Rent Control

“The Bronx is burning” said sportscaster Howard Cosell during the 1977 World Series. This was 3 years after the passage of ETPA, the Emergency Tenant Protection Act of 1974 which applied to New York City and limited immediate suburb counties.

The mid 70’s was a time of rapid inflation much as now in the 2020’s. This was caused by the creation of OPEC, the Organization of Petroleum Exporting Countries who promptly stopped shipping oil to the US over its support of Israel. This created catastrophic shortages, called the “Oil Shock” which overnight quadrupled the price of gasoline, diesel and heating fuel. The resulting inflation raced through the entire economy raising the prices of everything including rents. Mortgage rates shot up to 18%.

In New York City, municipal worker unions , Police, Fire, Sanitation, Teachers, Transit Workers demanded large raises to keep with inflation, struck, brought the City its knees and were given huge increases in wages and benefits. This dramatically increased property taxes.

Multifamily property owners were caught in vise of rapidly increasing cost of heating fuel, electricity and taxes, while as a result of ETPA, were unable to raise rents to account for the increased costs, 10’s of thousands of building went bankrupt and owners walked away from their buildings.

Squatters moved in set fires to keep warm, some owners in desperation resorted to arson to save them from ruin not of their making. We witnessed block after block in the Bronx and Brooklyn being burned to the ground leaving hulking shells of building stretching as far as the eye could see in any direction. In the Bronx alone, 250,000 people were displaced as their housing was destroyed.

This precipitated a homelessness crisis in the City which culminated in a consent decree requiring that anyone in the State who has no place to sleep to be entitled to temporary shelter. This same consent decree is what entitles anyone who steps off a bus in New York City to a shelter bed or hotel room to this day.

Eventually, the State Legislature realized the unintended consequences of their ETPA legislation, the destruction of hundreds of thousand of apartments which had been decent housing. By 1990’s the State legislature eased up the strictures of ETPA and changed to rules to allow ways for some of the apartments to be released from rent control, through vacancy bonuses, luxury decontrol and other ways. These now market rate rent apartments provided the cash flow to make the remaining building financially viable and stopped the destruction. You now find in NYC building with mixed rent control and market rate, with the market rate tenants essentially subsidizing their neighbors’ rent.

By 2019, the State Legislature’s institutional knowledge of what led to the easing up in 90’s was gone and the State Legislature erased all the ways to de-regulate apartments, returning the rent controlled housing market to a unsustainable poor financial prognosis by the passage of the Housing Tenant Security Protection Act of 2019.

Recently the NYU Furman Center released a report which explains why rent controlled building are once again being driven to bankruptcy by the HSTPA 2019 amendments to ETPA.

A History of Failure

It’s natural and human to want to do something to help people who are struggling. But it’s important to offer solutions that are constructive, not destructive.
A constructive solution to a housing shortage is simple: more supply. Building more housing will increase the supply of units, lowering costs. It’s the most obvious solution in the world and constructive in a literal sense. You’re building something.
Rent control is a destructive policy. In his book Basic Economics, economist Thomas Sowell spends entire chapters documenting the failures of rent control policies around the world, from Australia and Sweden to New York and San Francisco.
We have decades of research showing rent control makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists.
Why wasn’t a single housing unit built in Melbourne in the nine years after World War II? Because rent control laws had made the buildings unprofitable.
Why did Washington, DC, see its available rental housing stock decline from 199,000 to less than 176,000 in the 1970s? Because fewer people were willing to rent their homes because of price controls.
Why did building permits decline by 90 percent in Santa Monica, California, in 1979 from just a few years earlier? Again, because rent control laws had made the building of new units unprofitable.
The lesson? Rent control has effects on housing supply, and those effects are not good. And that’s only half the equation.
Rent control also has adverse effects on the demand for housing. Because properties are priced below market rates, people tend to consume more than they otherwise would. In some cases, Sowell points out, this has resulted in housing shortages in the absence of actual scarcity, such as Sweden in the 1950s, which saw the average wait time for a place to live reach 40 months even though Sweden was building more housing per person than any nation in the world.
“As of 1948, there were about 2,400 people on waiting lists for housing in Sweden, but a dozen years later, the waiting list had grown to ten times as many people despite a frantic building of more housing,” Sowell writes. “When eventually rent control laws were repealed in Sweden, a housing surplus suddenly developed, as rents rose and people curtailed their use of housing as a result.”
The evidence is overwhelming. Rent control laws are destructive. We have decades and decades of research that shows that it makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists.
Nevertheless, the perils of rent control seems to be a lesson we may have to relearn. Bad ideas, like old habits, die hard.

VIDEO: WHY RENT CONTROL HURTS RENTERS: https://youtu.be/oJvTTGOHFkU

In 2019 The New York state Legislature amended the 1974 Emergency Tenant Protection Act “ETPA” allowing any municipality in the State to adopt “Rent Stabilization” as well as other measures that put strict and unrealistic caps on reimbursements for capital improvements.

A link to the act is here: https://www.nysenate.gov/legislation/bills/2019/S6458