Legislating Shabbiness
In 2018, New York was one of only two cities in the ten most expensive U.S. housing markets to see a decline (3 percent) in its median rent. Even so, tenant advocates want to expand rent regulations. For the first time in decades, Democrats have gained firm legislative control in Albany and are eager to enact long-promised progressive reforms. As the state legislative session nears its end, it appears likely that property owners will soon face limits on their ability to set prices in response to market conditions.
The most aggressive proposal would limit rent increases based on “major capital improvements.” Under current law, landlords can pass on the cost of large installations that substantially benefit tenants in the form of a rental assessment—a new boiler or roof, say, or pointing the building’s brickwork. The Real Estate Board of New York estimates that building owners invest some $10 billion annually in such improvements.
Led by a new group called the Upstate-Downstate Housing Coalition, tenant advocates see capital improvements as the leading edge of gentrification. An improved building can indeed attract tenants who can pay higher rents. As the decline in median rents makes clear, though, making improvements is not a risk-free proposition for property owners. Investments can fail to pay off; markets can decline.
On the other hand, if rent regulation discourages capital improvements, then buildings in all but the highest-rent areas will become the private-sector equivalent of the city’s Housing Authority, where deferred maintenance has snowballed into a repair backlog of $32 billion. The opposite of gentrification—call it shabbification—would emerge, as city housing stock becomes more and more degraded. Middle-class and working-class neighborhoods, where rents are often not that high (in some outer-borough neighborhoods, market rents are lower than permitted by law) would be at particular risk.
Shabbification, over time, would lead New York down the path taken by New Delhi, where rent controls, in place since 1948, have let tenants take advantage of what newspapers call “absurdly low rents.” Tenants whose families have been in place for decades in now-fashionable areas of the city, where comparable rents may be in the thousands of dollars, pay as little as 80 cents per month because the law makes no provision for increases. Landlords have no incentive to maintain their properties above minimal standards of habitability, so much of the housing stock has deteriorated.
The idea behind the new bills in Albany is that, left to the market, all neighborhoods would gentrify and force out legacy tenants. But there are only so many financial-industry employees, and they won’t all be moving to the Bronx. Rent laws distort the market, encourage tenants to stay in apartments bigger than what they need, and discourage owners from performing maintenance. Legislators should resist the rent-regulation temptation.
