“In many cases rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”
Last week (June 21), in its biannual circus, New York City housing regulators once again decided how much landlords will be able to raise rents. Despite inflation raging at a 40-year high of 8.6%, they decided on an increase of 3.25%. In real terms, this is a rent *reduction* of 5.35% (3.25% minus 8.6%), assuming the costs of maintaining the building rise in line with inflation.
This is a tragedy on multiple levels. Owners of New York rental property must face the challenge of operating a building as costs such as labor, supplies and taxes (yes, taxes are never capped) rise at a much faster rate than the rents the landlord can legally charge. We have gone down this path before. The last time inflation was this high was in the 1970s, when annual inflation averaged 7%. The costs of operating buildings rose much faster than legal rents, and the result was disastrous.
Take a look at these two photos. One of these is Warsaw in 1945, the most severely destroyed city in Europe from World War II. The other shows a neighborhood in the South Bronx of New York City in 1977. Which one is which? Read to the end for the answer.*
In a quote often repeated by Milton Friedman, Swedish economist Assar Lindbeck said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.” Judging from the photographic evidence, he is right.
The tragedy of rent control goes far beyond just the palpable destruction brought on by high inflation and lagging rent increases, although we may be headed there again.
A quiet tragedy plays out every day in the lives of everyone who suffers from the stunting of the New York housing market caused by rent control. There is the suffering of the landlords, who unjustly have their properties reduced in value and even destroyed economically, when their legal rents can no longer support maintenance of their buildings. This tragedy is exemplified in an anecdote I read years ago at one of the biannual rent increase hearings. At a raucous hearing where dozens of “pro-tenant” activists demanded rent freezes and rent rollbacks, the owner of a small building approached one of the czars who would determine his fate. He said, “You are killing me. I may have to abandon my building and, with it, the savings of my family that bought it to provide retirement income.” The rent regulator-czar turned to him and said, “Look around. For each of you [landlords] there are twenty of them [tenants].”
The hearing ended with a 2% permitted rent increase. The fate of that landlord and his building is not known, but the fate of thousands of similarly positioned landlords whose property was destroyed completely by rent control is known.
Raymond C. Niles is a Senior Fellow the American Institute for Economic Research. He holds a Ph.D. in Economics from George Mason University and an MBA in Finance & Economics from the Leonard N. Stern School of Business at New York University. Prior to embarking on his academic career, Niles worked for more than 15 years on Wall Street as a senior equity research analyst at Citigroup, Schroders, and Goldman Sachs, and as managing partner of a hedge fund investing in energy securities. Niles has published a book chapter and numerous articles in scholarly and popular publications.