The law widens the scope of rent control in numerous, complex and sometimes dramatic ways: It makes it harder to raise the rents on vacant apartments or take them out of the rent-control system, limits the power of landlords to occupy their own units (by displacing tenants), and nixes a provision that disqualified tenants if they made more than $200,000 annually.
But the boast about restoring “equity” is unearned, reflecting only part of the picture. Rapidly escalating rents from rising demand in New York City do indeed threaten thousands of people with immediate eviction, and rent control provides a quick and perhaps even necessary solution to that pressing problem. But the protection provided by rent control alone, unaccompanied by any increase in housing supply, does not deserve to be called fair. And because many cities are confronting the problem of unaffordable housing, it’s important to be clear about the limitations of New York’s actions.
Incumbent tenants, those lucky enough to have snagged a rent-stabilized unit, will certainly benefit from stronger rent control. The price will be paid, however, by city residents who lack a rent-stabilized unit as well as those seeking to migrate to New York City for its higher wages and better job opportunities. For these current and would-be tenants, rent control is one more burden imposed by what we might more broadly call the “incumbent economy.”
Think of the incumbent economy as any system in which people who already hold an entitlement get to keep it at the expense of newcomers. The entitlement might be a deed to land, a lease, a license, a tenured job or a taxi medallion. To be sure, the incumbent economy isn’t all bad: Because some of its beneficiaries are working-class people (say, low-income renters), the incumbent economy sometimes serves egalitarian goals — in some cases, and over the short term. But those protections come at a steep price: Protecting incumbents is deeply inegalitarian in the long run, because rent control discourages the creation of new rental housing that new migrants need if they are to enter the nation’s most economically productive regions.
Economists’ opposition to rent control is well known, but it’s also well founded. In 2012, when the University of Chicago’s Booth School of Business asked a panel of experts whether rent control had had a positive effect on the supply or quality of housing, 2 percent said yes.
A recent study by Stanford economists Rebecca Diamond, Tim McQuade and Franklin Qian is among several that confirm what economic theory predicts: Rent control encourages producers to move investments out of price-capped commodities — namely, rental housing — into owner-occupied housing such as condominiums. And that diminishes the total supply of rental housing and increases the rents of any units that are not controlled.
Diamond and her co-authors took advantage of a change in San Francisco law, in 1994, that imposed rent control on certain small buildings that had been exempt. Five to 10 years after rent control ended, beneficiaries of price controls moved out of their homes 20 percent less often than those who did not — suggesting rent control achieved some of its stated aims. But that trend was swamped by a broader one: Between 1990 to 1994 and the mid-2000s, landlords responded to rent control by reducing the number of renters by 15 percentage points — typically because they converted the buildings to condos. And those condos were often sold to high-income buyers. All in all, “it appears rent control has actually contributed to the gentrification of San Francisco,” the authors write. The policy helped one group, who lived in the city in 1994, and hurt those who arrived later.
It also simply prevented people from moving to San Francisco in the first place, just as we can expect that New York’s move will prevent people from moving to New York. This also exacerbates inequality. As the University of Chicago’s Peter Ganong and Harvard’s Daniel Shoag have showed, starting in 1990, there was a dramatic slowdown in income convergence between wealthy and poorer states. Ganong and Shoag attributed this to high housing costs in the more productive parts of the country.
People today can no longer migrate from poorer to richer regions to raise their wages, because economically successful regions such as Silicon Valley, San Francisco, New York and Boston in essence use zoning and other restrictive land-use rules to wall out migrants seeking higher wages. Large-lot requirements, single-family zones, height limits, historic preservation and other restrictions ensure the supply of new housing lags far behind the creation of new jobs in these cities.
Deleterious if used alone, rent control can still serve as one tool in a broader attack on the problem of expensive housing. Incumbent renters frequently oppose new market-rate housing out of a fear that new housing will bring in wealthy residents who bid up rents. But the research is clear that new market-rate housing reduces the cost of older housing stock. Politicians could buy support for new market-rate housing by making the expansion of rent control conditional on looser zoning.
Setting aside below-market rate units in new market-rate buildings is another way to allay gentrification fears. San Francisco-area leaders provided such a bargain with their “CASA compact” linking tenant protections to expansion of housing near mass transit. But whatever the specific mechanism, the critical move is to tie the benefits of insurance against rent hikes for incumbent tenants to increases in housing supply for newcomers.
New York did nothing of the sort, which is why proclamations of the dawning of a new era of “equity” are premature. The upshot may be that the state might just create a new privileged set of incumbent tenants to match the already privileged incumbent homeowners whose rising house values suck up an increasing share of the wealth created by New York City. That’s probably a slight improvement over the status quo, but, in the big picture, it’s just another brick in the wall of the incumbent economy.