Wednesday, May 04, 2005

The failure of rent "stabilization"

There was a big hubbub today in Manhattan, with lots of angry protestors, as the NYC Rent Guidelines Board approved extremely modest rent increases for rent-stabilized apartments. From what I saw briefly on the news, the permitted increase will be about 4%. That's $20 to $50 a month, depending on the apartment. Naturally, all those who live in rent-stabilized apartments are protesting these hikes, when the reality is that their landlords keep losing money because of rent stabilization (which is nothing less than suppression of the free market). Mayor Bloomberg's property tax hikes don't help, either, but that's another story.

A recent New York Times article claimed that "Costs for landlords of rent-stabilized apartments increased at a slower rate than during the previous two years." It's a typical trick of the Times: make only relative comparisons, and omit absolute values that would disprove their bleeding-heart nonsense. What that article didn't mention is that utilities and other expenses still increased significantly, just not quite as fast as in the last two years. The Rent Guidelines Board's own statistics are:
The Price Index of Operating Costs for Rent Stabilized Apartment Buildings (PIOC) increased 5.8% this year.

Costs in pre-war buildings increased 6.8% and costs in post-war buildings rose 4.7%.

The "core" PIOC, which excludes the erratic changes in fuel oil prices, natural gas, and electricity costs, is useful for analyzing inflationary trends. The core rose by 3.7% this year.

Fuel oil costs increased 20.0%.

Real estate taxes rose 1.2%, due to the rise in assessments and the decrease in the tax rate for Class Two properties.

Labor Costs rose 3.5%.

The Utilities component increased by 8.4% due primarily to increases in electricity and gas costs.

Insurance Costs grew by 8.9%.

The Price Index of Operating Costs for Rent Stabilized Apartment Buildings is projected to increase 6.7% next year.
Today the Rent Guidelines Board released their preliminary findings about landlords' operating income versus expenses in 2002-2003 (these are the most recent data available):
Rental income increased by 3.5%.

Total income rose by 6.2%.

Operating costs increased by 12.6%.

Net operating income (NOI) declined by 4.5%.
Read those last two very carefully: operating costs increased more than double what landlords are pulling in. How do these tenants, complaining about modest rent hikes for extremely valuable real estate, expect their landlords to stay in business? Running an apartment building isn't a charity. Do you think the local grocer, the ticket clerk at the subway or anyone else will give the landlords price breaks, because after all they're helping to house lower-income people? Of course not.

And when the landlords have to pay their property taxes, the city won't say, "Oh, you house a lot of people, don't worry if you can't pay the whole thing." Fat chance of that, even when it's the city forcing landlords to act almost like a charity!

Meanwhile, rent at non-stabilized apartments is naturally going through the roof. It's not even the rich who are causing it. There are a lot of middle-class people who obviously can't quality for rent-stabilization, and fighting each other for non-stabilized apartments has sparked a real estate bidding war like few have ever seen. What happens to the losers? For the last several years, it's been pushing Manhattanites to Westchester County, where I live. That in turn has driven up Westchester real estate values and rent, which has pushed Westchester residents up to Putnam County. Well, that drove up Putnam real estate prices too, and some Putnam residents are moving north to Dutchess County. And to what end? So low-income people can continue to live in undervalued Manhattan real estate, while their landlords wonder what the hell they're doing because their profit margins decrease year after year? While a very few benefit while a great many lose out?

For further reading about big government's benevolence, I highly recommend "Economics in One Lesson" by Henry Hazlitt, recently made available online by the Foundation for Economic Education. "Government Price-Fixing" is an excellent chapter (well, they all are), and though it doesn't specifically discuss real estate, it's still the same principle that government price controls create artificial scarcity. Those at the bottom will benefit, but those just above them will get squeezed, and society as a whole will have a smaller economy than before.

5 Comments:

Blogger Nicolaj said...

In NYC, don't dare utter any thoughts hinting that you don't think rent control works. You'll be immediately confronted with rabid (but vapid) status-quo protectionists... in other words, left wing crazies. The whole point that regulation and price controls make housing supply more scarce is completely lost on the average New Yorker. They just don't get it.

Wednesday, May 04, 2005 8:41:00 PM  
Blogger NicFitKid said...

Yeah, we need to just kick all those low-income folks off the island. Hell, let's kick 'em out of all the boroughs, too, so they can commute to their low end wageslave jobs from some mobile home park upstate. Free market uber alles!

"Efficiency and progress is ours once more
Now that we have the Neutron bomb
It's nice and quick and clean and gets things done
Away with excess enemy
But no less value to property
No sense in war but perfect sense at home:

The sun beams down on a brand new day
No more welfare tax to pay
Unsightly slums gone up in flashing light
Jobless millions whisked away
At last we have more room to play
All systems go to kill the poor tonight"
--DK

Friday, May 06, 2005 3:06:00 AM  
Blogger Perry Eidelbus said...

courier, the very purpose of the price system is to allocate scarce resources to those who value them most. If you value something more than another person, in the absence of price controls, that means you must be willing to pay more for it than the other person.

Manhattan real estate is among the most valuable in the world. Why not put it to good use? What happens is that a family on public assistance or with low-end jobs get to live in the city, paying, say, $900 for an apartment worth $1500 a month. That means a businessman who wanted that $1500 a month apartment can't have it. And with the resulting shortage of non-controlled apartments, he either spends $2000 or so for a comparable apartment, or he lives outside Manhattan (outer boroughs, Westchester, or New Jersey). That means he either spends more of his money on the same resource, or he spends a lot of his more valuable time in commuting. Yes, his time is more valuable than the low-income people. It's by definition, simply because he earns more.

You can find low-end jobs just about anywhere. On the other hand, you won't find a lot of high-level jobs in investment banking, real estate, insurance and advertising that are based in, for example, Mount Vernon or Yonkers. White Plains has a lot of big firms, but the very best jobs with the very best opportunity are in Manhattan.

You're quite incorrect to believe that lower-income people have to commute into the city for their low-end jobs. To quote Curtis Sliwa, you couldn't be more hopelessly wrong. They can leave the city and find comparable jobs just about anywhere else.

Meanwhile, the businessman gets to live in the city at the fair market price. If he had been paying high rent, he now saves money. If he no longer has to commute from outside Manhattan, he saves a lot of his valuable time. (He can even work longer hours and produce more economic output than before.) Either way, he's now considerably wealthier than before. That increase to society's wealth far exceeds anything the low-income people would lose. Now that's a fair system.

Friday, May 06, 2005 8:54:00 PM  
Blogger NicFitKid said...

Okay, you answered my off the cuff frivolity with seriousness, so I'll put in my next two cents without any more Dead Kennedys' verses.

First of all, everybody needs housing. It's not a question of "valuing" it more than the next person, its just a cost of modern living, since there's not a lot of nomadic options these days. We're not talking about price controls on non-essential merchandise here.

As far as commuting to low-end jobs, the people move to big cities to look for work. I mean, I'm sure housing in Wyoming is cheap, but if you sent that state all of Manhattan's residents who make less than twenty grand a year, I don't think there's enough of an economy out there to absorb them all. People follow jobs, and if you price out all the janitors, waiters, bellhops, and short-order cooks from the housing market, I don't think Manhattan would end up dirty, without luggage service, and standing in a buffet line in dire need of a grilled cheese sandwich. These workers would just have to drive in from elsewhere.

Of course, any indivdual can say "Screw it, I'm going somewhere else to find work," pick up their bags and leave. But pricing out entire communities from a local housing market has nothing to do with choice and everything to do with good old fashioned gentrification. For example, here in Miami, there's a huge condo construction boom going on downtown, with the result that many folks in Section 8 housing are being pushed out in a very direct way as older buildings are demolished and rents rise. And in our case, we don't have a flood of investment bankers moving into these expensive digs, but instead a flood of pre-construction speculators who will probably all end up trying to flip their units as soon as possible.

As for your hypothetical businessman with the "valuable time," increasing his wealth doesn't guarantee "an increase in society's wealth". In fact, he may just sock away most of that in an IRA or some other financial instrument; no goods purchased, no profits increased, and hence no reason for a company to go out and hire more workers. Companies hire labor to produce the goods and services that meet consumer demand. Redirecting more wealth to already wealthy people just increases their personal worth, but they have the least reason to spend it all. This is why the Bush tax cuts have nothing to do with economic stimulus. You really want to increase consumer spending and ramp up the economy? Rebalance the majority of that tax cut towards the middle classes and lower (poor schumcks like me who live paycheck to paycheck), and the money will transfer into spending so fast your head will spin. Believe me, there's always extra bills to pay and crap to buy.

Oh, and by the way, nice blog. I disagree with about 99% of it, but nice blog all the same.

Sunday, May 08, 2005 2:58:00 AM  
Blogger Perry Eidelbus said...

First of all, everybody needs housing. It's not a question of "valuing" it more than the next person, its just a cost of modern living, since there's not a lot of nomadic options these days. We're not talking about price controls on non-essential merchandise here.

To start, I never denied that everyone needs housing. But there's no difference between it and "non-essential" goods and services. You're going to benefit a few people, but at the expense of the many. Because the benefits are exceeded by the costs, society overall loses money.

As far as commuting to low-end jobs, the people move to big cities to look for work. I mean, I'm sure housing in Wyoming is cheap, but if you sent that state all of Manhattan's residents who make less than twenty grand a year, I don't think there's enough of an economy out there to absorb them all.

Who said anything about Wyoming? There's a lot of population base out in the Bronx, Hoboken, Mount Vernon, even up in Putnam County. Up until several decades ago, it was true that you had to move to the city for work, unless you were a farmer or ran a business that farmers patronized. That's completely changed. Cars and a highway system facilitated it but were not an underlying change. The single reason is that cities got too crowded, and better transportation allowed people to live outside the big population loci. As they moved out of the big metro areas, they found jobs making goods and performing services for each other, or producing goods that could be "exported."

People follow jobs, and if you price out all the janitors, waiters, bellhops, and short-order cooks from the housing market, I don't think Manhattan would end up dirty, without luggage service, and standing in a buffet line in dire need of a grilled cheese sandwich. These workers would just have to drive in from elsewhere.

You don't seem very familiar with NYC, so I'll tell you that they'd take the subway in. Hardly anyone, and especially not lower-income people, will drive in Manhattan. They'll take the subway from their apartments in the outer boroughs, or the less-nice areas of Manhattan like Washington Heights.

If they have to live too far, it won't be worth it for them to commute. So wages for those occupations will rise until they make commuting worthwhile. Those with higher incomes will find the increased prices worth it, because it's more than offset by housing that's no longer artificially expensive.

When it comes to commuting time, face it: people's time becomes worth more as their incomes increase. Society's wealth is maximized by giving them extra time for their economic output, versus the time that lower-income people put in.

Of course, any indivdual can say "Screw it, I'm going somewhere else to find work," pick up their bags and leave. But pricing out entire communities from a local housing market has nothing to do with choice and everything to do with good old fashioned gentrification.

It's a matter of what the real estate is worth. What about Cherry Hill, or Aspen, or Beverly Hills? Don't lower-income people work there? How do they get there?

For example, here in Miami, there's a huge condo construction boom going on downtown, with the result that many folks in Section 8 housing are being pushed out in a very direct way as older buildings are demolished and rents rise. And in our case, we don't have a flood of investment bankers moving into these expensive digs, but instead a flood of pre-construction speculators who will probably all end up trying to flip their units as soon as possible.

And what's wrong with that? The speculators are showing that the land is undervalued -- or are they? If they ask too much when reselling, they'll be wasting money.

Once again, the very function of the price system is to allocate scarce resources to those who value it most. If the lower-income residents have to move somewhere cheaper, that's really too bad, but the real estate is simply worth more.

You should read the March Urban Affairs Review. Lance Freeman of Columbia reported that gentrification doesn't drive as many people out of "their" neighborhoods as is commonly thought. This was his national study; last year he published his NYC study. His NYC study showed that people of gentrifying neighborhoods move less than residents of other neighborhoods. Why aren't residents moving out as much as expected? Why are they staying despite higher rents? For the simple fact that the higher rents are worth having cleaner neighborhoods with less drugs and less crime.

As for your hypothetical businessman with the "valuable time," increasing his wealth doesn't guarantee "an increase in society's wealth". In fact, he may just sock away most of that in an IRA or some other financial instrument; no goods purchased, no profits increased, and hence no reason for a company to go out and hire more workers. Companies hire labor to produce the goods and services that meet consumer demand. Redirecting more wealth to already wealthy people just increases their personal worth, but they have the least reason to spend it all.

Don't take it personally, but you're completely wrong here. The increased wealth comes because the businessman saves time, allowing him to do more work -- allowing him to contribute more to the economy. Or, he spends less on his housing. Either is greater than any loss to a lower-income person who now has to live in a cheaper (actual value) neighborhood and travel a longer distance. Therefore, total wealth increases.

The second way you're wrong is in the nature of savings. What is the purpose of saved money? When you put it in a bank, it's not tucked away in a vault. When you buy stocks or bonds, the money likewise isn't effectively stuffed under a mattress.

When you put money in a savings or money market account, that's money a business can borrow. When you buy its corporate bonds, you're lending it money. When you buy its new shares of stock, your part ownership supplies the company with business capital. And what will it use this money for? With rare exceptions, it's simply to expand business. Expanded business means hiring more people, i.e. more jobs.

Savings actually boost an economy more than consumer spending, but the tradeoff is that we don't have as many things in the present. The nice thing about Bush's tax cuts is that you could have used them any way you wanted. Moreover, $500 to a lower-income family means a lot more than $5000 to an upper-income family.

This is why the Bush tax cuts have nothing to do with economic stimulus. You really want to increase consumer spending and ramp up the economy? Rebalance the majority of that tax cut towards the middle classes and lower (poor schumcks like me who live paycheck to paycheck), and the money will transfer into spending so fast your head will spin. Believe me, there's always extra bills to pay and crap to buy.

The Bush tax cuts were a stroke of luck. They helped maintain consumer spending, which kept the 2001 recession extremely mild. The tax cuts encouraged businesses to reinvest, which has kept our economy humming along so well (though the liberal MSM won't admit this). Or are you another sucker for Paul Krugman's lie that Clinton's 1993 tax cuts ushered in the economic boom?

You need to read this post, where I explain why "trickle down" IS reality. When you borrow money to buy a house or car, where do you think it came from? When GM sells $1 billion worth of corporate bonds, which is then uses to shore up its pension plan, who are the main investors?

You really shouldn't envy the rich. They're rich for a reason, because they're the ones producing the most economic output. They're the ones really driving the economy, and sooner or later, even if they save most of their income, it still circulates through the economy.

Sunday, May 08, 2005 5:32:00 AM  

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