"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Friday, June 7, 2013

Rent Control, Tenants’ Rights, And Other Market Distortions

I have a friend in New York City who has long been a champion of tenants’ rights and who feels that a united front against the predatory practices of landlords is not only important but necessary for maintaining economic diversity in a city increasingly populated by the very wealthy.  New York has always had one of the most pro-tenant policies in the country, and under Rent Control families can rent an apartment, pay below-market rents with only nominal increases, and can rarely be evicted.

However, since landlords can raise rents to their market value only when a tenant leaves, reports of intimidation are rife – maintenance never carried out, physical infrastructure neglected, and thinly veiled threats by rent collectors that mimic the age of Dickens.

New York is not the only city with such tenant-biased housing laws.  Most cities in fact tilt in favor of tenants because of politics – there are far more voting renters than landlords – and municipal administrators see little advantage in redressing the balance.  Although a more open market would ultimately increase tax revenues for the city, most self-serving local politicians think only about the next election.  These same politicians may salivate at the sight of tax coffers filling with new revenues as the property market heats up – more revenue means more spending which means more votes – but the housing issue is so sensitive that they remain wedded to their old, outdated policies.

For decades there has been a cabal between narrow-minded public officials and liberal activists.  Politicians want to continue rent control and aggressive tenants’ rights to appeal to poor voters who are often in the majority (as in DC); and ‘progressive’ advocates for the common man increase or solidify their own street creds with each rent strike, public demonstration, or indignant storming of City Hall.

While the motivation behind elected leaders is clear – rent control is a means of political patronage – it is less clear why non-governmental activists have so much stake in the game.

One day I remarked to a neighborhood friend in DC that I saw a police car frequently parked in front of a house not too far from us.  It was not there on police business, she informed me proudly; but because a DC cop lived there. His residence was a tribute to the kind of social and economic diversity engineered by programs such as rent control and tenants’ rights.  She was delighted that in a neighborhood catering to high-income professionals there was still room for “the policeman, the fireman, and the teacher”. 

My New York friend argued the same principle. Before long, she said, Manhattan would be an exclusive island populated only by the very rich.  The middle-income renters would be quickly priced out if the City didn’t step in with tenant protection.  There was a value in economic diversity.  Arab sheiks and transport workers rubbing shoulders was part of the American ideal.

In a New York Times article a few months ago, Jeremiah Moss decried the building of the High Line, a narrow strip of parkland built along an old railway right of way:

The High Line has become a tourist-clogged catwalk and a catalyst for some of the most rapid gentrification in the city’s history. The designers had scrubbed the graffiti and tamed the wildflowers. Guards admonished me when my foot moved too close to a weed. Was this a park or a museum? I felt like I was in the home of a neatnik with expensive tastes, afraid I would soil the furnishings.

Ross saves his most urgent anger for the redevelopment of the High Line residential areas. They have become elite havens for the rich, destroying diversity, creating a glass-tower homogeneity, and destroying the city.

The park has quickly become a tool for the Bloomberg administration’s creation of a new, upscale, corporatized stretch along the West Side. As socialites and celebrities championed the designer park during its early planning stages, whipping community support into a heady froth, the city rezoned West Chelsea for luxury development in 2005.

The New York City Economic Development Corporation published a study last year stating that before the High Line was redeveloped, “surrounding residential properties were valued 8 percent below the overall median for Manhattan.” Between 2003 and 2011, property values near the park increased 103 percent. (See my entire blog post on the High Line and NYC waterfront improvement http://www.uncleguidosfacts.com/2012/08/no-sour-grapes-please-case-for-new.html)

What Ross and his supporters ignore, however, is the fact that the High Line and the Hudson River Waterfront development have helped to make the city livable once more.  Gone are the nasty, graffiti-, trash-,  and crime-filled streets.  The tax revenues generated by high-income developments have enabled Bloomberg to invest in public spaces and help create an urban environment to be envied.

In all this political and social debate, one aspect is completely forgotten – the market.  I would very much like to live on Central Park, high up on the Sausalito hills, in Pacific Palisades, or in Bel Air, but I cannot afford to do so. Why should families who cannot afford the rent on the Upper East and West Side, or the newly hip areas of Brooklyn be subsidized to live there?  Why shouldn’t they move to Queens or Staten Island where life is more affordable?  Where does it say that all renters, regardless of income, have the right to live in all areas of the city?

The case of San Francisco, reported by Scott James in the New York Times (6.7.13) is even worse.  Housing laws are so skewed in favor of the tenant that buildings sold without tenants are more valuable than those with units occupied.  In other words, it is more economically advantageous for an owner to sit on empty apartments than to take the risk of renting to tenants who can never be evicted. 

I’ve recently joined the ranks of San Francisco landlords who have decided that it’s better to keep an apartment empty than to lease it to tenants. Together, we have left vacant about 10,600 rental units. That’s about five percent of the city’s total — or enough space to house up to 30,000 people in a city that barely tops 800,000.

James and his partner had rented to a tenant who had appeared reasonable and responsible at signing, but who turned out volatile and destructive.  Not able to get in to his apartment one night, he banged his way in with a sledge hammer, then had the chutzpah to say that it was OK, no harm done, for the law allowed him to destroy property as long as he ‘fixed it later’.

It is a widely held belief among renters here that laws are so tilted in favor of tenants (and against landlords) that renters can get away with any outrageous behavior. Indeed, in a city where 64 percent of residents are renters — and politicians court these voters — the rhetoric from some in City Hall and from tenants’ rights advocates is often vitriolic toward landlords.

DC’s housing laws are no where near as biased as San Francisco, and the renovation of older neighborhoods has provided a boon to the city. Areas like Bloomingdale, for example, once on the nasty fringe of the ghetto, now attract young professionals.  The housing stock has improved, as have public facilities.  With the influx of demanding parents, local schools are improving.  Crime is under control, and retail is thriving.  As word of these desirable new urban neighborhoods spreads, more young people with good incomes settle in the city, tax revenues go up, more run-down neighborhoods are revitalized, and Washington becomes more truly urban and livable.  According to many recent economic reports, the DC area has become a go-to hotspot for highly-educated, upwardly mobile income individuals and families.

Do the poor renters of Bloomingdale remain in the area when their building is sold?  No, but they settle in affordable areas outside the city in Prince George’s County. Yes, they have to pay more in transport costs to get to their old DC jobs, but that trade off is common among many for whom the lower housing costs more than compensate for the increase in Metro fares. 

In other words, the American economy is based on dynamics – a free movement of labor and capital to maximize profits and benefits.  Rent control like all other government subsidies distorts the market and inhibits the dynamism which has always characterized the US economic machine.

Scott concludes his article with the following thoughts:

That’s why we’ve joined the ranks of thousands of other small-time landlords here who will never rent again, adding to the city’s housing shortage.

That doesn’t mean the apartment sits empty. This is “Everybody’s Favorite City,” so we’ve had no shortage of visiting family and friends.

No, it doesn’t pay the mortgage. But then, not once have we worried that any of our houseguests would reach for a sledgehammer.

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