Source: Freakonomics

If you have read this blog, you may have gleaned that I live in New York City. Cities have made a fantastic comeback from the latter half of the 20th century when many people were moving out to the suburbs and cities seemed to be dying. Abandoned storefronts, homes and rampant crime were the norm.

A confluence of factors have helped cities, especially large coastal cities, make a huge comeback. One reason is the economy. New York saw the financial sector surge in the 90’s and 2000’s. San Francisco and San Jose saw tech start to sprawl out from the campuses of their universities. Smaller cities as well, saw spillover effects of the economic changes. Boston had silicon alley and many mutual fund headquarters. Washington D.C. benefitted from increased government spending that came with security and surveillance post 9/11. Places like San Diego, long a military town as the headquarters of the Pacific Fleet, saw incomes increase from companies like Qualcomm.

The other issue that I believe was just as important if not more important, was the drop in crime. If you watch the news, you would think that we are still being inundated with crime and danger at every turn. It’s the one advantage to growing up in an area with a lot of crime, you notice the difference when it changes. It is now relatively safe to walk in parts of many cities that were no-go zones in the 70’s and 80’s. Just take a look at what was in 1970, the worst slum in the US, The Bronx. The below pictures are from Westchester and Eagle Avenues in 1970 versus today.

Eagle Avenue 1970, Source: Reddit

Eagle Avenue today, Source: Google Maps

Statically speaking, violent crime is 2/3’s lower than it was in 1990, although the public perception of it has fallen by about 1/3.

Source: Pew Research

This boom in jobs that require high levels of education in large cities, along with the lowering of crime in many of those same cities has combined to fuel a resurgence in urban living. Many people have flocked to what were previously blighted neighborhoods to take advantage of cheap housing and shorter commutes to work.

This has put them at odds with many of the long time working class residents of these neighborhoods though. The answer that cities are coming up with to resolve the issues arising out of new tenants and owners coming in and pricing the original inhabitants out has increasingly been rent control.

Where the Idea Came From

Much of the rent control in the US had its origins in WWII. The US had positioned itself to a war and command economy to gather and control resources for the war effort. Many things were regulated. Sugar, gasoline and cooking oil supplies were all either strictly controlled or rationed out to the population. In addition, there was a popular social cohesion norm that the primary focus should be on the war and defending freedom, not making money off of those who were fighting or their families. So rent increases were restricted through rent control measures that many cities implemented at that time.

When the war ended, many cities removed these restrictions and went back to life as usual. New York though, decided to keep its rent controls and even expand them.

In the following decades, there were still affordable places to live in New York, it just became a question of either violating social norms of segregation or risking higher crime and worse schools to be in a cheaper place. With the economic boom that started in the 80’s however, people started to move into New York from other cities in the US as well as abroad. The influx was highly educated and increasingly well paid. These workers started to displace many of the original residents in many neighborhoods.

Rent control seemed a simple and easy way to keep the original residents in their neighborhood and keep parts of the city from becoming a stratified, monied monoculture.

The winners in this are obviously the tenants who get to stay in their apartments or houses. They are often limited to rent increases below area and national inflation. This creates a strong incentive not to leave the area or their apartment, and why would they? If they are getting a good deal, then they are justified in staying.

Who Loses From Rent Control?

The problem is that the rent control then creates scarcity. Apart from just creating a law to deal with a housing shortage, the efficient way would be to create more homes. When rent controls are in place though, developers have no incentive to pour millions of dollars into housing that will then be capped in terms of what they can charge. It also creates huge inefficiencies of space.

Take my own example. Due to my current circumstances I have 2 apartments in New York. One is a cooperative that I own but with a subsidized tax rate due to the fact that I purchased it when I was just out of school and was able to meet the income cap requirements.

The other is a rent stabilized apartment. Were there not so many restrictions on renting space, I would love to rent the time I am not in one to a tourist or a short term business traveler. People like that are flying in every day and looking for housing. Due to the crackdown on AirBnb and strict Co-op rules though. I would have to wait another year just to rent one the co-op and even then it can be for a period of no less than 30 days.

So even though I have subsidized rates on both places, it’s still an inefficient use of space in a crowded city where there is a “housing emergency”.

Or think of someone who has a 3 bedroom rent stabilized apartment. If they have 2-3 kids then it makes sense for them to have an apartment of that size. When their children are adults though, why would it make sense, when there are so many people willing to pay for a decent space for their family, for an older person to live in that place alone and be subsidized by the state?

A Harvard study by Ed Glaeser and Erzo Luttmer found that just the miss allocation of bedrooms leads to a loss in overall welfare of $500 million annually to the consumers of New York before we even consider the effect on the undersupply of housing.

So the losers end up being those new people who move to the city and have not been firmly planted there for some time in order to be able to navigate their way around the housing system and start to take advantage of rent controls. They are forced to look within the small stock of housing that is not rent controlled and those prices are pushed up to the clouds due to the fact that all the rent controlled places have made space so scarce.

Could the Renters Be Losing Too?

I have to chuckle sometimes when I read the Nee York Times articles on housing. For such a well educated talent pool writing there, you would think some of their housing writers came straight from the Soviet Politiboro, or were fresh of the boat from serving Maduro in Venezuela.

They often showcase people who live in dilapidated housing in the city and vilify the landlords who don’t make the effort to fix the issues. In these stories though, they fail to acknowledge that the rent controls in place don’t provide any incentive to upgrade or maintain facilities and the housing stock. With almost 1/3 of the housing being rent controlled or stabilized, it’s no wonder that New York City has poor quality of housing, even for middle class people. The fact of the matter is that price rises also spur investment in the same building, rent control takes this incentive away and often leaves people in slowly deteriorating housing.

In addition, when rent controls are announced, landlords can just adjust their strategy. When they realize that their income will be permanently capped, they may decide to convert their property to condos and sell them to the tenants. Will those tenants who are low income benefit from this? It’s likely not, especially if the neighborhood is gentrifying. It will be those same outsiders who swoop in to purchase those condos.

You can see this in Brooklyn currently. With new housing springing up and instead of being rented, quickly sold as condos. All the while the property may be sitting right next to a rent controlled building in failing condition.

Source: City Realty

Conclusion

There are a number of different examples I can give as well. From that of Sweden, where the whole country is rent controlled and half a million people are waiting 20 or even 30 years for housing as well as the fact that research shows that even those with rent control in place end up leaving so it is at best a temporary measure for those that are current residents which just preserves their time in a particular place for a greater period. It does not maintain the neighborhood character, which is constantly in flux anyway, especially in a place like New York.

What seems like a great idea and is immediately helpful to some, exacerbates the problem that cities are trying to attack in the long run. More housing is the solution, not limiting what is already there.

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