If the rent is too high, why don’t we just limit it? This is a common prescription for a problem that has vexed the city since at least the end of the First World War, when a housing shortage confronted millions of returning veterans. Expanded massively in the years following the Second World War, a program whose motivation seemed to necessitate a limited time-scale, it only mushroomed. Even at the height of liberalism in the 1960s, its flaws were clear and it became the first large-scale government intervention aiding the poor to be dismantled, a process which began in 1971 and continues slowly today. What, then, are the pernicious effects of rent control that have made it unsustainable as early as the 1970s? A full explanation requires some basic economic theory.

In normal times, housing, like any other good, will be built until the supply reaches the level demanded. That is, it will be produced until “suppliers” (developers in this case) can make no more money, either due to increasing costs, decreasing willingness of buyers or renters to pay, or a combination of the two. When the price is capped, as in the case of rent control, a shortage ensues. There are two reasons for this: firstly, since the cap is below the market price of housing, demand is artificially high, as more people are willing to rent; and secondly, because not enough housing is supplied by developers who cannot make enough money renting the property.

The housing market does not just consist, however, of developers and renters. Many buildings are owned by landlords, who do not build new housing, but rent out their property and make improvements as they see fit. Responsible for the cost of maintenance and the burden of taxes, landlords are especially harmed by rent control. In the late 1960s and early 1970s, the situation grew so dire that many, mostly in the Bronx, burned down their buildings for the insurance money rather than continue to unprofitably rent out their property. Many more simply did not maintain their property, massively increasing the risks of accidents, damage, and crime.

These ailments convinced city leaders that rent control had to go. Out of concern for the poor, however, they allowed rents to only slowly adjust to market conditions. Year-to-year increases were extremely small until the rent reached a specified value, currently $2000 per month. At this point, it could be set to market value, as long as the property stayed in the same family. This adjustment, while less actively harmful, does little for the poor. Rather, it mocks them, as most beneficiaries are upper middle class and wealthy renters, whose families have held the apartments for generations. While in the past the owners may have been lower middle class and perhaps deserving of a subsidy, the current wealthy owners, be they on Central Park West or in Stuyvesant Town, constitute a class singled out for favorable treatment for no other reason than grandfathering. The poor, who are more likely to move to find jobs and safer neighborhoods, rarely inhabit rent-controlled apartments.

The legacies of rent control have made it impossible for Stuyvesant Town and Peter Cooper Village to be profitably renovated, as they greatly need to be. This is to the benefit of their largely upper middle class residents, who enjoy a great deal, courtesy of the taxpayers of New York. As MTA projects that displace residents require the MTA to find equivalent replacement housing, the authority has been forced to pay over a million dollars in rent subsidies to wealthy Upper East Siders who pay token rents of around $1000 per month for their three-bedroom apartments along Second Avenue. This is madness. Yet when confronted with the problems of rising rent, community activists and politicians don’t suggest freeing the housing market, the solution I described in my last column (March), but instead demand new controls on rent.

The debate over rent control reflects a continual tension in liberal democratic societies. In a world of scarce resources, not every desire can be fulfilled. The ultimate benefit of democracy is that the necessary tradeoffs can be chosen in the manner that society finds most in accordance with its values. Ironically, when a program or law that benefits a certain sector of society, but has been analytically determined to be suboptimal, democratic societies are terrible at removing it. As long as it can be said that “it helps x” or “solves y,” and a couple of sob stories are presented to the public and the legislature, the efficiency constraint is forgotten. This is the fundamental issue with rent control. Its very existence makes it hard to remove. We consider only the possible benefits, the qualitative, idealistic argument for it (and a couple of strategic hard cases paraded in front of the media), rather than examining its costs and effects and statistical benefits. We thus are stuck providing socialism for the middle and upper classes and denying the poor affordable housing, by limiting the size and scope of the market. When one is arguing solely in idealistic terms, it is hard to justify replacing “keep families in their homes” with “let developers build as much as they want.” A clearheaded analysis, however, reveals that we have certainly chosen the wrong path and continue to make the poor suffer for it. Such is the shame of democracy.

Reference:
1) http://nymag.com/news/intelligencer/neighborhoodwatch/neighborhood-news-2011-5-2