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Rent-Control Revival?

Now that the days of easy credit are over, people who would have been buyers are willing to be renters.


Name

Alan Ehrenhalt

Alan Ehrenhalt is a senior editor at Governing.

Nobody's paying a lot of attention to this, because it seems like a small piece of the much more dramatic mortgage credit problem, but if you look closely you will find that rents are starting to rise pretty sharply in most parts of the country.

Reis Inc., the property research firm, reported in October that for the third quarter of the year, the average rent in New York increased by an annualized rate of 14.4 percent. San Francisco recorded 13.6. Less obvious cities such as Seattle and even Cleveland came in with annualized figures in the 7 to 8 percent range. The Wall Street Journal took a look at the figures and proclaimed that "for most of the country, it's a landlord's market."

It doesn't take too much creativity to guess why this might be happening. The supply of apartments in most cities has been decreasing the last few years. With the price of single-family homes and luxury condos as high as it was, landlords had every reason to ease out of the rental business and look for something they could sell. And that's what they did. Now that the days of easy credit are over, people who would have been buyers are willing to be renters. But there isn't much out there to rent.

In Los Angeles, the most recent numbers simply accelerate a trend that's been going on for quite a while. Rents there have been rising steadily since the late 1990s -- 82 percent over the decade just ended. Meanwhile, the city has been losing about 5,000 units of its rental stock every year -- in some years, nearly half of those to demolition and subsequent condo construction.

If you're wondering why this hasn't become a political issue in a city where three-fifths of the residents are renters, the answer is that it has. This spring, tenant activists staged a march on city hall; they also went to UCLA to picket the office of a professor who, in his second career as a landlord, had his rents jumping far beyond the citywide average.

Meanwhile, the local papers suddenly seemed to be discovering stories of tenants who were managing to survive only through the city's rent-control program, which still covers apartments built before 1979. The Los Angeles Times gave front-page play to the story of a 79-year-old woman who lives in one of these older flats on $851 a month in Social Security, and pays $653 of that in rent -- more than 75 percent of her income for housing, a figure nearly twice as high as many experts would consider prudent. If the apartment were not under rent control, the Times reported, her payment would be around $1,000 a month. She'd have no choice but to move -- if she could find somewhere to go.

After reading one of these hardship stories after another, the L.A. City Council offered a response. It passed an ordinance making it less attractive for landlords to do what they had been doing regularly during the boom years of this decade: tear down a pre-1979 building and put up a new one on the same lot to escape the rent-control law. Under the revised ordinance, a landlord can make this kind of switch and charge as much as he wants for the first tenants in the new building, but after that, the property is subject to control all over again -- which usually means rents can't go up by more than about 3 or 4 percent a year.

This wasn't a drastic step -- even some of the landlord associations said they could live with it -- but it raised the interesting issue of whether we're likely to see action elsewhere if rents keep rising by as much as they have in 2007. Or, to put it in the most apocalyptic terms: Are we going to see a revival of rent control as a political issue in local government?

It would take quite a bit. Most citizens in most of America, if they do not happen to be enjoying the benefits of a rent-controlled apartment, believe that rent control is in the long run a bad idea -- a rigid solution that is bound to make the supply of reasonably priced housing scarcer rather than more plentiful. The people who believe this most fervently tend to be economists. In a profession whose members disagree about the vast majority of important issues, rent control is a subject that brings them together. In a survey 15 years ago, 93 percent of economists agreed that rent control "reduces the quality and quantity of housing." I don't know who the other 7 percent were. I'm pretty sure I've never met any of them.

If we are talking about rent control in its most draconian form, it's almost self-evident. A government that places a freeze on rents -- as the federal government did during World War II -- will choke off new construction, force property owners out of the rental business and lead before long to painful shortages of supply. You don't have to be an economist to understand that.

But what happens when rent control is employed as a less blunt instrument? What about a law that protects poor and elderly residents from double-digit rent jumps in tight market conditions? What about a law that simply holds the landlord to annual increases allowing him to cover his costs and make a respectable but not exorbitant profit? Does that depress the supply of housing?

Perhaps it does. Economists of all persuasions, liberal as well as conservative, seem to think so. Paul Krugman, the Princeton University economics professor and newspaper columnist who qualifies as a liberal in almost everyone's book, wrote a few years ago that the "pathologies" of rent control are "right out of the textbookÉexactly what supply-and-demand analysis predicts."

Reading the economists on this, it's hard not to notice some parallels with the debate over a minimum wage. The economics profession is nowhere near as united on wages as on rents, but a majority of mainstream economists will tell you that raising the floor on wages will reduce the number of jobs. It has to -- the theory of supply and demand is absolutely clear on this, and it couldn't work any other way. What's the empirical evidence? Well, there isn't very much. But it doesn't matter. Raising the minimum wage is bad for the economy. Theory shows it.

A few weeks ago, in a discussion that included several economists of impeccable credentials, I posed a similar question about rent control. I was taken aback by their candor. "The literature," one of them admitted, "doesn't suggest the conclusion that rent control decreases the supply." He wasn't saying he liked rent control; he thought it was a terrible idea. But nobody had ever come up with the smoking gun.

Which brings us to the subject of New York City. To call it the capital of rent control in America is to put it mildly. The city possesses a substantial proportion of all the rental units in the United States, and roughly a million of these are under some form of rent limitation. New York has been doing rent control in a serious way for more than half a century, sometimes under state rules, sometimes under rules the city makes.

In the 1950s, rents for many of the pre-war apartments in New York remained frozen or very close to that. This led to obvious and embarrassing inequities. There was the case of the wealthy tobacco dealer Nat Sherman, who paid $335 a month for a luxurious six-room apartment and justified it on the grounds that he didn't use it a lot. Meanwhile, low-income New Yorkers living in Sherman's own neighborhood were paying considerably more.

Finally, in 1969, the city enacted a milder program called "rent stabilization." Rents on apartments built after 1947 can rise by a fixed percentage every year, so the landlord can keep them up and make some money. This year, the city's rent-stabilization board approved increases of 3 percent on one-year leases and 5.75 percent on two-year leases. When an apartment becomes vacant, the controls go off, as they also do in many cases when the stabilized rent hits $2,000 a month. A landlord can apply for exemption from controls if he makes major improvements in the building.

There's no question that this leads to landlord-tenant conflicts that might not exist under different rules. Landlords frequently pressure tenants to leave so they can be free of controls. Some of them have been known to use pretty rough tactics, such as pretending they didn't receive rent checks and then starting an eviction for non-payment. At the same time, the city continues to protect thousands of affluent renters who could afford to pay market rates but happen to be living in the right apartment at the right time.

It's clearly not a great system. But does it depress the stock of affordable housing? Economists, such as the widely respected Edward Glaeser of Harvard, are convinced that it does. Glaeser thinks the way to increase supply would be to end rent control of all sorts and loosen up on density and height-limit requirements. Other argue that both rent control and rent stabilization should be replaced by a voucher system that that would let the market determine rents (presumably encouraging more construction) but would give tenants subsidies to pay for them. The latter solution isn't very likely. One of the politically appealing features of rent control is that it pins the cost almost entirely on the landlords. It's hard to envision taxpayers volunteering to take over the burden.

In the end, I think the conclusion has to be that rent control is a troubled program with numerous inequities that need to be considered carefully. That it allows some genuinely deserving poor and elderly people to remain in their homes also happens to be a fact. Do the inequities justify its full-scale abandonment in the few big cities that currently use it? Or do the benefits suggest its possible expansion to other tight-market cities? I don't know. But I suspect we will be talking about the subject more often if rents keep going up the way they are now.


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