econo-missed #4: Universal Rent Control

Economics as a discipline wields some ideological power through mystification. What is frequently referred to in media as “basic” economics is in fact loaded with ideological assumptions that often bear little resemblance to reality. Data for Progress (@DataProgress) is proud to host “econo-missed,” an economics advice column for the left, featuring a cast of young economics grad students and practitioners. This econo-missed comes from Pete Harrison (@PeteHarrisonNYC) who is a co-founder of homeBody. He explores an idea gaining traction in New York politics, the idea of Universal Rent Control (URC).

Dear Econo-missed,

I live in a major city and I’m increasingly engaged in local politics. But I’m still trying to get a sense of the issues - I hadn’t thought much about them before.  Candidates I like like Zellnor Myrie and Julia Salazar talk about the idea of universal rent control? I’ve heard from economists that rent control is bad because it distorts free markets, which have never failed anyone. - Definitely Not Sean, New York

Universal rent control (URC) at this point is a fairly broad term, but in the context of New York City, it’s essentially a series of policy proposals that aim to fix the many flaws in current rent regulation laws (which, for the purpose of this blog, includes rent stabilization and rent control policies, but not Section 8 or public housing policies). These laws only apply to some, mostly older buildings and have tons of loopholes that allow units to be deregulated. Universal rent control would expand protections to every rental unit and remove those loopholes. It would “distort” the housing market, but, as we’ll discuss, it could also fix the bigger issue distorting it.

The URC fight has been embraced by a group of insurgent state candidates on the left and has the support of many leading activist groups in the city and upstate (full disclosure: I volunteer for the Ocasio-Cortez and Salazar campaigns). With these laws up for renewal in Albany next year, this framing marks an important shift away from previous (mostly losing) battles over the issue and is quite timely.

What really excites me about URC goes to the second question about rent control and markets. URC would of course impact rent costs, but what it could do to land costs is potentially even more important.

Rent regulations are one of economists’ favorite “gotcha” concepts because they go against every basic market theory that says the highest and best use of an asset is intrinsically the best for a society. The scale of displacement in NYC puts that concept to bed. New York City has been a vibrant place historically because it has been possible to be poor and working class here. Without protecting these New Yorkers, that vibrancy will end.

Rent regulations limit how much a landlord can charge for an apartment and how much they can increase rent over time. They are often blamed for raising rents and/or lowering supply in cities overall but these arguments vastly overstate their impact compared to more pressing issues like rising construction costs and, especially, skyrocketing land costs.

Land costs are the key here. Economists argue that rent regulations create terrible inefficiencies in markets, but they should also be worried about rent-seeking behavior doing the same.  An “economic rent” is the extra wealth earned from an asset used in its present form (not to be confused with the “rent” we pay each month) and rent-seeking is the attempt to manipulate circumstances to increase that rent without creating new value from it. Owning land, particularly in a city like NYC, is a “gotcha” example of rent-seeking behavior run amok.

The economic value of housing is mostly tied to the value of the land its on, which has little to do with a landlord’s investment and more to do with surrounding public investment. From the tenant’s perspective then, why should she pay more for something the landlord didn’t even create? You don’t need to be a Georgist to see that this is inefficient. It robs the tenant and the economy of more productive use of her income (while completely ignoring the overall well-being of her community.)

To be clear, current rent regulation laws in NYC aren’t designed to challenge rent-seeking behavior. Given the patchwork history of legislation and the oafishly corrupt nature of Albany politics, they don’t have a cohesive goal, let alone design. They limit the rent increase for some renters to some degree, but they ignore or create a host of other problems.

Universal rent control does challenge rent-seeking behavior. Doing so could fundamentally change the economic calculus in NYC real estate and the potential value of land by making housing more of a utility than a commodity. Keep in mind URC is still just a series of broadly defined proposals, but conceptually it offers a glimpse at a more equitable and democratic future.

To start with, less than half of all rental units in NYC fall under current rent regulations, which severely limits the political power of renters as a united front against the well funded and organized real estate industry. There is little incentive for market-rate tenants to cooperate with rent-regulated tenants. This leaves a smaller, poorer, and older population to fight for tenants’ rights for everyone.

URC calls for extending rent regulations to all rental units in New York, which would radically change this political dynamic. The sheer number of renters as a political constituency could offset the financial power of the real estate industry in Albany and create more protections and, most importantly, real innovation in affordable housing.

Another problem with current laws is loopholes - too many perverse means and motive for landlords to force rent increases and/or to force out tenants. The most disastrous policy, vacancy decontrol, allows apartments to leave rent regulations altogether when they hit $2,733/m. The city lost an estimated 147,500 affordable units over the last 24 years to this alone.

URC would end vacancy decontrol and remove loopholes around vacancy bonuses, preferential rents, and major capital improvements. In effect, they would permanently prevent the speculative (and cynical) calculations that some landlords make to get passed regulations.

It’s not that landlords can’t still make a profit, but there would be a cap. This would suppress the speculative value of land across the city. It would certainly scare off the worst actors in the market and likely create space for local landlords, non-profits, and models like community land trusts to enter the market instead. This would be a net positive for NYC.

Rent regulations attempt to maximize the value of shelter over financial value, which is a foreign concept at this stage of late capitalism America. Most economists think that’s a mistake, but keeping wealth and power in local communities rather than private equity firms or foreign investors is more democratic, better for the economy, and better for the life of the city in the long run. Universal rent control can help rebalance our economic priorities in NYC.

- Pete Harrison (@PeteHarrisonNYC) is a co-founder of homeBody.

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