in 1973. Only two citywide rent increases were approved during the next 11 years, but annual increases of four to six percent were allowed thereafter. The city instituted vacancy decontrol in 1976, which over time had the effect of deregulating 75 percent of the regulated rental stock.
Cambridge adopted controls in 1971, setting most rents at 1967 levels. Rent increases were allowed for improvements to property, changes in operating expenses, and general adjustments for specific property classes, and the law limited the circumstances under which a landlord could remove a tenant from a unit.
Strong demand for housing in the late 1970s, coupled with a decade of rent control, led to a tightening of Cambridge’s housing market. The city’s response, however, was to pass additional regulations in 1981 that limited the removal of units from the market through demolition or conversion to condominuiums or cooperatives.
The 1994 statewide ballot initiative ended all these controls. To ease the transition back into a market system, the state legislature provided one- or two-year extensions for lower-income tenants, with special thresholds for the elderly or disabled. Extensions were granted to all those who earned less than 60 percent of the Boston metropolitan area median income, adjusted for household size. Under this formula, single people with incomes of $21,500 or less qualified. For the elderly and disabled, extensions were granted to those whose incomes were below 80 percent of the median income, or $27,950. These extensions lasted one year for apartments in buildings with up to 12 units and two years in larger buildings.
Evidence Points to Little Harm from Lifting Rent Control
The most striking feature of the end of rent control in Massachusetts was that a remarkably small number of rent-controlled households–only about 7 percent–applied and qualified for these transitional extensions. In the three rent-regulated cities, about 42,500 units were subject to rent controls in 1994. However, tenants in only 3,090 of these units were deemed eligible for short-term protections because of their low incomes.
To say that this came as a surprise to most would be an understatement. It was generally believed that considerably more households would qualify for protection from decontrol. Clearly, the number of poor tenants in rent-controlled housing had been overestimated. It is worth noting that there has been a virtual absence of horror stories of hardship evictions reported by Boston’s vigilant press.
In Boston, the Rent Equity Board had believed that the city’s 22,000 regulated apartments were occupied primarily by the elderly, and that many of them were poor. The board had no direct information to support this view, and relied on the fact that tenants in rent-controlled units had to have occupied them since before vacancy decontrol in 1976. However, the U.S. Census indicates that the number of elderly poor was about 7,400. It is reasonable to conclude that many of them lived not in the 22,000 rent-controlled units but in the city’s 136,000 other rental units, both private and public. In fact, only 1,065 tenants in regulated apartments ended up qualifying for extensions.
In Cambridge, a 1987 Abt Associates telephone survey seemed to imply that some 5,000 rent-controlled households (almost one-third of all rent-controlled households) would be eligible for an extension. Some predicted an even higher number. After deregulation, however, only 2,345 applied, of which 1,545 were accepted. Some households undoubtedly chose not to apply, but the number of applicants was still significantly lower than many would have predicted. It appears either that the demographic profile of renters in controlled units changed, or some respondents had underestimated their income.
Rent Control Benefits Flowed to Young, Single, Professionals
Who, then, did benefit from Massachusetts’s rent controls? Estimates are available for the most heavily regulated city, Cambridge. Using computer mapping, a 1992 study by Goetze matched the Election Commission list of residents with rent-control addresses in Cambridge and came up with some surprising conclusions. One-half of the residents in rent-controlled housing were in the prime earning years (30-49), while only about ten percent were elderly (65 or over). Remarkably, about half were in higher-status white-collar occupations. In rent-controlled condominiums, over 70 percent were in these occupations. Thus, despite the fact that both Abt and Goetze found incomes somewhat higher, on average, for households not under rent control, substantial benefits were going to the well off. This is similar to many areas in Manhattan below 96th Street.
Ending rent control in Massachusetts meant the loss of a good deal for many young people and professionals but was certainly not a hardship for them; some could take in roommates (49 percent of rent-controlled units were occupied by one person), some could pay higher rents, and others could move to less choice locations.
The Results of Decontrol in New York City May Resemble the Results from Massachusetts
As several studies have shown, rent stabilization in New York City also benefits the poor less than popularly believed, while bestowing substantial benefits on the affluent (Roistacher, 1991, Pollakowski, 1997). About 70 percent of the benefits in the form of lower rents accrue to those living in Manhattan below 96th Street. The most bizarre case is the Upper West Side, where one-bedroom stabilized units (the predominant size) are occupied by people with a median 1992 household income of $50,000, compared to a median of $19,000 for all New York renters. Upper West Side stabilized rent tenants receive, on average, a rent break of several hundred dollars a month. In Manhattan below 96th Street, the average household living in unregulated housing has been there for 4.5 years. In contrast, the average household in stabilized units has been in place for 8.5 years. And there are 250,000 households in stabilized apartments in that part of the city.
That a regulatory change of this magnitude causes discomfort for market participants should not be swept under the rug. What is important is to distinguish discomfort and inconvenience from the vulnerability of the least fortunate. But this distinction is blurred in the public debate. Somewhat increased rates of mobility should be expected, since one problem with rent control is that it it tends to freeze people in place. When deregulation occurs, many previous beneficiaries of rent control move from larger apartments to smaller ones, often enabling larger families to rent apartments with more space.
After Decontrol, Positive Signals
Information on post-deregulation rent increases does not yet exist, and the behavior of unregulated rents does not, by itself, provide usable evidence. Nonetheless, on average, unregulated rents in Boston have not increased significantly, despite a robust housing market. According to a Rental Housing Associates survey of primarily unregulated units, the average Boston rent, measured in 1996 dollars, rose from roughly $825 in the fall of 1994 to $900 a year later, and has stayed at that level. Over the same period, average rents for the surrounding metropolitan area (also in 1996 dollars) rose from about $800 to $850.
How has deregulation in Boston, Cambridge and Brookline affected the local housing market? Although it is too early to measure some effects, some benefits are already visible. The case of Cambridge is most striking because, prior to 1994, there had not been any vacancy decontrol or other easing of rent control. Almost two thirds of rental housing (not including public and assisted housing) in Cambridge was under a strict, long-standing form of rent control. Building permit activity increased in 1996, but more importantly, renovation and repair of formerly rent-controlled buildings is visible as one tours Cambridge. Also, new apartment buildings are in the pipeline.
Since the apartment market in the Boston area was already heating up at the time of the 1994 ballot initiative, it is difficult to know how much of the activity in Cambridge can be attributed to rent deregulation. What is important to note is that the current high level of renovation and repair of Cambridge buildings previously under rent control did not occur during the previous market peak in the late 1980s. Also, while there was considerable condominium activity in Cambridge during the previous market peak, there was essentially no new apartment construction.
Residential Property Tax Revenue Increased
Increases in the market value of rental buildings in Cambridge–reflecting both the movement of rents toward market value and landlords’ increased incentive to undertake renovations and repairs–are being rapidly transformed into higher property tax revenues. A three-year effort is currently underway to reassess the entire deregulated rental stock. During the first year, North and East Cambridge, primarily non-affluent areas, were reassessed. The second and third years will see the reassessment of the more affluent Harvard Square area. (Interestingly, the Cambridge residential assessor has indicated that the buildings in the Harvard Square area are now assessed at 40 percent below market, while the reassessments in North and East Cambridge found the buildings in these less affluent areas had been assessed at a considerably lower percent below market. This, of course, is consistent with substantial benefits of rent control having gone to non low-income households.) The Cambridge assessor indicated that the three-year assessment would yield an annual increase in property tax revenues of $4.5 million. This represents a remarkable nine percent increase in residentail property tax revenues, and a three percent increase in total property tax revenues.
The Cambridge case is also noteworthy because the City Council has made a commitment to spend at least $2 million a year for ten years on targeted housing assistance. This program was begun early in anticipation of the property tax revenue increase. This provides an example of local government addressing housing affordability problems of its residents, directly, not indirectly.
The Boston and Brookline cases differ from Cambridge in that vacancy decontrol has been in effect for some time, thus reducing the proportion of the rental stock under strict controls. There is considerable construction of rental housing in progress or planned in both Boston and Cambridge. Though it is difficult to say how much of this is purely cyclical, its magnitude suggests some boost from rent deregulation. According to the Rental Housing Association, there are about 2,500 new housing units, mostly rental, under construction or in the pipeline in these two cities, adding almost one percent to the existing stock. This is the largest amount of conventionally financed rental housing activity since the beginning of rent control 25 years ago.
Given that the 22,000 controlled units were renting, on average, for around $300 below market, the Boston property tax base is increasing. It appears that assessments will only change gradually, with the eventual annual increase in property tax revenues being at least $5 million to $7 million per year. (Some of this increase may already have been achieved since Boston has had a policy of aggressively reassessing rent-controlled buildings at expected eventual vacancy decontrol values.) This result implies an increase of residential property tax revenue of at least 2.3 percent, and an increase in total property tax revenue of at least 0.7 percent.
Deregulation in New York should produce results at least that strong. A 2.3 to 3.2 percent annual increase in the city’s residential property tax collections would amount to $83 million to $116 million. Studies by Roistacher (1991) and deSeve (1997) suggest the increase would be even larger, in the range of $150 million to $180 million. And an increase of one percent in New York’s housing stock during the current strong economic period would amount to more than 27,000 units, four times more than the number now being planned or under construction.
New York Would Benefit from Deregulation, but the Process Would Be More Complicated than in Massachusetts
There are numerous lessons from the Massachusetts experience that are relevant to the current rent deregulation debate in New York City. The most important is to bring the best possible data and analysis to bear on the issue. New York has the tremendous and unique advantage of having available the Housing and Vacancy Survey. But even in the Massachusetts case, in retrospect it turns out that there was sufficient information available indicating that deregulation would not be as cataclysmic as many believed. But few were paying attention. In New York, there is empirical evidence that a carefully designed, phased withdrawal from rent regulation can be achieved. Total deregulation will require targeted housing assistance for the least fortunate.
A major difference between the Boston area and New York is the scale of rent regulation. In the Boston metropolitan area, in a two-year period 42,500 rental units were decontrolled. New York has more than a million regulated rental units and has had rent regulation for more than 50 years. Deregulation in New York will take longer than two years. It should be remembered, however, that a majority of New York households under rent stabilization are not benefitting from the system. In Upper Manhattan and the outer boroughs (with the exception of some affluent areas) benefits on average are negligible or nonexistent. Stabilized units do have somewhat lower rents but are also generally smaller. When size, quality and neighborhood are taken into account, the rent benefit disappears. Of course, there is considerable variation in benefits, so a short phasing out period makes sense. Thus the Boston area had 42,500 controlled units with large benefits, while New York has more than a million regulated units, but with only a minority enjoying modest to substantial benefits.
Like other U.S. cities, Boston and Cambridge will continue to have housing problems. But deregulation is increasing the quality and quantity of the housing stock, and making more effective use of the existing stock. By ending its more comprehensive system of rent regulations, New York can achieve a far healthier housing market and, hence, much greater benefits.