Plan will make market rents more affordable, introduce a Renters’ Tax Credit
Gubernatorial contender Joel Giambra, the former two-term Erie County Executive, is pledging to end New York City’s decades-long housing crisis – promising to make the City more affordable by allowing the State’s current rent control and rent stabilization laws to lapse when they are up for renewal in 2019.
Nearly all economists from both sides of the ideological spectrum agree that repealing those laws would make market-rate housing more affordable. Rent control laws have created an extraordinary constraint on new housing supply in New York City’s housing market, creating an affordability crisis that has lasted for the entirety of the post-War period.
“The only way to solve New York’s affordability crisis is to make it easier for the market to produce a greater supply of housing units, which will alleviate prices in the long term. Our current system of price controls has kept the city trapped in a perpetual housing shortage that has wildly increased rents,” Giambra explains.
“Low income folks in the outer boroughs are hurt most by these laws. Rather than building new skyscrapers in Manhattan more quickly, the housing shortage pushes young people into Brooklyn and Queens. Albany Democrats have exacerbated the gentrification that is displacing Black and Brown folks,” Giambra argues.
“The only people benefiting from rent control are high-income Manhattanites whose rents have been essentially subsidized by the rest of us for decades, because we are all forced to pay higher market rents as a result of the housing shortage that the law creates,” he explains.
Giambra’s plan would allow the current regulations to sunset, according to their respective statutes. In order to prevent displacement associated with the laws’ repeal, Governor Giambra will pass a final non-renewable phase-out of rent control that would assign a monetary value to a tenant’s rights under the law, which a landlord would then be able to purchase in order to expedite decontrol.
The amount that a tenant would be compensated in exchange for their rights under the State’s rent laws would depend on how long they’ve been a tenant in the unit and the number of bedrooms in the unit. Giambra is leaving the precise valuation formula for negotiation with leaders of the State Legislature.
Giambra’s pledge to “End Rent Control as We Know It,” comes as part of a broader plan to address New York City’s affordability crisis with supports supply-side economic policies that reduce housing prices for New Yorkers, and that treat renters and homeowners fairly.
A central component of the plan is a Renters’ Tax Credit, modeled on the mortgage interest deduction, that would allow individuals to off set their rent expense against other state tax liabilities.
“The only way to have more affordable market rates for rent is to allow the market to produce more units in order to satisfy the demand,” he explains. “That’s going to require reforms to our zoning laws, it’s going to require fixing and expanding the MTA, and it’s going to require a transformational new approach to public housing.”
Giambra plans to fully unveil his “Affordability Agenda” in the coming weeks.
The Real Estate Board of New York, the Rent Stabilization Association of New York City, the National Multifamily Housing Council, the National Association of Realtors, and the National Association of Home Builders have long called for reforms to New York State’s rent-pricing regulations.
The Economics of Rent Control
The economic and social consequences of government intervention in the nation’s housing markets have been well documented and throughly studied. Rent control does not advance the important policy prerogative of its stated goal: to preserve affordable housing for low- and middle-income families. In most cases where it is implemented, rent control reduces both the quality and quantity of available housing.
Those who have advocated for rent regulations ignore the economics that govern the housing markets. Rents, in addition to compensating providers of housing, also provide the economic incentives needed to attract new investment in rental housing — and simply to maintain existing housing stock.
Under normal market conditions, a housing shortage (the reason typically cited for imposing rent control) will cause rents on the margin to rise in the short term as consumers compete for available units. But over time these higher rents will encourage new investments in rental housing — new construction, rehabilitation, and the conversion of buildings from nonresidential to residential use — until the shortage of housing has been eliminated until rental prices fall to the market’s equilibrium.
Without the economic incentives required to attract new investment, new housing construction would be sharply limited and there would be no long-term solution to the housing shortage. Rent control has the perverse consequence of reducing the supply of housing in times of shortage.
The costs of rent controls are not confined to the political boundaries of the municipality that adopt them, but often impose significant costs throughout regional housing markets.
Harm Caused by Rent Control
Economists are nearly unanimous in their condemnation of rent control. In a survey of economists of the American Economic Association, fully 93% agreed that “a ceiling on rents reduces the quality and quantity of housing available.”
Economists have several objections to rent control:
- Inhibition of New Construction. By forcing rents below the market price, rent control reduces the profitability of rental housing, directing investment capital out of the rental market and into other more profitable markets. Construction declines and existing rental housing is converted to other uses.
- Deterioration of Existing Housing. By reducing the return on investments in rental housing, rent control also can lead to a drop in the quality and quantity of existing rental stock. It can also lead to a deterioration of the quality of housing stock as providers faced with declining revenues may be forced to substantially reduce maintenance and repair of existing housing.
- Reduced Property Tax Revenues. Rent control reduces the market value of controlled rental property, both in absolute terms and relative to the increase in property values in unregulated markets. The tax implications of this reduction can be significant, as taxable assessed rental property values decline relative to unregulated property. A study of rent control in New York City by economist Peat Mawrick in 1988 calculated the loss in taxable assessed property values attributable to rent control at approximately $4 billion, estimating that distorted assessments cost the city an estimated $370 million annually in property tax revenues.
- Substantial Administrative Costs. Rent controls require the creation of elaborate bureaucratic systems. Rental property must be registered; detailed information on the rental property must be collected; and elaborate systems for determining rents and hearing complaints and appeals must be established. The associated costs in dollars and time fall not only on providers, but also on consumers and municipal authorities.
- Consumer Entry Costs. In many rent-controlled communities, prospective consumers must pay substantial finder’s fees to obtain a rental unit, due to the scarcity of available housing. In some communities a “gray-market” in rental housing has developed in which units are passed among friends or family members. Poor families, single consumers, and young people entering the market are especially hard-hit by these costs.
Higher Income Households Benefit Most from Rent Controls
Rent control is most often justified as an anti-poverty strategy. But higher income households are the primary beneficiaries of most rent control laws. For example, a study of rent control in New York City in 1991 found that rent-controlled households with incomes greater than $75,000 received nearly twice the average subsidy of rent-controlled households with incomes below $10,000, not adjusted for inflation (Citizens Budget Commission, Reforming Residential Rent Regulations, New York City, 1991).
Another study concluded that rent control had the greatest effect on rents in Manhattan, the borough with the highest average income (Pollakowski, An Examination of Subsidies Generated by Rent Stabilization in NewYork City, 1989). Similarly, a study of rent control in Berkeley and Santa Monica found that the beneficiaries of controls in those communities are “predominately white, well-educated, young professionally employed and affluent,” and that rent control had substantially increased the disposable income of these tenants while “exacerbating” the problems of low-income families (Devine, Who Benefits from Rent Controls? 1986). The same study found that tenants of rent controlled apartments in Cambridge, Massachusetts, had higher incomes and higher status occupations on average than other residents of the city, including homeowners.
Rent Control Promotes Housing Discrimination
Poor families suffer a marked decline in existing housing as the quality of existing housing falls in response to reduced maintenance expenditures. Poor families also are at substantial disadvantages when it comes to finding new housing in a tight market, in which housing providers have substantial discretion in choosing among competing consumers. Economist argue that in an unregulated market where supply is ample, consumer selection will be governed by the level of rent and the consumer’s ability to pay it. Rent control causes housing providers to turn to other factors — such as income and credit history — to choose among competing consumers. These factors tend to bias the selection process against low income families, particularly female- headed, single-parent households. In some cases, consumer selection decisions also may be based on a potential consumer’s race, sex, family size or other improper or unlawful factors. This may occur notwithstanding the rigorous enforcement of Fair Housing laws.
The reduction in housing caused by rent control also can slow the process of racial and economic integration of many communities, by limiting the opportunities of certain classes of consumers to reside in rent-controlled communities. In fact, in many middle-class communities rent control has raised a relatively impenetrable barrier to economic and racial integration.
Giambra’s Interest in Housing Policy is Personal
Growing up in the Lakeview Housing Project on the lower West Side of Buffalo shaped many of Giambra’s world views. He is often quoted, reflecting on his childhood, that “it was an environment where we were all poor, but nobody knew it.”
When he was elected to Buffalo’s Common Council — the youngest member ever at 24 years old — he railed against arsonists who were ravaging his Niagara District neighborhood in the 1980s, and he fought to create a new housing court committed to pursuing slum landlords.
When he left office after serving two terms as County Executive, Giambra began buying up vacant lots in his old neighborhood — a community that was very hard hit by the impacts of industrial restructuring, the collapse of American manufacturing, free trade, and suburban sprawl.
Since leaving office he has been rebuilding that neighborhood — lot by lot — branding it, “Connecticut Street Village,” after the small neighborhood commercial strip that was once the heart of a bustling Italian American community.
“As a developer and a landlord, I derive great pride in building new housing units, because affordable high quality housing gives families a sense of dignity that is very meaningful, especially to those of us from working class backgrounds,” he said.
“That I’m able to do it in my childhood neighborhood has been a real blessing.”