Saturday, May 24, 2008

Renter rant

There appears to be a strong opinion that rent regulation should be thrown out. In 1997 70% of New York supported rent regulation but it continued to be dismantled when a study showed that regulated rents would increase 13% citywide (but over 50% on the Upper West Side) if regulations were removed, despite the fact that in 1971 when regulations were removed, rents jumped 50% and after 3 years the result was so devastating that regulations had to be put back in place.

In 2007, 27.9% of New Yorkers paid more than 50% of their incomes to rent. That is astonishing when the assumption is made that "affordable" housing should rest around 30%.

The research in 1997 showed that rent regulation was inhibiting the housing market and creating artificially high rents in non-regulated apartments, and rich people were benefiting from regulation more than poor people. The argument went like this: the pressure on the NY housing market was great because there weren't enough apartments turning over. People were hoarding their below market apartments and the developers weren't incentivized to build new rentals because they couldn't compete with the regulated rents and make a profit.

On the surface this sounds incredibly convincing and I went to bed last night sure that I was wrong, and deregulation should be implemented gradually over time so as not to harm the people who need it, but to repair the situation over the course of the next generation. Then I woke up. Here is how I debunk its conclusions:

• We have 50 years of rent regulation, and it worked very well during some periods and not so well during others based on the economy of the moment. But mostly, the success was disrupted due to the tinkering of the legislature. I contend that dismantling the system has been the key determinant in recent years that has led to the incredible disparity in rents.

• The basic tenet of the study was that market supply was the determining factor in creating market rates, and if you inhibit the supply then you discourage new building. However, since 1972 all new buildings have been unregulated. That sounds like a great incentive to build new housing. If in fact people are hoarding their regulated apartments and refuse to move, you have a whole host of new arrivals to market who need apartments and want something new, not something 100 years old. Right there the free market economy should take over. The problem appears to be that fortunes are made faster when building condos than rentals so the new units were not built to alleviate the housing shortage.

• If supply and demand kept rates affordable, and people moving in and out, and thus a good supply of units on the market, then the coop and condo market, following the same logic, would be affordable. In the market rate world of ownership, it does not hold true. Therefore I believe that the rental world would follow the same patterns as the owner world and we would not have any affordable housing for middle income families should the market be deregulated.

• Manhattan is the most impacted by rent regulation in that the apartments here are further below "market rate" than in the other boroughs and thus if regulations were to be removed, Manhattanites would be the hardest hit, with 50% rent increases. Therefore, rent regulated apartments in Brooklyn and Queens are actually very close to market rate. Why aren't people hoarding apartments there like they are in Manhattan? Deregulation would create even more intense ghettos. Manhattan would be for the rich and the outer boroughs for the poor. There would be no place for the middle class. Regulation and the creation of mixed communities has helped make that situation less volatile than it already is.

• Had the oversight of rent regulation over the past 50 years been more intelligent and consistent we wouldn't be in this mess today. The dismantling of the system has made it worse. If apartments were available to move to, then people wouldn't be hoarding them. The reason there aren't any places to move is because everything coming into the market is not regulated, and thus not secured. Why would anybody leave security for insecurity? If deregulated apartments had some laws behind them, and gave tenants some protections in a long term life in that apartment, I believe that the impact would be different. Right now, it is a transient system and when a lease is up for a deregulated apartment, you could be made to move without cause.

• Housing studies show that regulated rentals have been overall profitable for landlords but probably not giant windfalls. Should housing be the most profitable segment of our economy, made on the backs of middle income tenants? I don't think that is healthy.

• The last survey of rents and housing was done in 2005. It showed that the median income of renters was half that of owners, supporting the idea that lower income people need and live with rent regulation and it does in fact work the way it should. It also showed that rent regulated tenants paid 32% of their incomes to rent. That means that it is affordable, according to our definitions. While there are some wild examples of rich people living in $1000/month units, it is NOT the norm. This part of the broken system should be fixed without harming those who cannot bear the burden of a 50% rent increase.

• Rent stabilization was put in place because of its flexibility. Rent increases were meant to keep up with inflation and rising costs. They are reviewed annually and the landlords have a big say in them. In looking back since 1984 when this plan was put in place, increases kept up with inflation and were also by some accounts considered higher than the economy should bear. That study done in 1990 showed that the system was working. So how did we get in this mess? Because now, half the housing stock is not regulated and greedy landlords are bilking new tenants with excruciating rents. Why can they get such high rents? Because more affordable regulated apartments aren't available. Why aren't they available? Because unregulated apartments aren't affordable. I contend that the exact opposite solution be the right one - regulate all rentals so that the market is fair for everybody, tenants and landlords. Then average prices would be fair. That's the way the system was set up, but it has been dismantled based on greed and avarice creating havoc in the market.

And as for the millionaires living in $1000 a month 2-bedrooms: first, it is unfair and the law is so stupid because it encourages hoarding. The salary cap for a rent regulated apartment is $175,000 but for it to kick in, the rent has to be over $2000. It is backward thinking. I believe the solution is that an income floor should kick in regardless of the current rent. If a household has a high income, and their rent is very low, that apartment should be freed up for a middle income tenant who needs it, or the rent should be raised for that tenant proportionately.

As an example that the abuse isn't everywhere, in my building of 50 units, there is nobody with a regulated apartment that could afford market rate ($3000/month). Most people pay average $1500/month which is what I would definitely call affordable for a middle income household but not cheap. However, if all 50 units were raised or lowered to $1500 there are about 10% of current tenants who couldn't absorb that increase. They would be homeless immediately. Exactly one unit of the 50 would be vacated because hoarding would be less attractive.

One misnomer that I have seen on many discussion boards is an ignorance about regulations. Let me clarify:

• Rent regulated apartments are not the same as government housing; it is not subsidized housing, it is not only for poor people; it is not divvied out by the government.

Then what is it?

• It is applied to normal apartments that are rented by private landlords to regular people like you and me. The laws now and the laws from 20 years ago are very different so we are in a time when buildings are mixed and it can be a little confusing. Some units are still grandfathered in from rent stabilization - i.e. if you have lived in your unit for a long time from when the rents were under $2000 and it hasn't increased beyond that through the normal allowable rent increases, then you are still regulated and get the protections that the law has always provided. There are still regulated apartments on the market; if the landlords don't make the effort to do all the things to increase the rents accordingly, they may charge only the allowable increase to the new tenant. This is more common in family and privately owned buildings.

Other units have been de-stabilized when the landlords manage to raise the rent above $2000 by a crazy method of forcing high rates of turnover: each time the apartment changes hands they can up the rent by up to 20%, plus they can renovate it (even shabbily) and add a portion (1/40th) of what they spend on the renovation onto the new rent, easily getting any unit to over $2000 without too much work, which is when, by law, apartments are allowed to go to "free market value." Then they can charge whatever they want and the new tenants have very few legal rights.

One argument can be made that if we stay in this system, the $2000 cap for regulation needs to change with the economy the same way rents are increased annually. It is currently too low, and has created a situation that makes it attractive for landlords to aggressively evict tenants who are coming toward the $2000 threshold. And then there is no place for them to move. If market rate is $3000 for a person currently paying $1500 you have just moved that person to a ghetto. You effectively are eliminating a healthier mixed income neighborhood or one of transients. If the goal is to have a healthy economy the only way you are going to get back mixed income neighborhoods is to build city housing, which most people don't want. Rent regulation allows private enterprise to support healthy neighborhoods and protect tenants rights.

• Tenants rights alone is a valid reason for regulation. People in market rate apartments currently pay very high rents AND they have few legal rights. But until they encounter a bad situation with a landlord, they don't understand why it matters. When times are flying high then all seems good. In a downturn they will see their services diminish and their leases subject to greater scrutiny. It seems that as a society we never learn from the past. Rent laws were passed because landlords were abusive and homes unaffordable. Public housing could not fix the problem. Then, we made laws and the abuses were mitigated and the city grew and prospered under this new system. Then we collectively forgot about what the old days were like, we got rid of the laws that were put in place to protect tenants and it starts all over again. Long term success morphs into short term greed.

• Rent regulation is a set of laws that provides a framework for how a landlord can treat a tenant. A landlord cannot evict a tenant just because they want to. They have to have a real reason, like not paying the rent, or breaking the law, or not actually living in the apartment. All good reasons to evict somebody. It isn't even very hard to evict somebody in these circumstances, nor should it be.

• Rent regulation also makes landlords renew a lease. In other words, at the end of your lease they can't change their mind and ask you to leave without a very good reason. Right now if they don't like the way you wear your hair, they don't have to renew your lease. Think of what a slippery slope that is. A good reason would be that you didn't pay the rent, that you didn't actually live in the apartment or that you are breaking the law (ie if you run a prostitution ring out of the apartment the landlord doesn't have to renew your lease).

• And finally, and most controversially, the regulated rent can only be raised upon renewal by a certain amount set by the Rent Guidelines Board that is determined every year in a pit of controversy and politics. Usually it is between 3%-7%. In some years they added an additional $20 increase if the rent was under $400. Also, they are allowed to raise the rent if they make a "major capital improvement" such as putting on a new roof or installing a new boiler etc. Then they can up your rent by 1/40th of what they spend on that improvement, and they can do it without your approval. Therefore, our boiler conveniently breaks every few years and our rent goes up accordingly.

Why are the above issues IMPORTANT?
• Imagine that you move into your new apartment, pay a rent that you can afford and that is in line with your salary. You send your kids to the neighborhood school. You get a job that is a nice 30 minute subway ride away. You join the local church or synagogue or mosque. You make friends with your neighbors who will feed your cat while you are on vacation. The dry cleaner learns your name. The deli-man learns that you like your coffee with milk no sugar. In other words, you become part of the community.

Then imagine that after a year or two your lease is up and the landlord asks you to leave. Why? No reason, he just wants you to. He doesn't need a reason. (This is what is happening today).

Now you have to move, find a new job, new schools for your kids etc. Potentially this could happen every year or two or whenever "market rates" skyrocket. You have no stability, you don't put down roots in the community. You become transient. You don't care about your neighborhood because you might be leaving soon anyways. You probably won't even take very good care of your new apartment because you know you might be kicked out.

This is why we need regulation. Not to screw the landlords or to help people pay cheap rents, but to make sure that families can afford to live in the places where they set down roots without feeling constantly afraid they might have to uproot themselves periodically and against their will. Without regulation we live in a dorm room mentality.

Why is it important that middle income families live in the city? Why don't you just move where you can afford the rents?

• This is a good question. And I'll tell you why. Because rent regulation was what helped build the communities that are now desirable by maintaining a stable group of families who have built attractive neighborhoods (ie parks, gardens, safety, schools) and kept the economy of the neighborhood strong with their purchasing power. It's the same way owners build their neighborhoods. If high rents create a transient population, these neighborhoods would soon become quite unattractive.

• Middle income people earn about the same, proportionally, as they did 25 years ago. By these people I mean teachers, musicians, Con Ed workers, cops, fire fighters, the grocer and the receptionist at your doctor's office. We need these people in our community for it to function properly. If they all moved away we would be missing so many services, ie it would be impossible to hire, and those who could afford these rents would find their quality of life hampered by lack of services. Then they too would move because for these kinds of rents they would move into a mixed income city that has the services they demand. It creates a community of transients that becomes soul-less and without real integrity. I see it happening. Supermarkets are disappearing, we have no butcher or fishmonger. Try to find a fresh tomato for less than a piece of meat. Therefore, rent regulation helps to create continuity and stability over the long term by sacrificing some profits in the short term. You cannot underestimate the value of stability and the long term health of a community. It may seem subtle for you day traders, but it's what keeps our civilization stable and intact. Nomads in Asia have a very different society than we do. And while it may be perfectly viable, it is not the society we have built or chosen.

Have I made my case? I look forward to feedback.

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