Monday, February 13, 2006

Rent Control in NYC and Rent Hikes

Randy Crane of UCLA has started up a new urban planning blog (see http://planningresearch.blogspot.com/ ). It is quite thought provoking.

Today Columbia University's student newspaper has a piece that hints at the endowment effect. If you live in a NYC rent control apartment, how much should your landlord be allowed to raise your rent each year? The article hints that the incumbents have a "constitutional right" to stay in their apartment regardless of market signals and opportunity cost. The endowment effect must be very strong here!

The New York City housing market is very strange featuring this mixture of expensive free market apartments and this substantial share of rent controlled housing units. Does any other city in the USA have such a mixed system? Perhaps San Francisco? Do any cities featuring significant % of Republicans living in the city feature such free market aversion?

When I lived in NYC, it looked to me that there were a lot of rich people living in rent control apartments. These savvy people knew how to play the system to get what they wanted. Somehow I find the free market "fairer" as we are all charged the same equilibrium price.



Rent Limits Upped
New State-Imposed Ceiling Will Allow 8.2 Percent Hike

By Lauren Hovel
Spectator Staff Writer

February 13, 2006

Tenants in rent-controlled units in New York City may soon be subject to a rent increase of 7.5 percent.

The change comes under a state system intended to make rents reflect fluctuations in buildings’ operating costs, which some tenants feel is outdated and unfair.

Rent increase for rent-controlled units occur under a Maximum Base Rent program regulated by the Department of Housing and Community Renewal. Under the rent-control system, each apartment has an MBR which the state raises every two years. In 2006-2007, the law calls for an MBR increase of 8.2 percent allowing landlords to raise rents 7.5 percent.

“The system of rent increases is arcane and fundamentally unfair,” said Jenny Laurie, a representative of Met Council on Housing, a tenants’ rights organization. “The MBR is based on a formula set in the late ’60s and early ’70s, which is completely out of sync with today’s housing market.”

Currently, rent control applies to any apartment in a building constructed prior to 1947 and in which its tenants have lived continuously since 1971 or before. The city’s rent-controlled tenants are an average age of 70 years and earn an average income of 20,000 dollars a year.

“It’s a population that cannot afford a 7.5 percent increase a year,” Laurie said. According to Laurie, for the average tenant on rent control, over 30 percent of income is spent on rent.

“Once our rent reaches a certain amount, the rent control will no longer apply, so the 7.5-percent increase will make our rent-control disappear much more quickly,” said Jessica Robertson, BC ’07, who lives in an apartment on the Upper West Side that her grandparents bought in 1956. “It makes the time limit on how long I can pay a rent that is a reasonable price a lot shorter.”

A public hearing will be held on Mar. 10 to evaluate the acceptability of the proposed MBR. A state official who asked not to be named said the 8.2 percent is not set in stone and could be changed at the hearing. However, Laurie said the MBR is not likely to change, since it is established by a formula embedded in law.

“The 8.2 percent will probably be the final guideline, but there are things people can say [at the hearing] that may make a difference for future lawsuits,” Laurie said. “State officials will be there, so people who come and complain will be heard. They can make general complaints about how the system is run or how the agency manages the system.”

According to the DHCR’s Web site, the MBR reflects changes in real estate taxes, water and sewer charges, and maintenance costs. Many rent-control tenants also pay a fuel fee of 10 to 50 dollars per month if their landlords use oil to heat the building.

Tenants can contest a rent increase if their landlords are not providing essential services or if the building has serious violations by contacting the DHCR. Only about 60,000 apartments are on the rent-control system, as rent-control no longer applies to units when tenants move. Most apartments with rent regulation in New York City are rent-stabilized and are not on the MBR system.

3 comments :

Anonymous said...

Basic economics come into its most stark conflict with basic greed and fear in the world of NYC rent regulation. It is a spectacle to behold.

But I got a good laugh out of this:

“Once our rent reaches a certain amount, the rent control will no longer apply, so the 7.5-percent increase will make our rent-control disappear much more quickly,” said Jessica Robertson, BC ’07, who lives in an apartment on the Upper West Side that her grandparents **bought** in 1956. “It makes the time limit on how long I can pay a rent that is a reasonable price a lot shorter.”

Bought?!? They may think and act like they own the place, thanks to divine right of lease renewal and 50 years of below-market rent increases, but it isn't so.

http://www.housingnyc.com/downloads/research/pdf_reports/greenrentstudy.pdf

The RGB framework raises rents so that "a reasonable profit margin" can be made by landlords. The focus is on a constant dollar amount of profit.

From the above-linked report: ''Landlords also assert that the formula does not consider the erosion in value of landlords' income by inflation -- so that by maintaining current dollar net operating income at a constant level, profitability may decline over time.''

The authors of this report have a howler of a come-back for that simple statement of fact, but I won't bother to retype it for the sake of sanity. I think using inflation adjustment is a well-accepted approach, even for such things as Social Security Cost of Living increases and the like (Social Security! Which primarily benefits the elderly! -- this is of course a favorite stalking horse of the people-will-be-out-on-the-street-if-you-change-rent-regulation crowd).

For what it's worth, one of the greatest appeals of traditional free-market real-property investment is its built-in inflation protection. But in the years 1975-1997 (those covered by the report above) the dollar lost two-thirds of its value according to the CPI. It suggests, shall we say, that a constant-dollar framework is inappropriate over the long term as a measure of fairness between the price charged to tenants and the costs incurred by landlords.

-Motts

Rob Dawg said...

Inhierited rent controlled aparts, taxi medallions, billions in bridge tolls subsidizing transit, more billions in federal subsidies, commuter taxes, on and on. It is a wonder any econometric analysis is possible in and/or about NYC at all.

Brandi said...

Very Informative post.
Apartment Rentals