The Unintended Consequences of Rent Regulation

Everyone knows New York City is extremely expensive and unequal. It is the most expensive city in North America according to the Economist Intelligence Unit. Though higher incomes partially compensate for the high cost of housing in New York, the city is still unaffordable for many by standard measures. Additionally, New York´s inequality is striking. Park Avenue houses several of today´s billionaires and it also touches what was the poorest congressional district in the country in 2010.

Using the standard measure a home is considered affordable if a household spends 30% or less of its income on rent or if the home costs less than three times the houshold´s annual income. By this definition, housing is unaffordable for over 50% of New York renters. Over 68% of households are renters in the city and of them 54% pay more than 30% of their income on housing. Additionally, according to the US Census the median home value in 2012 was $478,400 and the median household income $50,895 which means an index of 9.4, far away from 3. Something is amiss. The range of housing prices is also astonishing, some reaching over $100 million dollars. 

The city government is well aware of both the lack of affordability in housing and the inequality in incomes. The city rent-regulates over 1.2 million apartments in the city in an effort to maintain affordability and help those in most need. However, tackling affordability and inequality with rent-regulation can raise its own problems.

A key challenge to affordability is that the city does not let its supply of housing keep up with demand. The city is known for its complex and restrictive zoning and building processes, which are shown to add significant costs to developers. This essentially limits the supply of new housing, pushing prices up for all. Relaxing some regulations would allow developers to put more units on the market, mitigating or possibly reversing rent and price increases.

Another issue is that the city regulates most of its rental stock; 61% of all rental housing is price regulated, which leaves only 39% of units in market-rate prices. Because the supply of new housing is severely restricted and existing rental housing is highly regulated, the limited number of market-rate apartments end up absorbing most of the demand.

The number of households eligible for New York City Housing Authority subsidies exceeds 1.7 million, representing half of the city’s households. The system is most likely failing if half the city´s households are entitled to a subsidy. Additionally, there is a debate that those with rent-regulated apartments are not necessarily those in most need. Many have gamed the system. A rent-regulated apartment is such a coveted privilege that people sometimes bend the rules to obtain one.

Finally, New York’s housing policies limit residential mobility. Those in rent-regulated apartments are reluctant to give them up. The rent regulations give people an incentive to consume an inefficient amount of housing. Households in rent-regulated units overstay and use space inefficiently in comparison to households in market-rate apartments. Twenty three percent of people in rent-stabilized units have lived in the unit for 20 years or more compared to just 7% of households in market-rate units. Additionally, the mean household size in rent-controlled apartments is 1.70 people per unit versus 2.70 in market-rate units. People hang on to rent-regulated spaces, even when the units are no longer compatible with household size. Consider that more than 55,000 NYCHA family units are under-occupied, which means the number of bedrooms in these units exceeds the needs of the occupants.

By giving people a disincentive to move in response to changing life circumstances, New York’s rent-regulations effectively restrict residential mobility. To stay in rent-regulated units, families may stay in locations that put them at a substantial disadvantage in terms of access to jobs, schools, and public services. For example, there is evidence that rent-regulated households live in neighborhoods with lower-performing schools than market-rate renters or voucher renters.

Unfortunately, the city’s efforts to address affordability through rent-regulation have done little to mitigate rising prices and rents. Additionally, the impact that the current policy regime does have on affordability appears to come at a high cost of restricted residential mobility, which may be strengthening inequality. Re-establishing affordability will require the city to reduce restrictions on new housing construction city-wide. Re-establishing residential mobility will require the city to revisit its rent-regulation policies, perhaps shifting to mobile vouchers that give eligible households greater flexibility to adjust their housing situation in response to changing life circumstances.

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