Affordable Housing - 93% of economists agree

steve austin · August 2005

Thanks for the quick finance lesson I don't know how I survived the last 9 years as a mergers and acquisitions lawyer without you.

As you may know, expenses change such as the cost of heat, electricity and real estate taxes while rents remain stabilized. Landlords are forced to absorb those costs and not allowed to pass them on to rent controlled and stabilized tenants.

My point was more that rent control and stabilization is a tax that is levied on a few more for political convenience than economic reason. As you argue, rent control forces down the noi of buildings (look I even know that noi stands for net operating income) and thereby the prices of buildings as they are priced on a multiple of earnings, and that loss of return on the investment acts as a de facto tax. My question was simply why should only landlords pay the tax when other people, more importantly other rich people who invest in investments other than real estate, are not asked to.

carnivore · August 2005

Steve Austin wrote: My question was simply why should only landlords pay the tax when other people, more importantly other rich people who invest in investments other than real estate, are not asked to.

It's not a tax. Landlords are providers of an essential requirement for human life (shelter). As such, they are being required to ensure that they don't restrict what they offer to the richest among us. This is just as fair as requiring hospitals to treat anyone who shows up in the ER, regardless of ability to pay. It's a matter of basic decency in our society.

escap · August 2005

Regardless of jml's own personal generosity, forcing landlords to rent out at below market rates b/c housing is a basic necessity is like forcing farmers or food retailers to sell food at below market rates to a wide swath of the population for the same reason. But in fact, in this country we do the opposite, driving up prices by....hold it...price supports!! And guess what, nobody's claiming those price supports don't work, or that the data are vague or inconclusive. Obviously, the artificial floor put on agriculture in this country creates annual surpluses of food. Similarly, price controls on oil in the 70s led to shortages. Ask the people standing on gasoline lines for hours if the data were vague.

No, I'm not an urban planner, but I am an economics student, and price controls are in Econ 101. There's very little dispute over their effect, from housing to oil. The real catch is, even ideally rent control would help the poor, not bother the rich, drive out the middle class and cost the city tax revenue; however, the reality is even worse because there are lots of non-poor who stay in rent controlled apts, making the whole venture a complete waste.

Affordable housing is a basic necessity, so it is something we should all pitch in to help with. Rather than a backwards policy that is bad for the city as a whole, however, we should use taxpayer money (the windfall the city would receive by eliminating rent control should do the trick) to give aid directly to those who need it in the form of a housing voucher or other such assistance. In fact, the city has already moved in this direction by providing tax breaks to developers (a la Ratner) who are willing to provide "affordable" housing, although to me this seems backwards. I am not advocating a return to a Dickensian world where poor people are blamed for their own misfortune and cast out into the streets. I'm advocating a change that will actually help ensure the aid goes to the right people, the middle class are not victimized in the process, and landlords are not unfairly asked to shoulder the entire burden.

jml · August 2005

Steve Austin wrote: Thanks for the quick finance lesson I don't know how I survived the last 9 years as a mergers and acquisitions lawyer without you.

As you may know, expenses change such as the cost of heat, electricity and real estate taxes while rents remain stabilized. Landlords are forced to absorb those costs and not allowed to pass them on to rent controlled and stabilized tenants.

That's simply not true. Each year, the rent guidelines board meets to determine the amount that rent stabilized rents can be increased by landlords. The board considers exactly the costs you have mentioned above: the increase in the costs of heating and so forth. Landlords are then able to pass those costs along to tennants in the form of rent increases. I have a feeling these are pretty fair, as each year tenants rights groups say they are too high, while landlords say they are too low.

There are also mechanisms to pass along the costs of major capital improvements, improvements in the apartments and so forth. There are vacancy increase of 8% that can be used to raise the rents as well.

I'm not schooled in the finer points of finance, but I don't think it is a tax. I think it is closer to what escap has argued is a price control. But my point was that the price control lowers the purchase price, but doesn't affect the return on investment. If a landlord wants to invest more money, he or she can simply purchase more buildings.

Why should landlords pay when others don't? My point was that landlords don't pay a tax. The value of buildings depends on their rent roll, and so landlords pay less for lower-priced apartments. No investor in their right minds would pay more for an investment than it's woth.

As for escap's post, I agree (and am glad to see the discussion come back to this) that affordable housing is a basic necessity. There is a program which provides direct aid to poor tenants. It's called section 8, and most people agree that it's a terrible failure. In fact, longtime PH residents will remember (better than I can) a recent development in the neighborhood where a developer built a building specifically to house section 8 families. Maybe someone with a better memory can elaborate.

Escap, what are you proposing? That RC/RS be done away with and then the government step in to provide subsidies directly to the landlord? I'm not sure this will provide the effect you hope for. Let's take an example of someone in an apartment paying $200, where fair market is $1200. So, RC is eliminated and the government pays the landlord an extra $1000 per month. The tenant gets to stay in the apartment, and the landlord now gets paid fair market for the apartment. This seems like a windfall for the landlord at the taxpayers expense.

How will this help the middle class? I think - and again am not sure so would like to hear your take on this - that you argue that this will open up more housing, and therefore increase supply overall and eventually drive down prices. But what's the market force here to drive down prices?

escap · August 2005

Jml, great post, and your points are well taken. I appreciate the level tone and intelligent rebuttal. I agree that there is no magic solution and that any intervention the govt makes will have unforseen costs. Off the top of my head I can think of several problems with the voucher idea, but just to be clear, this is how I believe it would work: using money collected from the proceeds reaped by the city by abolishing rent control, there could be a progressive subsidy doled out to those in need, which they could use to help pay for housing. The extra $ could also be used to improve public transportation. I would further recommend tax breaks for renters and lower taxes in general for low income New Yorkers. I don't see this as a subsidy to landlords at all.

The point you make about investment opportunity being priced into the purchase cost of property is a great point. However, I would also counter that landlords don't always buy pre-existing housing. The knowledge that their profit margins are limited discourages developers from turning abandoned property and vacant lots into housing in the first place. It further discourages even generous landlords like yourself from upgrading or even maintaining their property (kudos to you if you do anyway).

Finally, experience shows that despite fears of mass homelessness and spiraling rents following deregulation, in fact this has not occurred. The bottom line is that market rates are only as high as people are willing to pay, and there are a finite # of millionaires. The best way to reduce price in the long run is to increase supply, so we should incentivize development. All those greedy developers seeking luxury rates will eventually correct the shortage that our policies have created and will be forced to rent out property at truly affordable prices as they compete with each other. The govt should help fill in the gaps and help out those who need it in the mean time, rather than badly skewing the system on a structural level.

anonymous · August 2005

An earlier posting likened rent stabilization/control to the taking of private property by eminent domain. I would disagree.

Owners of a rent controlled building have made a decision to invest in the rent controlled market, whatever its limitations or disadvantages may be.
The taking of private property by eminent domain has no similarity to this. The owners of these properties are being forced to give up their property.

(In the case of Ratner, he's paying market rate for properties zoned
to be 8 stories, but through the eminent domain takover will be able to override local zoning to build 40 stories.)

escap · August 2005

Not to revisit this unpopular subject, but the WSJ is reporting that the rush to development and investment is pushing rent prices down, as the supply increases. Not that we should be surprised, since this is an economic law, but there were apparently doubters.

Also, on the density issue, NYC is more dense than other American cities, but there are still huge swaths of dilapidated or abandoned housing, or just empty lots. There is lots of room to increase the housing supply before we resort to price controls.

anonymous · August 2005

Also, a correction: I may have been wrong about section 8 housing. There is an article about subsidized housing in the Times which descirbes the program here:

http://www.nytimes.com/2005/08/09/nyregion/09wide.html

candicissima · August 2005

escap wrote: Not to revisit this unpopular subject, but the WSJ is reporting that the rush to development and investment is pushing rent prices down, as the supply increases. Not that we should be surprised, since this is an economic law, but there were apparently doubters.

You got an article link? Does it specify which range they mean?

Because if you are building 10 new complexes with a rental range of $2600-$2900 for a 2 bedroom, that would be suddenly more attractive to someone in an older place paying $3000 for sure. But, what does that have to do with the $1500 for a 3 bedroom sphere? Not much.

escap · August 2005

You need a subscription to read the WSJ online, but brownstoner.com has some highlights. Either way, it is a given that increasing the supply of housing will ease the upward pressure on rents.

To be fair, even with massive construction would we have enough supply to bring prices down to where truly poor or low income people would have plenty of choices, or even any choices? No, probably not. The middle class would benefit dramatically, however, and there is no assurance with rent control that the units actually go to poor people. Indeed, the data show that most units don't go to poor people (see the links above if you want the actual sources; they are footnoted clearly in the Cato link, and you can also find similar studies by searching online for 10 seconds). The best remedy is to encourage development and investment that would help the vast majority of New Yorkers, and to provide direct aid to the poor people who actually need it.

And don't forget the increased tax revenue the city would reap, which could be used to finance education, transit, parks and other public services.

Affordable Housing - 93% of economists agree

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