In 2023, a bank collapsed after New York’s legislature tightened rent control, making it impossible for some cash-strapped landlords to repay their mortgages. Americans ended up footing the bill when the FDIC had to bail out the bank.
Now, New York City is making things even worse for landlords, making it impossible for some of them to maintain their buildings or make ends meet.
“The New York City Rent Guidelines Board approved Mayor Zohran Mamdani’s key campaign promise to “freeze the rent” on Thursday — in a move that landlord advocates slammed as “an absolute farce,” reports the New York Post:
The board passed a rent freeze on both one-year and two-year leases for the Big Apple’s roughly 1 million rent-stabilized units in a 7-1 vote. Arpit Gupta, an appointee of Mamdani’s immediate predecessor, Mayor Eric Adams, was the one no vote.
It came hours after the public resignation of one of the RGB’s nine members, Christina Smyth, who accused the panel of ignoring its own data during the lengthy process to decide whether to adjust rents — claiming the decision was made “last year on the campaign trail.”
The board “stopped being a fact-finding body” and was rebuilt “to deliver a rent freeze” no matter what, Smyth…wrote in her scathing resignation letter….Smyth was one of three members appointed by Adams. Mamdani appointed the other six members after taking office this year.
Even before this rent freeze, rents were already so far below market rates that some landlords were losing money renting them out, and thousands of apartments already sit empty due to lack of money to fix them. Brandon Fuller notes that 57,000 of the rent-stabilized units subject to this rent freeze already “sit empty. ~10% of these buildings already lose money every month. A freeze doesn’t make housing cheap. It makes it scarce, decrepit, and eventually the taxpayer’s problem. It’s the same” kind of draconian restrictions on rent that earlier “hollowed out Mumbai’s housing stock” by leaving some landlords in the world’s fourth largest city with too little money to maintain their housing units.
As a dissenting member of the New York rent board noted,
In 1971, the Swedish economist Assar Lindbeck offered a famous critique of rent control: “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”…
[Rent] freezes carry severe long-term costs. Mumbai, for instance, froze rents in 1947 as a temporary relief measure; the consequences are still visible today in dilapidated buildings so starved of maintenance that many have fallen down. New York City has experienced a version of this dynamic, too, in the form of the nickel subway fare. Held at 5 cents from 1904 to 1948, the fare slowly bankrupted the private transit companies that had built out the system, until they collapsed into public ownership and the system entered a long decline that took decades to reverse.
The lesson is that freezing the price of a service indefinitely while its costs continue to rise does not produce cheap or abundant service. Instead, it produces deteriorating assets and, eventually, public bailouts and takeovers…
The most careful study of modern rent control, published by Rebecca Diamond, Tim McQuade, and Franklin Qian in the American Economic Review, found that extending rent control in San Francisco reduced the supply of rental housing by 15 percent as owners converted units to condominiums or redeveloped them for other uses. Tenant mobility fell by 20 percent. The lost supply pushed up market rents across the city, offsetting the gains to protected tenants.
Jason Furman, who chaired President Obama’s Council of Economic Advisers, has put the professional consensus more bluntly: “Rent control has been about as disgraced as any economic policy in the tool kit.”
When landlords can’t pay their bills or mortgages due to rent freezes or policies limiting rent increases to less than inflation, other people suffer. Imposing rent control cuts landlords’ incomes and also reduces property values, leaving some apartment building owners unable to pay back their loans. That can lead to bank failures, and banks being bailed out at the expense of taxpayers or depositors at other banks.
As real estate broker Tom Hynes notes, Signature Bank loaned $11 billion “to developers to rehab apartments. In 2019,” New York State changed its “rent control law, killing value. In 2023, depositors panic. New York killed Signature.” As a result, the public was on the hook for billions of dollars in bailout costs.
Due to rent control, when there was a run on the bank, and the FDIC had to take it over, “the FDIC couldn’t find a buyer willing to buy a full share of Signature Bank’s $11 billion portfolio of NYC rent-stabilized apartment loans,” notes real estate economist Jay Parsons. Instead, the FDIC “plans to retain a 95% stake in the rent-regulated pools,” reported the Wall Street Journal. “New York state legislation enacted in 2019 made it much tougher for multifamily owners to raise rents, a development that has greatly reduced the worth of these buildings.”
When federal bank regulators bail out a big bank, they have to either raise their assessment on other banks — which reduces the interest rate those banks can afford to pay depositors — or get an infusion of cash from taxpayers, as happened in the 1980s and 1990s when taxpayers bailed out the Federal Savings and Loan Insurance Corporation at a cost of at least $124 billion. So one way or another, the public ends up paying for failed banks, either as bank customers, or as taxpayers.
Once limited to places like New York City, rent control is now spreading to more areas, reducing property values and the quantity of housing available. In July 2023, Maryland’s most populous county, Montgomery County, imposed rent control. As a result, some housing projects stopped as a result. Montgomery Perspective reported that a “Montgomery County-based developer has written the county executive and the county council with news: their company is stopping a county project because of the pending passage of rent control. And they are not alone as at least six other developers are stopping further projects here and shifting resources to other areas including Northern Virginia.”
Rent control harms housing quality, noted The Washington Post years ago. That’s partly because “landlords have less incentive to maintain their properties in a rent-controlled environment.”
Rent control reduces the value of housing stock, shrinking the property tax revenue that funds schools and local governments. “Researchers at the University of Southern California said rent control hurt property values in St. Paul, Minn. by $1.6 billion,” reported Market Watch.
As even the progressive Nobel Prize-winning economist Paul Krugman noted in the New York Times, economists overwhelmingly oppose rent control: “In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ‘a ceiling on rents reduces the quality and quantity of housing.’ Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go — and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended.”
After New York limited rent increases to pay for major capital improvements to 2 percent, landlords cut back on such improvements. A survey of rent-stabilized landlords found that when rent increases were curbed,
Three out of four reported cutting back on essential building-wide repairs, such as a roof or boiler replacement, since the rent law passed. Nearly 90 percent said they had forgone kitchen or bathroom renovations. Just over half decided against revamping their buildings’ security systems to include cameras or video intercoms or adding storage lockers for deliveries to thwart porch pirates. Efficiency upgrades have also been pushed to the back burner. Over 40 percent of respondents said they would not replace lighting with LED fixtures that use 90 percent less energy — a budget saver for tenants. A quarter said they opted against installing fuel computers, which better regulate heat and hot water systems and reduce a building’s energy consumption.
It seems unfair to limit rent increases to less than inflation, when tenants’ pay and pension benefits tend to rise along with inflation. Average wages have risen faster than inflation since 2014, going from $24.48 per hour in July 2014, to $37.53 now. That’s an increase of 53%, compared to inflation of about 40% since then. Even most tenants who are retired can pay more in response to inflation, because retirees get annual increases in their social security payments based on cost-of-living adjustments.
