David R. Henderson  

Rent Control and Material Things

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In a recent article in the New York Times about people living in rent-controlled apartments in New York city is the following telling section:

But having made it through the 15-year real estate boom with their tenancy intact, the O'Neals, who have been careful to keep their household income below the $175,000 maximum allowed for stabilized tenants with rents above $2,000, don't seem too concerned about any possible fallout from the bust.
"We're protected by the rent laws," said Christine O'Neal, Coke's mother. "I'm 70 years old. It's not something I think about. I've been living here for years and I just want to detach myself from worrying about material things."

Of course, the fact that rent control protects her from "worrying about material things" means that the owner who takes the loss must do so.


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CATEGORIES: Price Controls



COMMENTS (11 to date)
Methinks writes:

Not just the landlord who owns the building pays the price for this woman to "not worry about material things", but also the people living in New York who are renting in non-rent controlled buildings.

One of many reasons I left NYC last year.

Tim Fowler writes:

Also harm is done by the fact that people where pushed to be "careful to keep their household income below the $175,000 maximum allowed for stabilized tenants. The economy lost out on the additional production that would have resulted from the effort to earn more than the $175K/year.

The Cupboard Is Bare writes:

I shook my head as I read about this bohemian wonderland where the tenants allow wanderers to come and go as they please.

What I am curious about is the lease agreement. Rental agreements frequently state that you can't sublet the apartment, rent out rooms, or take in additional tenants without paying additional rent.

Tenants who work the system by not paying their fair share end up raising rents for new tenants. But that's what happens when the state gets involved. People end up subsidizing their neighbors.

Is it any wonder that landlords want to get out from under these buildings.

kurt writes:

What a bunch of selfish people. Do they really think they can buy off their enviable situation by giving strangers some short term accommodation?

John Booke writes:

I thought you had to make more than $250,000 a year to live in NYC? Or is this woman the only New Yorker scamming the system.

Methinks writes:

John,

An apartment that size (3,000 square feet) in that neighbourhood would rent for no less than $15,000 - $20,000 per month. An 1,100 square foot, 2 bedroom, non rent controlled apartment in a cheaper neighbourhood (you understand Madame resides in the Lincoln Center area) rents for over $6,00 per month. NYC taxes take the tax rate up to close to 50%. Do the math.

She moved into the rent controlled apartment in the '60's, so her rent is $2,850. The 650 square foot one bedroom I rented on the edge of Harlem many years ago rented for over $3,000 per month.

So, if you had the good fortune to have your palatial estate subsidized by the landlord and those living in non-rent controlled buildings for four decades, then you can totally survive on $175,000 per year. People living in rent controlled apartments will stop at nothing to keep them. The stories are hilarious.

From_ NYC writes:

I agree that such cases as the O'Neals show that some people can play the system. My beef, however, is not just with those people, but with the mix of ignorance and ideology that drives many of the comments, both here and in similar places, when it comes to rent stabilization in NYC.

First, let's all agree that investors who buy an apartment building, including those that fall under the rent guidelines board of NY, deserve a decent ROI. So here is my question: If being a landlord of rent stabilized/controlled apartments is not profitable, why did many investors buy any of these buildings over the last 50 years or so?

When the NYC rent guidelines were enacted, rents (and rent increases hence) were set at a level that guaranteed the owner a decent ROI after expenses such as heat, hot water, garbage removal charges etc. That percent ROI is currently several times what anyone could get for savings or current investment-grade bonds.

Anyone who buys a building (with or without price control) knows beforehand what the current rent roll is, and can use that to calculate if the price is right. Pricing a controlled rental building in the hope of decontrol is simply gambling, not investing.

BTW, I own my current place for the last 10 years or so, but rented for many years before, and, yes, in a rent-stabilized building.

From_NYC

bjk writes:

From_NYC is proposing the novel ROE (Return on Expenses) calculation. He's right that many of the buildings were bought after the rent regulations went into effect. It's not those landlords who are getting shortchanged, it's the New York renters who are unable to bid on much of the NYC housing stock, which in turn drive up the price of the remaining apartments.

Methinks writes:

bjk makes a good point.

I also take issue with any investor "deserving" a decent ROI. The plain fact is that any investment carries risk. The reason the city sets the ROI is because it caps the rent. One market distortion requires another. Because both landlords and the entrenched renters are important to NYC government, the renters of non rent controlled properties pay the subsidy because the supply of housing is kept artificially low as government planning reduces the upside while increasing the hurdle rate.

That's not ideology. That's economics.

lamontnow writes:

As some posters have pointed out, rent regulation in NYC hurts the general population, not just owners of regulated properties. Market-rent tenants pay more because of the artificially low vacancy rate due to hundreds of thousands of apartments being kept off the market for decades by long-term tenants such as the one in the article, and the quality of housing is below par because of neglect. Tax payers pay more because the revenue from property tax is significantly lower than it would be in a free market, and the state and city are forced to spend hugh sums for administrating and litigating the system.

Unfortunately, the voters don't realize this and see it as strictly a regulated landlord vs. regulated tenant battle. The irony is that the state is about to tighten the screws even more, making the situation even worse.

lizWCU0966 writes:

In David Henderson’s blog “Rent Control and Material Things”, it seems that he is taking the side of New York City apartment owners. He states that tenants who remain in rent controlled apartments force the owner to take a loss of income. The article states that the O’Neal’s have lived in their apartment for years. In my opinion controlled rent is the same as having a fixed rate mortgage from the bank. At the time of the agreement both parties are happy with the agreement. So it must have satisfied the owners income needs at that point. Tenants who have these agreements shouldn’t have to worry about their rent increasing to a point beyond their budget. I understand that over the years New York has grown and property values are at a premium, but not everyone who lives there is a CEO or stockbroker. Average people with average incomes need the protection of rent control. Keeping their income below 175,000 is probably much easier than coming up with the extra money that would need if their rent increased to today’s market value. Yes, the apartment owner could be making a considerable amount more on this apartment but if tenants chose not to sell out their leases, they should be able to live in peace. It sounds like greed to me.

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