One would guess the folly of rent control regulations needn’t be explained any further. If rents are held in place by government edict, landlords have no incentive to maintain apartment units to attract renters, the housing stock ultimately deteriorates, and homelessness increases. But, as Bloomberg reports, “Tougher rent control, returning worldwide, destroys $75 billion in property value. Cash-strapped tenants cheer as they maintain a foothold in the city.”
That was the article’s subtitle. The title of the piece authored by Patrick Clark and Prashant Gopal screams that New York City apartment values have been cut in half. In 2019, alarmed about the decline in affordable housing, New York State lawmakers made rent control laws tougher. They sharply reduced how much landlords could raise rents after renovations, and worse yet, the units no longer leave the program when rents rise high enough.
The difference between rent-stabilized unit values and market rent unit values since the 2019 change is startling. Last year, the price of New York buildings with at least one rent-stabilized unit sold for prices that were 34 percent lower than in 2019. By contrast, the price of nonregulated apartments rose 23 percent during the same timeframe.
The Federal Deposit Insurance Corporation unloaded $15 billion in loans backed primarily by New York rent-stabilized apartments in December at a 40 percent discount. And the charges New York Community Bank took for its exposure to rent-stabilized projects is well known.
“A lot of owners I’m speaking with want to walk away from buildings,” Lazer Sternhell, chief executive officer of Cignature Realty told Bloomberg. Douglas Peterson, who bought more than forty properties for $300 million over twenty years, is behind on his mortgage payments and fresh out of money for repairs. “My career is over,” Peterson says. “Now it’s just a question of: What’s my legacy going to be? Is it going to be that I abandoned the ship when it was sinking, or that I stayed and fought?”
“The politicians are defunding these buildings,” Lewis Barbanel told Bloomberg. “They’re trying to create a situation where the owners fail.” Mr. Barbanel is taking his investment dollars to New Jersey.
Sounding like Wesley Mouch in Atlas Shrugged, Cea Weaver, campaign coordinator of Housing Justice for All, said defiantly, “We weren’t being very secret that we were trying to change the rules, nor were the lawmakers in Albany,” Weaver said. “I don’t know if it was hubris or not, but laws change, and that impacts markets.”
What’s happening in New York City hasn’t stayed in the Big Apple. Oregon and California have instituted rent stabilization statewide, and two dozen states last year considered rent caps, according to the National Multifamily Housing Council.
Canada, India, and Sweden all have rent control. Denmark’s government placed a two-year cap on rents last year, while Berlin froze rents for five years in 2020 until courts overturned the measure.
Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies, says the rental market in large cities is a market failure, citing scarce land and zoning laws. He is forgetting or ignoring that one government intervention leads to others, as Ludwig von Mises explained.
New York has sixteen thousand units under rent control and a million units under rent stabilization. Before the 2019 changes, property owners could raise rents by 20 percent each time a tenant moved out. Past a certain threshold, they could set their own rents. Owners could also raise monthly rents by one dollar for every forty dollars in renovations. Landlords have taken their case against the 2019 rent laws to the US Supreme Court with no success.
Clark and Gopal write, “In one of the strange twists of rent regulation that worry economists, [Douglas] Peterson is among the landlords leaving apartments empty because it doesn’t make sense to repair and rent them out at current rates. Thousands of apartments are vacant, according to government and industry estimates.”
A strange twist? It’s just simple economics.
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