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Civic Report
No. 34 March 2003


Who Really Benefits from New York City’s Rent Regulation System?

Appendix

Estimation of Shadow Rent in a Partially-Controlled Market

In a market under partial rent control, one sector of rental units is subject to rent control and the remaining sector is not. In such a market, not only will the controlled rent be lower than the shadow rent[1], the rental rate which would exist if the market were unregulated, but the equilibrium market rent in the uncontrolled sector will be higher[2]. The excess demand in the controlled sector created by the partial rent control implies greater demand in the uncontrolled sector than would otherwise exist and thus creates a function of the proportion of units under rent control (p), the demand elasticity (h), and the percentage decrease in the controlled rent from the shadow rent. By deriving expressions for the deviations in supply and demand from that which would exist in a free market and setting the two expressions equal, the rent difference in the uncontrolled market may be calculated as follows:[3]

Du = -pDc/[(1-p) + hDc] ;

where

Du = (Ru—R);
Dc = (Rc—R);
Rc = the controlled rental rate;
Ru = the equilibrium uncontrolled market rent; and
R = the shadow market rent.

Using this relationship, one can solve for the shadow market rent for an existing partially regulated market by taking the two roots of the R in the above equation (when extended, the equation is quadratic in R). Because only one of the two roots reflects a binding rent control situation (i.e. Rc<R), we shall use that one:

R = [(p-h)Rc + (1-p-h)Ru + [(p-h)2Rc2 + 2[p(1-p) + h(1-h)]RcRu + (1-p-h)Ru2]1/2]/2(1-h).

This relationship between the controlled and uncontrolled sectors is depicted graphically as follows:

  1. By definition of binding rent control.
  2. Assuming supply is not infinitely elastic.
  3. See Marks (1984) for a detailed derivation.

References

  • Marks, D. (1984). “The Effects of Partial-Coverage Rent Control on the Price and Quantity of Rental Housing,” Journal of Urban Economics 16, 360–369.
  • Olsen, E. (1972). “An Econometric Analysis of Rent Control,” Journal of Political Economy 80, 1081–1100.
  • Pollakowski, H. O. (1997) “The Effects of Rent Deregulation in New York City,” Working Paper, Center for Real Estate, Massachusetts Institute of Technology.
  • Pollakowski, H. O. (1992) “The Effects of Partial Rent Deregulation in New York City,” Working Paper, Joint Center for Housing Studies, Harvard University.
  • Roistacher, E. A. (1992) “Rent Regulation in New York City: Simulating Decontrol Options,” Journal of Housing Economics 2, 107–138.

Endnotes

  1. This finding is broadly consistent with previous research, including Roistacher (1992) and Pollakowski (1992, 1997).
  2. The New York City Housing and Vacancy Survey is conducted every three years. This study is based on the most recent available Survey, taken in 1999. The current study repeats and refines much of the analysis that was done using the 1993 Survey (Pollakowski, 1997). This strategy serves two purposes. First, it provides a detailed look at how the New York City rental housing market has changed since 1993. Second, it provides a comparison of two quite different states of the housing market. Coming out of the recession in 1993, the market was “cooler” than it had been in the late 1980’s and would be later in the 1990’s. In 1999, the market was “hot.” However, the changes from 1993 to 1999 were far from uniform. The current study documents what can be learned concerning rent deregulation from the pattern of change.
  3. A moderate form of partial deregulation began in New York City in 1994. With the renewal of enabling legislation at the state level, a combination of high-income, high-rent deregulation and partial vacancy deregulation was put into place. A unit renting in excess of $2000 per month could be deregulated when the income of the occupying household reached $250,000 two years in a row. In addition, a unit renting above $2000, regardless of income, could be deregulated when the tenants of the unit moved. The 1997 legislation strengthened this partial deregulation by lowering the income level to $175,000, while maintaining the rent level of $2000. In addition, larger increases in rents were allowed upon turnover of stabilized units, including an allowance for the length of tenure of the outgoing tenant
  4. The methodology builds upon that of earlier researchers, including Olsen (1972), Roistacher (1992), and Pollakowski (1992, 1997).
  5. These findings are broadly consistent with conclusions drawn from previous work with the New York City Housing and Vacancy Survey, including Pollakowski (1992, 1997) and Roistacher (1992).
  6. The market rent level that would exist in the event of complete deregulation is often referred to as the “shadow” market rent. The shadow market rent for any type of housing at any point in time can be estimated through an adaptation of the model developed by Marks (1984). This model develops an equation for the underlying or shadow market rent based on the three factors discussed herein: (1) the existing unregulated market and regulated rents; (2) the price elasticity of demand for rental housing; and (3) the extent to which rents are regulated. Marks’ model is summarized in the Appendix.
  7. As with all our numbers, these represent average effects.  Since many of the presently stabilized units have been under some form of rent regulation since World War II, rent changes for some households will vary from these typical amounts.
  8. Note that this necessitates using a period of two years and three months. The “two-year” results thus actually pertain to a period of two years and three months.
  9. Again, individual rent increases would vary from the medians, and within each location some households would see far greater rent increases than others. In addition, a misreading of the market situation could lead to higher than anticipated rent increases for the first deregulated units.

 


Center for Civic Innovation.

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CR 34 PDF (99 kb)

WHAT THE PRESS SAID:

NY’s Rent Laws: Boon to the Rich, New York Post, 3-13-03
Study: Rent Controls Have Little Impact Outside Affluent Neighborhoods, New York Sun, 3-12-03

SUMMARY:
This report analyzes the benefits provided by rent regulation in New York City and estimates the effects that total or partial deregulation would have on City residents. The author, Dr. Henry O. Pollakowski, finds that rent stabilization provides little benefit to residents of the outer boroughs and the lower and middle-income neighborhoods of Manhattan, while providing a substantial subsidy only to the residents of the relatively affluent areas of Lower and Mid-Manhattan. Even including those areas, it finds that the median monthly subsidy provided by rent stabilization is only $42, and moreover that the median monthly rent would rise a mere $8 under total deregulation, due to the downward pressure on rent levels the expansion of the unregulated market would create.

TABLE OF CONTENTS:

Executive Summary

About the Author

Acknowledgements

Introduction and Overview

Calculating the True Effects of Rent Stabilization

Table 1: Median Rents By Sub-Borough and Control Status, New York City, 1999

Methodology

Table 2: Locations Used In Subsidy Analysis, New York City, 1999

Table 3: Median Subsidies Generated By Rent Stabilization, By Location, New York City, 1999

Table 4: Subsidies Generated By Rent Stabilization, By Borough, New York City, 1999

Table 5: Median Rents and Income Levels, New York City, 1993–1999

Table 6: Median Rents By Borough, New York City, 1993–1999

Rent Changes Under Complete Deregulation of Stabilized Housing

Table 7: Deregulation of All Stabilized Units, Median Predicted Rent Changes and Number of Units Affected, By Borough, New York City

Rent Changes Under Vacancy Deregulation

Table 8: Stabilized Units Turning Over At Least Once During 1997–1998, By Borough, New York City

Table 9: Two-Year Vacancy Deregulation of Stabilized Units, Adjusted For Subsidy Levels, Predicted Rent Changes and Number of Units Affected, By Borough, New York City

Conclusion and Policy Implications

Appendix: Estimation of Shadow Rent in a Partially-Controlled Market

Table A-1: Number of Units By Sub-Borough and Control Status, New York City, 1999

Table A-2: Explanatory Variables Used In Regression Analysis

Table A-3: Hedonic Rent Equation, Unregulated Sector, Bronx and Upper Manhattan

Table A-4: Hedonic Rent Equation, Unregulated Sector, Brooklyn and Staten Island

Table A-5: Hedonic Rent Equation, Unregulated Sector, Lower- and Mid-Manhattan

Table A-6: Hedonic Rent Equation, Unregulated Sector, Queens

Table A-7: Deregulation of All Stabilized Units, Median Predicted Rent Changes and Number of Units Affected, Bronx and Upper Manhattan

Table A-8: Deregulation of All Stabilized Units, Median Predicted Rent Changes and Number of Units Affected, Brooklyn

Table A-9: Deregulation of All Stabilized Units, Median Predicted Rent Changes and Number of Units Affected, Lower- and Mid-Manhattan

Table A-10: Deregulation of All Stabilized Units, Median Predicted Rent Changes and Number of Units Affected, Queens

Table A-11: Stabilized Units Turning Over At Least Once During 1997–1998, By Sub-Borough, New York City

References

Endnotes

 


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