If you had to guess the median rent paid in New York City, what do you think it would be? $3,000 per month? $4,000? Would you picture a Wall Street fat cat reclining in his penthouse lair overlooking Central Park while he laughs at the peons below?

This is the image the media portrays much of the time. Although San Francisco has been grabbing much of the attention in terms of high rents the past few years, New York has always been known as a place where it is very expensive to rent and live, especially in Manhattan. The median rent for an apartment in Manhattan is currently $3,500 while the median rent in Brooklyn is $3,015, an all time high as of August 2019. Both these figures are for market rate apartments, an important distinction which I am going to explore below.

The actual city wide figure, taken from the city government’s own study, shows that the median rent paid (contracted rent) was $1,337 in 2017. This median figure hides wide variations among the city’s tenants and is worth a brief overview of the different types of rent programs in the city.

Not All Renters Are Equal

There are 4 basic rent classifications worth discussing that exist in New York.

Market Rent: The first and easiest is the market rent apartment. The landlord sets the rent, there are no caps, no funny business, just pure unadulterated capitalism. Someone who thinks the rate they offer is a fair price, passes the income qualifications and credit background check, will then enter a lease to rent the apartment. The market rate apartments in Manhattan are usually what catches the headlines for being expensive. We will see why that is a bit later.

Rent Stabilized: The next level is the rent stabilized apartment. Rent stabilization applies to buildings with 6 or more units constructed before 1974. The rent is capped in a rent stabilized apartment and allowed to adjust annually by a maximum set by the Rent Guidelines Board. The board usually raises the guideline for the city annually at or below inflation, which means that these tenants will pay the same or only a little bit more each year in real terms. Once you are in a rent stabilized apartment that is it. Your income is never checked again and as long as you reside in the apartment, the rent can only increase by the percentage dictated by the Rent Guidelines Board. About 50% of all the rentals in New York are rent stabilized.

Rent Controlled: Rent controlled apartments only apply to those apartments that have been continuously inhabited by their renters since July 1, 1971 in a building constructed before 1947. Rents in these units had a different base rent calculation which was used for decades which meant that their costs often rose slower than even the percentage mandated by the rent guidelines board. New changes to the law allow landlords to raise rents by an amount similar to the percentage increase allowed by the Rent Guidelines Board. These leases can also be passed on to direct family members who have lived in the apartment. What this means is besides the immediate family, no one will likely ever have the chance to live in one of these apartments unless they shack up with a family member of one of the tenants. There are only about 22,000 units left like this in the city, or about 1% of the rental units.

Subsidized and Public Housing: Most famous of all in terms of public housing is the New York City Housing Authority or NYCHA that owns and administers the public housing projects at its 325 locations around the city which house 400,000 to 500,000 (depending on what estimates you use) people. However this is far from the only option which is either directly run or subsidized by the government. The city and the federal government offer programs that are intended to provide developers with incentives to allot some of the apartments in the buildings they create for affordable housing. These programs include ones like 80/20, where developers receive tax exempt loans to develop a building which will set aside 20% of its units for units which are 50% to 60% of the Area Median Income or AMI. The remaining 80% of units tend to then be rent stabilized. They also include rental assistance programs, an exhaustive list can be found here, but essentially these are programs that assist specific groups or those that qualify to receive government assistance to help pay their rent whether it be stabilized or market rate. These include programs like section 8 vouchers, grants for veterans and for those with disabilities. The city is attempting to consolidate its rental assistance programs and there are different rules depending on each one. Many of these require the tenant to pay 30% of their income with the city or the federal program picking up the rest. This is similar to how NYCHA sets rents as well.

So Why is Median Rent Not Higher?

Renting dominates in New York because owning is so expensive as well. New York stands out as the opposite compared to much of the country when it comes to home ownership. Only 32% of people own in NYC compared to 63.5% nationally. When you break it down by boro, only Staten Island reflects an ownership rate similar to the rest of the country.

Home Ownership Rates

Source: Street Easy, as of 2013

This is worth mentioning because it’s not the typical case where owners are necessarily pushing out renters all over the city and driving up prices.

One of the keys to what drives up rent which I mentioned above is that approximately 50% of all the rentals in NYC are rent stabilized. This represents 34% of all the housing in NYC and means that the rent stabilized market exerts just as much influence on the cost and supply of homes as compared to owners. The way they influence prices is not as obvious though.

One of the main reasons is that once people secure a rent stabilized apartment, they hang onto it for a very long time. There is an economic reason that motivates this. If the Rent Control Board does not raise rents greater than inflation, than rents remain flat or even can decrease in real terms no matter how much demand there is for housing. It essentially cordons off these apartments from market influences and pushes any increase in demand on to those people who can’t secure a rent stabilized apartment. The longer a tenant is in the apartment, the cheaper it will get in nominal terms. This gives renters a big incentive to stay where they are for as long as they can. These are the people that benefit from these programs, however they restrict the supply of homes and force more market rate renters to seek fewer market rate units, which drives up the price for them.

Based on 2017 data from the New York City Housing and Vacancy Survey, the ownership and rental figures have shifted somewhat, lower ownership at 29.9%, lower rent regulated apartments at 45% and a bit higher non-regulated market rental units at 43%. The New York Post made an interesting graphic summarizing the state of housing in 2017.

Source: New York Post

It’s worth noting that even some people who pay market rents may be subsidized as well, through some of the temporary housing grants which means the figure for government controlled or subsidized housing may be even higher than 57%. It’s also worth noting that this graphic tends to look at average rents while I have focused on median rents. Average figures tend to be skewed by a few extreme outliers like movie stars who rent a loft for $30,000 a month so it’s generally thought from a statistical point of view that the median rent is a better representation of what the average person pays.

Despite all the caveats, the Post graphic does show us some interesting information, like the fact that the average market rent apartment is 33% more expensive than the average rent stabilized apartment yet the average incomes for market rent apartments are 50% higher, meaning there is likely even more room for market rent prices to increase.

All these units that essentially are priced below the market rate creates a funny distortion that was pointed out by the Cato Institute in a 1997 report which is likely little changed up to this day. That there are plenty of cheap apartments, it’s just that if you are new to the rental market, then you can’t have them. Compared to markets which are mostly unregulated, except for public housing and the federal subsidies I discussed, the average housing distribution looks much different.

Source: Cato Institute

Contrast this with the distribution of rents in NYC and you can start to see the problem.

The above is just a distribution of available rents. If you note the tiny number left of the solid red line which denotes the median rent at the time of $545, you will see that very few apartments are available at all below the median rent.

The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.