Little Hope For Fixing New York's Housing Situation Any Time Soon

January 23, 2024 Francis Menton @ Manhattan Contrarian 

Read any few articles of your choosing on the status of New York’s residential housing market, and you will quickly learn that it is in “crisis.” The vacancy rate is minuscule, the prices are astronomical, many apartments are small and/or in poor condition, and everyone with any kind of normal job is completely priced out.

The funny thing is that the “crisis” has existed ever since the onset of the post-World War II economic boom in the late 1940s, or in other words for some 75+ years. While other states and cities have let the markets sort out matters of housing supply and demand, our politicians have promised to use the magic of government edicts to deliver better solutions. The “solutions” they have implemented are all one form or another of government central planning — price controls, subsidies, and mandates. A slight and gradual loosening of these restriction occurred during the several decades from the 80s to the 00s; but the last few years have seen a newly emboldened progressive-controlled state legislature re-imposing and tightening every restriction they can think of.

So how is it working out? The answer is, about the same as central planning always works out. Any comparisons to my favorite topic of energy policy are completely intended.

Here is a compilation on a New York City website of some of the tightened rent regulations enacted by the state legislature effective in 2019: no more de-control of regulated rents, or permitted rent increases, on apartment vacancy; near complete elimination of rent increases allowed after major capital improvements; and so forth. That’ll show those greedy landlords!

An immediate effect of the tightening of these regulations has been that many landlords figure they cannot profitably rent apartments that become vacant, so they just hold them off the market. How many apartments have gone into that status? 

That’s a subject on which it is near impossible to get good data. A 2023 Report from the City’s Independent Budget Office estimated the number at 13,000, which would be about 1.5% of the City’s stock of rent-regulated apartments; but a 2022 estimate from the City’s Department of Housing Preservation and Development put the figure at more like 89,000, or almost 10% of the regulated housing stock. Which is closer to right? It’s anybody’s guess. And you can’t expect the landlords to be forthcoming about this, because as soon as they admit they are doing it there will be some sort of crackdown. (The logical reason a landlord would do this is that if he can induce a vacancy of an adjacent unit, he can combine the two and take the position that the new enlarged unit is not subject to regulation.). 

Whatever the reason, and whatever the number of apartments involved, it is clear that a principal result of the tightening of rent regulations has been to remove some large number of apartments from the market, and to increase rents for remaining available units.

And thus we have an artificially-suppressed apartment vacancy rate. A mid-2023 piece in the Commercial Observer puts the New York City residential vacancy rate at 3.1%. That compares, for example, to a vacancy rate of 8.7% in Atlanta, 9.9% in Houston (“New supply additions have exceeded demand every quarter since Q4 2021; vacancies could continue to expand if demand remains subdued. Houston’s consistent ranking among the leading metros for employment and population growth has continued to attract apartment developers.”), and 8.0% in Phoenix. It’s amazing what a mostly-unregulated rental housing market can accomplish.

And it’s not just rent regulation. Other roadblocks to housing construction range from restrictive zoning to a complex building code to a “warranty of habitability” making landlords responsible for all apartment repairs. Or how about landmarking? That one seems reasonable in moderation, but of course we have carried it to extremes.

To see how landmarking can hinder efforts to expand the supply of housing in New York, consider a piece from Crain’s New York Business dated January 15, 2024, headline “Upper West Side church gives up, for now, on controversial demolition plan.” (Behind paywall — sorry, but it is getting harder and harder to find things that are not.). The church in question is West Park Presbyterian, on Manhattan’s Upper West Side at 86th Street and Amsterdam Avenue. According to Crain’s, the congregation of the church has dwindled to all of 12 members. They have been given a price tag to repair the church of some $50 million. Here is a picture from Google Maps:

A developer has offered the church $33 million to buy the property and construct condos. The proposed building would then contain space for the congregation, such as it is, to hold services. But unfortunately, the building is landmarked, so politicians have the power to hold up any change. The congregation made an application to the Landmarks Commission for permission to demolish the building as a matter of “hardship.” Of course, the local politicians oppose that. It seems that, at least for now, under political pressure, the West Park congregation has paused its demolition plan. From Crain’s:

[P]reservation-minded neighbors opposed to the plan have enlisted celebrities like Mark Ruffalo and elected officials including City Council member Gale Brewer to pressure the city against [the plan]. . . . {Brewer] said in an interview that she is “absolutely thrilled” that West Park is pausing its demolition plan, since the new building would have contained high-end condominiums rather than affordable housing. “We need affordable housing on the Upper West Side. We don’t need condos,” Brewer said.

Brewer advocates what the Manhattan Contrarian has repeatedly described as the worst possible public policy: subsidizing a handful of lucky people to the tune of approximately $50,000 - $100,000 per year per family to live in one of the most expensive neighborhoods in the country. Since nobody is going to put up the $50 million to preserve the church, likely the current standoff will persist until a coerced “agreement” is reached to add some small number of “affordable” (i.e., subsidized) apartments to the proposed new building; and the project will then proceed. But the government can never conceivably come up with enough money in the form of subsidies or tax breaks to solve the overall housing shortage by forcing construction of “affordable” housing in the most expensive neighborhoods. And meanwhile the lucky families who get the subsidized units in the fancy buildings will not receive any of their hundred thousand dollar annual subsidy in cash, and will continue to consider themselves to be “low income.”

In an environment where the whole idea of just letting the market do its work is unthinkable, we then resort to new rounds of government tax breaks or subsidies to mitigate the bad effects of the last rounds of government restrictions. Eric Kober of the Manhattan Institute has a piece with some suggestions in the New York Post on January 20. Kober’s proposal number 1 is reinstatement of what we call the “421a” tax abatement. This is a scheme whereby developers who put up new residential buildings get reduced real estate taxes for several years, but also must commit to making a certain number of apartments “affordable,” and also to subjecting some or all of the new apartments to the rent regulation regime. Kober:

The city needs three specific pieces of legislation, of which the most important is the reinstatement of the Section 421a tax exemption for new apartment buildings that include a percentage of units at below-market rents.

This proposal only makes any sense in a world where we have completely given up on the sensible approach of freeing up the housing market from rent regulations and lowering taxes for all. But I can’t blame Kober for making the proposal in the current environment. With the legislature in thrall to ever more and tighter rent regulations, there is little hope for fixing New York’s overall housing situation any time soon.