Saturday, August 20, 2011

Tenants Catch a Break For the Moment

Governor Cuomo seems intent on renewing rent regulations that keep our rent stabilized apartments stabilized.  Like the debt ceiling, many people have based their way of life on rent stabilization regulations.

While the average cost of a one bedroom apartment in Manhattan was $2406 in 2009 (according to CitiHabitats, the largest rental brokerage on Manhattan by transaction), the median income for 2009 in Manhattan is only $68,706. And that income hadn't risen much from before the bust, while rental prices had certainly dropped.

Using the rule of thumb of 40% of income, that median income would qualify a "household" (and we don't know how large this household would be - it could be an individual, couple or family with1 or more children) for a monthly rent around $2290. So already the average household making the average income is paying more than the recommended 40% maximum of income.

On the face of it, it does seem that rent stabilization is needed. However, as an economist (well, I majored in economics and remember just enough to do damage), I recall that by creating an arbitrary ceiling in one part of the market, you can artificially inflate the other part. In other words, because there are a bunch of apartments that are regulated in rent, people don't move, and therefore there is a housing shortage that results in other people overpaying for the remainder of apartments.

In practice, I don't know if that is true. Most of the remaining rent stabilized apartments on Manhattan are in northern Manhattan above 96th Street. But anyone looking for an apartment below 96th street with a budget of under $2400 certainly knows that the pickings are slim (and even slimmer below 34th street). So, on the one hand, maybe people pay a little more for destabilized apartments than they would if all apartments were subject to the same regulations. On the other hand, in Manhattan that doesn't seem to matter much.

One thing I would say is that rent stabilization does give the impetus to turn apartments over and renovate them really nicely. Which would seem in contrast to the arguments that landlords can't adequately maintain their buildings. But when you have $40,000 or more in property taxes a year, and you have 5 apartments where just one is still rent controlled at $1000 a year, you can see where the math doesn't add up. Heating oil can run thousands a year, so can property insurance. And that's all before you start thinking about reserves for capital improvements. That's where rent stabilized landlords get bitten.

On the other hand, does rent stabilization serve as a deterrent for positive change on the community side? Intuitively I can think of situations where people stay in apartments just because they have such a cheap rent. But let's get all Freakonomics on this issue. Is there a wider or more tangential effect?

One thought I have is that rent stabilization could deter entrepreneurship. In otherwords, people can keep working lower paying jobs in order to stay in the same apartment. This follows from the idea that union membership in the industrial parts of the country made it less likely for businesses and people to innovate. After all, if you're making good money, why change what's not broken? Except that it is broken.

I am not for pushing protected tenants out of homes. They have rights and it does unfairly punish the elderly and lower earners. But from a theoretical point of view, is there some way we haven't looked at it yet that maybe we should?

Food for thought.

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