Nothing but Palaces 8

The awesome devastation of rent control.

There's been so much bizarre politics in the last few years that it's hard to keep track, much less to pick out a winner for Most Extreme because every day brings a new level of extreme.

At the time, though, Jimmy McMillan's participation in the 2010 New York gubernatorial debates seemed like the tops.  He had one political agenda, and he proudly and plainly proclaimed it: "The Rent is Too Damn High!"  Even compared to his fellow debaters, which included a retired madam and a Black Panther, he and his mustache were over-the-top.  It was effective, though: Andrew Cuomo, who actually went on to become governor, agreed with him that "the rent is too damn high."

Alas for longsuffering New York renters - which is to say, nearly all residents of Manhattan anyway - Mr. McMillan did not achieve political power.  America's politics is less colorful for his absence, though these days he'd probably blend right in with the psychedelic-paisley craziness we're experiencing.

He's right though: residents of New York and of most major cities do pay outlandish prices for crummy apartments. Why?

As we've explored so far in this series, the cost of housing has grown far faster than wages or even inflation.  Our nation has plenty of room for construction, and even in cities, the laws of economics would tend toward providing more housing to meet the demand.  Because of bad laws, bad regulations, and bad policy decisions all round, much of the power of the market is handicapped if not kneecapped entirely.

And nowhere is that more true than in cities suffering under rent control, which really has to be the ultimate example of a policy solution that's simple, obvious, and utterly wrong.  Swedish economist Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Yet we still have it, and the reason is simple to understand: in a city where most people live in high-rise multi-dwelling buildings, there will always be more renters than owners.  And our democratic system calls for "one man, one vote"

Thus, it's easy to see how attractive it is to politicians to pass a law simply forbidding landlords from raising rents on their tenants.  After all, the buildings are already there - they can't be moved.  The tenants are already there too and in most places cannot be thrown out.  And of course, they vote!

So you get ludicrous situations like this one in New York City:

When Patricia O’Grady moved into the top floor of a Greenwich Village walk-up in 1955, she and her three roommates helped sweep the hallway in exchange for a discounted rent of $16 a month.

The unit was bare, no more than floor and walls, so the girls, all aspiring actresses, slowly improved it themselves, installing a sink and other modest amenities. While her roommates moved on, O’Grady never left the unit, and for that she received the ultimate New York City prize: unbelievably affordable rent.

Until March, when O’Grady, 84, was fatally struck by a car just a few feet from her home, she paid $28.43 a month for the apartment. [emphasis added]

That's right - her monthly rent was less than a cab fare, thanks to the awesome power of the government to steal.

It sounds impossible, but as the new owner of her building discovered to his dismay, it's all too real:

“I consulted with an attorney to find out if this rent was possible,” recalls Adam Pomerantz, who bought O’Grady’s building, which also houses his business, Murray’s Bagels, in 2002.

It was legit, he found, but using a rent-control-formula worksheet, he was able to increase her rent a whopping $1.98 — it had previously been $26.45.

Now, to be fair, her apartment had received no upgrades since she moved in and precious little maintenance, in part due to her own choice.  So at least her landlord wasn't having to pay a heating or hot-water bill for her: she enjoyed neither.  Even her electricity consisted of a single bare light bulb.  Her sanitary needs were apparently met down the road at the local YMCA.

Still, any apartment in the entire United States, to say nothing of Manhattan, has to be worth more than $30 per month.  This insanely low "rent" is nothing less than government-sanctioned theft from the landlord.

The article tells us that Ms. O'Grady liked her amenity-free apartment just the way it was.  If she hadn't, though, she had the legal right to demand heat in winter, without any increase in the rent.  At NYC energy rates, heating her place would doubtless cost the landlord more than $30 per day - and, legally, there's nothing he could do about it.

You might possibly have some sympathy for the idea of government helping out an elderly, impoverished lady with affordable rent.  Do you feel the same about a Democrat congressman abusing these laws to get not only cheap digs for himself, but for his offices and relatives?

A close relative of your humble correspondent once enjoyed a not-too-different situation in New York City: a crazy cheap, but unmaintained and ill-heated, apartment.  Unlike Ms. O'Grady, he chose to exercise his legal rights and report the violation to the appropriate government official.

In due time - not anytime soon, you understand, but eventually - said government official arrived to inspect the property and, sure enough, determined that it was unfit for human habitation.  He filed papers demanding that the building be repaired, which the landlord ignored.  Eventually, the property was condemned and the residents, including my relative, were thrown out to find other, vastly more expensive, lodgings.  Of course, they were no longer obliged to pay rent for their derelict apartments but that was small comfort given their vastly increased rent.

You'd think the landlord would be infuriated at this loss of income.  Not at all!  He welcomed it, because he'd been forced to accept crazy-cheap rents for years due to rent control, unable to get rid of any tenant who didn't want to move.  This was caused by government interference, but now government interference had worked in his favor, kicking out everyone he couldn't and freeing him to tear down the "condemned" building.

Because when you build a new building, or sufficiently heavily renovate an old one, you are allowed to reset your rents.

And here we see why The Rent is Too Damn High: because rent control laws make it insane to build or renovate any housing for anything less than insanely high rents!

There's two reasons.  First, if the rent is high enough, the laws assume that the property is meant only for millionaires and billionaires who don't need the help of rent control.  They have to pay whatever the market will bear, and rates rise and fall without government interference.  Trump Tower is an example of this; Donald Trump doesn't need to worry about rent-control laws getting between him and whatever zillions he can squeeze out of Russian plutocrats.

Second, even if rent control laws are changed, they don't force the rents down, or at least they haven't so far.  They simply lock them wherever they already are.  In this environment, it's obviously sensible to start rental rates out as high as they possibly can be and raise them at every opportunity.

Today, even in New York City, a modest $10,000/mo studio apartment probably contributes enough profit to pay for its part of the building plus a fair return on the purchase price.

In 30 years, assuming that rent control is applied and the rent can't change, $10,000/mo will be worth considerably less - but it'll still be worth something, and the building will have been paid for.  $10,000/mo will probably pay for the water and maintenance on the required solar panels.

100 years from now, $10,000 will probably buy a cup of coffee.  By then, the original tenants will almost certainly have died and the rent will have an opportunity to reset, or it would have, if the New York assembly hadn't just disallowed rent increases when tenants die.  The building won't have had any major maintenance in 50 years or so, leading to a situation like my relative encountered - a dilapidated pile whose only advantage is that it's cheap, with a landlord who's actively seeking to have it condemned so he can tear it down and rebuild, resetting the rents to a then-reasonable $1,000,000/mo.

Sound insane?  It is, but with most New York voters living in places that are rent-controlled, voting for politicians that want to get rid of that interference will immediately sock them squarely in the pocketbook.

Yes, if rent control were abolished and rents were allowed to fluctuate to their natural heights, in the long term there might be more housing built which, in theory, should lower prices - eventually.  But even without rent control, the other obstacles to building enough housing in our cities we've explored throughout this series would ensure that it didn't appear for decades if not longer.  Meanwhile, more people continue to flood across our borders and seek out places to park their carcasses...

Is it any wonder the residents of our cities vote ad infinitum for the same politicians who have created the problem and can only make it worse?  Our big-city Democrats have created a beautiful situation where, even with the best will in the world, it is simply not possible to actually solve the underlying problem within a reasonable time frame.  Or, put another way, "it has to get worse before it can get better."  Not only would the "worse" be a great deal worse than what we have now, the getting better would be a long way off - certainly far past the next election.

So, they continue to get re-elected for their promises to provide immediate relief that produces long-term devastation.  And next election, the calculation will be the same - and the next, and the next, and the next, until someday the city collapses entirely after everybody with any money finally moves out, as seems to have happened in Detroit a decade ago.  Then it all resets, public employees take a haircut, sharpies buy vacant skyscrapers for cheap, and you start over.

But we live in a very large and still somewhat-free country, so there is another, far better, immediate solution for when The Rent is Too Damn High: move.

One million people have fled New York City and the tri-state area—which encompasses New Jersey, Connecticut and Long Island—in the last nine years. According to Bloomberg, almost 300 people are moving out of the area per day.

This trend is not exclusive to the New York metropolitan area. Many similar regions are seeing their residents migrate to other states. Los Angeles, Chicago, Washington, D.C., and San Francisco, as well as Connecticut’s Hartford, Bridgeport and New Haven, have all experienced a substantial exodus of people.

There's just one problem with this solution.  As we saw in an earlier article about Austin, TX, people are fleeing crumbling Democrat-run cities for vibrant, less-dense Republican areas - then promptly vote for the same Democrat policies that destroyed the places they left.  Austin did not used to have an overwhelming homeless problem like San Francisco; now it does, due to the same brain-dead Democrat policies which turned San Fransisco and Los Angeles into fetid pools of human feces.

And some of the smarter Demos have noticed this potential weakness: Just this week, Rep. Alexandria Ocasio-Cortez (D, NY) came out with an "economic justice" proposal that, among many other odious and unconstitutional things, highlights national rent control:

“The Place to Prosper Act” would prevent year-over-year rent increases of more than three percent.

Why are Democrat policies which are known not to work so attractive to so many voters?  Must the entire nation suffer the poop-filled agonistes as San Fransisco and Los Angeles before we wise up?

Even so...

It's a simple fact that residential housing is still being built - yes, even in Manhattan, albeit intended for the superrich.  As we've seen, even properties originally designed for plutocrats often find themselves, a century later, fully-depreciated, out of style, unmaintained, and now occupied by the poor.  Sure enough, Manhattan real estate purchase prices are plummeting, so surely there will be at least some buildings about to cross over that boundary of death into rent-control territory that weren't there before.

Given that our major cities have had rent control for several lifetimes now - plenty of time for this cycle to be clearly visible and well known - why don't we see large numbers of buildings continuing to be built and, over time, sliding down the scale, and thus eventually meeting the housing requirements of the poor?  There's one more factor which we haven't yet addressed, which we'll take a look at in the next article in this series.

Petrarch is a contributing editor for Scragged.  Read other Scragged.com articles by Petrarch or other articles on Economics.
Reader Comments

The housing market isn't the only market the governmetn has totally messed up - they're making local transportation overpriced and inconvenient by issuing a limited number ot taxi medallions. There have been recent sob stories about taxi drivers who bought medallions at the peak as a way to save for retirement committing suicide. The Times and other papers have generally blamed disruptive ride sharing systems such as Uber, but the Times recently explained what had been really going on.

https://www.nytimes.com/2019/10/04/nyregion/taxi-medallions-chicago.html?action=click&module=TopStories&pgtype=Homepage?utm_source=digg&utm_medium=email

points out that a bunch of sharpies who had honed their "pump and dump" skills in the New Yor taxi medallion market turned their sights on Chicago.

But the most ambitious expansion targeted Chicago, home of the nation’s second-largest cab industry, a New York Times investigation found. New Yorkers eventually bought almost half the city’s medallions, records show.

Some adopted an especially aggressive approach, according to documents and interviews. First, they purchased medallions at bargain rates and established big fleets of cabs. Then, they pumped up medallion prices. Finally, they sold their medallions to their drivers and to rival fleet operators just before the collapse.

The incursion created extraordinary wealth for a small number of New Yorkers. One New Yorker’s network of companies bought $30 million worth of Chicago medallions and later sold them for $185 million. He purchased eight homes, including a house in one of the most elite neighborhoods in the Hamptons, records show. Another who made millions in both cities opened a polo club near his 10-acre estate in New Jersey.

“They used us to get rich,” said Demetrios Manolitsis, 52, a Chicago cabdriver from Greece.

Mr. Manolitsis, who started driving in 1992 and owned an extra medallion as an investment, said New Yorkers in Chicago convinced him to borrow money to buy 15 more medallions at the height of the bubble, when prices were skyrocketing and the asset seemed invincible. He is now buried in debt and on the brink of losing everything.


This is due to government creating an artificial shortage of taxi medallions in the first place. ALL regulation offers opportunities for unscrupulous operators to advantage themselves by finding short cuts.

The housing market is not alone, not at all.

October 7, 2019 10:14 AM

The Wall Street Journal published a letter to the editor:

New New York Rent Law Hurts Tenants, Workers

https://www.wsj.com/articles/new-new-york-rent-law-hurts-tenants-workers-11570388074

Joshua Stein hits the nail on the head in describing the damaging effect of New York state’s new rent regulation on the housing market (“How to Kill a Housing Market,” Cross Country, Sept. 28). The landlords aren’t the only losers here.

My company provides design and construction services for several residential property owners. I’ve witnessed firsthand how the improvements and beautification of residential lobbies, corridors and apartments changed the lives of low-income tenants. The residents behavior changed. They were proud to live in a renovated building. The previously trash-filled corridors were kept clean. The well-lit corridors and new security devices helped reduce drinking and drug use. The buildings’ supers were telling me that the residents aren’t complaining as they used to, because everyone is happy.

The new rent-control law has brought all this progress to a screeching halt. All renovations are on permanent hold. Many vendors that depended entirely on housing renovations closed shop. My friend who was in the kitchen cabinet installation business laid off his crew of 25 installers. He’s selling his house to be able to sustain his family. My friend, a contractor who renovated apartments in the Bronx for the last 20 years, closed shop. Ninety of his skilled construction workers are looking for new jobs. The domino effect from this legislation is greater than anyone could have predicted. But the saddest part is that the people whom this was supposed to help are the ones who’ll end up suffering the most. What were the legislators thinking?

October 7, 2019 10:29 AM

In case you're intersted in the article the letter referenced:

How to Kill a Housing Market
New York state tightens the screws on landlords, who will respond by letting apartments go vacant.

https://www.wsj.com/articles/how-to-kill-a-housing-market-11569621441?mod=article_inline

New York Gov. Andrew Cuomo signed a law in June expanding the state’s damaging and counterproductive rent regulations. Driven by tenant-rights activists who want to keep rents low for the minority of New Yorkers who live in rent-stabilized apartments, the law targets what activists call a “loophole” allowing property owners to raise rents—potentially to market levels—when they make major capital improvements to their buildings or to individual apartments.

In response to the new law, New York property owners immediately began making decisions that, when played out across tens of thousands of apartments, will add up to a disaster for everyone—not only landlords.

I spoke with one of those landlords over breakfast not long ago. He owns a medium-size portfolio of older buildings in middle- and lower-middle-class New York neighborhoods. Among his properties is a large building in northern Manhattan. For more than 40 years, one of the building’s apartments—a two-bedroom—was occupied by a tenant paying about $800 a month. That barely covered the apartment’s share of the building’s operating costs and ever-rising taxes, water, and sewer charges. The apartment would be worth about $1,800 a month on the free market, if offered in good condition.

The tenant recently died. After four decades of wear and tear, the apartment needs some work. Long-term tenants of this type typically don’t let owners into their apartments to do nonemergency repairs. They don’t like the disruption.

Before the new law, the vacancy would have entitled my friend the landlord to a “vacancy-bonus increase” of about 20% a month, about $160. Then for every $15,000 spent on improvements, he could have raised the rent permanently by an additional $250 a month. That’s a good return on incremental investment.

A bathroom upgrade costs about $10,000 and a kitchen about $15,000. My friend could have invested another $10,000 or so to repair damage, replace doors and finishes, and upgrade electrical circuits. Those investments could have brought the rent to about $1,700. The apartment’s next tenant could have moved into an improved, not fancy, two-bedroom with a somewhat below-market lease, still protected from increases by rent stabilization.

The new law ensures that won’t happen. It gives property owners no vacancy-bonus increase. For every $15,000 my friend spends on improvements, he can raise the rent by only $83.33 a month. Even that shrunken rent increase will go away after 30 years. If he makes any investment in the apartment exceeding $15,000 in any 15-year period, it will be money he isn’t legally allowed to recoup. He won’t be allowed to raise the rent further. Whoever lucks into that apartment will pay only about $900 a month, half the market rate.

My landlord friend could rent the two-bedroom to a family willing to accept the apartment nearly as is. But if one family member leaves, another would have a “right of succession” and be entitled to stay at the same rent. So a string of family members would probably stay there forever at around $900 a month, the rent rising ever so gradually over time while the building’s maintenance costs and tax bills rise faster. Eventually, the new tenants will almost certainly complain about the apartment’s subpar condition, which will require the time and attention of building management and city agencies.

Here come the unintended consequences: My friend now says he won’t invest a penny in the apartment, because doing so makes no economic sense. Instead, he plans to hold it vacant and wait for better days. ...

For now, though, a perfectly good Manhattan apartment stays empty.

October 7, 2019 10:35 AM
Add Your Comment...
4000 characters remaining
Loading question...