It’s the Economy: The Perverse Effects of Rent Regulation

The East Village and the broader Lower East Side make up one of the most economically integrated parts of the city. It is one of the last places where the fairly rich and the very poor live on the same blocks and shop in the same bodegas. But the area is steadily becoming more like most of Manhattan: dominated by those with high incomes paying seemingly absurd rents, while the poor either leave or stay in government housing on the periphery. While older affordable housing is reaching the end of its life cycle, new affordable housing’s major source of public funding — Congress — is planning comprehensive tax-and-spending reform. This could pose an existential threat to New York’s regulatory efforts to keep Manhattan affordable for the poor.

So what would happen if Manhattan were completely free of rent regulations and other forms of housing subsidies? According to several housing analysts, it would quickly become an island occupied solely by middle class and rich people. Christopher Mayer, a housing economist at Columbia Business School, imagines tens of thousands of professionals, currently scared away by insane rents, moving in from Brooklyn, Queens and Hoboken — even Philadelphia and Chicago. “Poor people would be priced out of Manhattan,” he says. “Period.” But an East Village where nobody makes less than $90,000 a year might actually damage the city’s long-term prospects.

Manhattan has had an outsize impact on the world’s culture and economy in large part because of its economic diversity. Home to broke writers and wealthy publishers, starving painters and well-heeled collectors, unproven fashion newcomers and the established houses, and countless other symbiotic pairings, Manhattan has been a place where unlikely ideas can build an audience and, sometimes, dominate the mainstream. For 200 years, the East Village has served as an initial toehold into this chaotic mess. But rent regulation may not be helping keep it diverse.

Rent control first appeared in the 1940s, when soldiers returned to the city seeking apartments for their new families, causing rents to rise drastically. Since then, countless housing programs have been created at local, state and federal levels, but the biggest housing intervention in New York today is rent stabilization: a slightly more flexible version of rent control, in which a city board of experts annually determines how much more landlords can charge their tenants.

The problem, though, is that these programs actually make the city much less affordable for those unlucky enough not to live in a rent-regulated apartment, Mayer says. The absurdity of New York City’s housing market has become a standard part of many Econ 101 courses, because it is such a clear example of public policy that achieves the near opposite of its goals. There are, effectively, two rental markets in Manhattan. Roughly half the apartments are under rent regulation, public housing or some other government program. That leaves everyone else to compete for the half with rents determined by the market. Mayer points out that most housing programs tie government support to an apartment unit, not a person. “That is completely nuts,” he says. It creates enormous incentive for people to stay in apartments that no longer fit their needs, because they have had kids or their kids have left or their job has moved farther away. This inertia is a key factor in New York’s housing shortage. One East Village real estate agent told me that only 20 to 30 units are available in the entire area any given month.

Article source: http://www.nytimes.com/2013/07/28/magazine/the-perverse-effects-of-rent-regulation.html?partner=rss&emc=rss