An economist explains how restrictions can be warranted in a city like New York.
In late June, Mayor Mamdani delivered on one of his central campaign promises, as the Rent Guidelines Board voted to freeze rents on nearly one million rent stabilized apartments. The freeze, applying to both 1- and 2-year leases, undoubtedly pleased most rent-regulated tenants by providing them a modicum of relief from cost-of-living pressures. Nevertheless, as an economist with a long involvement in affordable housing, I believe the mayor’s freeze is misguided housing policy that may undermine the stability of older rental housing.
Does this mean I’m foursquare against all rent regulations as unacceptable distortions of the housing market, a position thought to be the norm in my discipline? No; to the contrary, rent regulations can make a lot of sense, especially in a city like New York. I’m opposed to Mamdani’s rent freeze precisely because of the risk it presents to the larger rent regulation system — not because it’s a normal application of that regulatory tool.
I’ve long been one of the few economists who defended the appropriateness of well-designed rent regulation laws in New York and other “superstar” cities that are subject to rapid increases in market rents in gentrifying neighborhoods. In most stable cities and suburbs, I believe rent regulations are superfluous, if not actually harmful, but in a handful of the largest cities — New York, San Francisco, Los Angeles, Seattle, maybe Boston — the benefits of “second generation” rent regulations outweigh the costs.
By “second generation,” I mean regulatory regimes that allow for annual increases in rent that are consistent with the general rate of inflation (or possibly somewhat more), or are tied to some measure of landlord operating costs (as in New York City). Such regimes usually also exempt newly constructed housing, provide incentives for capital improvements to regulated properties and/or apartments and allow for readjustment of an apartment’s rent to prevailing market levels upon vacancy. Such systems address some of the biggest economic objections to rent regulation while maintaining their principal benefit: providing security of tenure to existing renters.
But having a subset of units with restricted annual rent increases has value in a place like New York because it mitigates bargaining power that is inherently unequal. Put differently, when an apartment is vacant and a potential tenant views it, there is relatively equal bargaining power between the prospective tenant and the landlord. If the tenant thinks the asking rent is too high, they can easily look elsewhere, and there is little additional cost in doing so. However, once a tenant signs a lease and moves in, the tenant-landlord bargaining dynamic changes.
Households typically organize their lives around the location of their residence. They may choose a job depending on the ease of commuting to their home. They may place their kids in a particular school depending on its proximity to their residence. They may join a religious congregation based on its proximity. They may choose to buy a car depending on the ease of parking at that location. They and their children may forge friendships with neighbors or schoolmates.
When the lease comes up for renewal, the relative bargaining power of the tenant and landlord has changed. If the lease is not renewed, the tenant now faces tangible moving costs and, more importantly, may face significant “disruption” costs. It’s now an asymmetric bargaining situation favoring the landlord, and both parties understand that the negotiating leverage has shifted away from the tenant. The landlord could exploit that bargaining asymmetry by hiking the renewal asking rent beyond what the tenant would be willing to pay if they were a new prospective tenant with the option of costlessly looking elsewhere.
In a city like New York, there often aren’t suitable available rental units in the immediate vicinity of the tenant’s current apartment. Even a move of one mile could cause significant disruption effects in terms of commuting to work, access to schools, friendships, and more.
In stable real estate markets, tenants also have some leverage when negotiating lease renewals. Landlords will typically want to minimize revenue losses due to vacancies, and if the tenant has reliably paid their monthly rent, the landlord also faces risk in finding an equally stable replacement tenant. Consequently, it is not uncommon for building owners to give reliable existing tenants rental discounts upon renewal.
In gentrifying neighborhoods where market rents are increasing rapidly, that logic could be turned on its head. Frequent tenant turnover may actually become a revenue-maximizing strategy for a landlord. The frequency of landlords asking for traumatic rent increases for lease renewals would consequently be increased, as would their magnitude.
Gentrification, defined as middle- and upper-middle income people (of whatever race) moving into an urban neighborhood in large enough numbers to change its demographic composition, is a sensitive topic in urban politics. It offers many positives for big cities. It strengthens a city’s economy and fiscal balance, and it may help to desegregate neighborhoods and deconcentrate poverty. It can improve the lives of existing neighborhood residents by stimulating retail services and local job creation, improving schools, enhancing street safety, improving the aesthetics of the built environment and building wealth among minority homeowners. Nevertheless, it is often fiercely opposed by communities, primarily because they fear that rising market rents will force existing residents out of their neighborhood.
Rent regulations that allow landlords reasonable renewal rent increases while also preventing them from imposing financially traumatic rent increases on existing tenants are thus justified from a policy viewpoint. The policy goal should be to smooth the adjustment of neighborhood rents to new levels of market demand while protecting existing tenants from large, sudden rent increases that serve as de facto eviction notices. Regulations shouldn’t attempt to regulate the rents of vacant apartments since there is no incumbent tenant to protect. In other words, rent regulation shouldn’t be used to regulate the price of apartments, it should be used to regulate tenant-landlord relationships.
Critics of rent regulation often argue from ideological or theoretical priors and exaggerate the negative effects found by economists who have studied second-generation regulations empirically. For example, while rent regulations may moderately affect the supply of rental housing as landlords convert rentals to condominiums, there is little evidence that rent regulation reduces the market supply of housing overall. Similarly, critics of regulation take it almost as an article of faith that they inflate rents in the uncontrolled sector, but evidence of that is ambiguous. According to Dirk Early and Jon Phelps, who studied that issue explicitly, their “results suggest a positive and statistically significant relationship between the introduction of rent control and price in the uncontrolled sector. However, the link between controls and prices declines through time and may completely disappear after 20 to 30 years with no new construction subject to controls.”
My purpose is not to dismiss all purported negative effects of rent regulation, for there surely are some. Rather, I suggest that the negative effects of rent regulations must be balanced against their effectiveness in achieving what should be seen as their primary purpose — minimizing the economic displacement of existing tenants, particularly in gentrifying neighborhoods. Lance Freeman and I found that Rent Stabilization in New York City substantially reduces the odds that households headed by a tenant without a college degree (a proxy for being working class) will move from their dwelling unit in a gentrifying neighborhood during any given time period.
In one of the most influential recent studies of rent regulation, Rebecca Diamond, Tim McQuade and Franklin Qian found:
“On average, in the medium to long term the beneficiaries of rent control are between 10 and 20 percent more likely to remain at their 1994 address relative to the control group and, moreover, are more likely to remain in San Francisco. Further, we find the effects of rent control on tenants are stronger for racial minorities, suggesting rent control helped prevent minority displacement from San Francisco.”
When I was executive director of the Citizens Housing and Planning Council of New York (1994-2006), we advocated for a “decontrol-recontrol” Rent Stabilization system, similar to that used in San Francisco. Under such a regulatory system, an apartment is rent stabilized when a tenant moves in, but allowed to rent at market value if the tenant vacates. Once a new tenant moves in, the apartment is re-controlled.
Critics argue that a decontrol-recontrol system increases the incentives for landlords to harass tenants out of units if market rents are rising rapidly. That is true, but there are laws against tenant harassment and those laws should be taken seriously and enforced.
In the late 1990s, state legislation moved New York City towards a decontrol-recontrol system. Landlords were allowed to increase rents for vacant apartments by up to 20%. However, revisions to the State law in 2019 moved the City back towards a rigid rent regulation system, ending the vacancy allowances, eliminating provisions that permitted some units to be decontrolled and curtailing owners’ ability to recapture the cost of capital improvements through rent increases.
It is ironic that many of those who purport to care the most about affordable housing championed these deleterious laws. The effect of those changes has been adverse for rent-stabilized rental housing in New York City, especially older buildings in marginal market areas. The deterioration in the financial condition of stabilized housing has been documented extensively.
This brings us back to Mamdani’s rent freeze. In light of the tightening of the regulatory system in recent years and the deterioration in the financial condition of stabilized housing, I believe it is both counterproductive to affordable housing and represents a further, dangerous politicization of the regulatory system.
The freeze will accelerate the deterioration in the financial and maintenance condition of older rent-regulated housing. Regardless of its form of ownership, housing needs adequate cash flow to cover its operating expenses and to provide for periodic capital improvements. The freeze, combined with the 2019 changes to the stabilization law and rising operating costs, will squeeze the operating margins of older buildings (which have a disproportionate share of stabilized units) and inevitably result in deteriorating living conditions for tenants.
To say this is not to say that rent-regulation itself is inherently unworkable. For more than 40 years, New York’s Rent Stabilization system worked fairly well. Neither owners nor tenants were ever completely happy with the Rent Guidelines Board’s decisions, but the general public largely treated it as the technocratic arbitrator it was established to be. Tenants-in-place were protected while the City and its real estate sector prospered. The City’s housing abandonment plague of the 1960s and 1970s abated and living conditions for most tenants improved.
The injection of Rent Guidelines Board decisions into mayoral politics began with Bill de Blasio, who also campaigned on a rent freeze and pressured the RGB to deliver three. De Blasio, however, at least did so with the justification that overall inflation was very low and so rent increases weren’t justified. Mamdani dangerously furthered the politicization of the RGB by centering a four-year rent freeze in his campaign despite the RGB’s own research showing that building operating costs are increasing rapidly. It’s now unlikely that we can go back to an environment in which the RGB is seen as an independent panel trying its best to balance landlord and tenant interests. We’re hurtling either towards a successful legal challenge that rocks the existing regulatory system, or to a low-rent housing crisis that does the same.
