Rent Control
Tel Aviv’s housing protest grows, and Saturday night tens of thousands of protesters descended on HaBima Square, demanding rent control. Although I have yet to see media heavyweights on the left echo those demands – instead, they view it in abstract terms of people power versus the state – they are clearly too important to ignore right now. There is already a response from the right and from (classical) liberals saying that it’s government’s fault and that the correct solution is deregulation of new construction.
However, since government intervention is ubiquitous in expensive cities, including several famous ones I have lived in, I’d like to talk about case studies of world cities. In most of the last ten and a half years, I lived in Singapore and New York. Both have extensive government regulation, despite the capitalist orientation of Singapore. However, this government involvement takes different forms, though some of consequences are similar.
In New York, there’s rent control, precisely what the Tel Aviv protesters are demanding. More precisely, there are two forms of rent regulation: rent control, and rent stabilization. Rent control is far stronger, requires the tenant to have continuously occupied the apartment since 1971, and only applies to 2% of rental units, mostly in Manhattan. Rent stabilization allows higher rents and merely limits the increase in rent every year to a few percent, and is far more common, applying to about half of rental units. Both figures come from the most recent housing survey, in 2008. There are also public housing programs, some for the poor and some for the middle class. In addition, the Inclusionary Housing Program encourages developers to set aside 20% of the units as affordable housing, by offering them a bonus in floor area ratio.
In Singapore, the main form of government involvement takes the form of subsidized public housing, called HDB estates after the housing development board. These are rented and sold to Singaporean citizens at a discount, and are home to 85% of Singaporeans. The mandatory savings accounts, which function similarly to social security programs except that people only get back what they paid in, with no redistribution of wealth, encourages home ownership by allowing people to use their accounts to buy housing. Thus home ownership is high, in contrast to the situation in other expensive cities, such as New York.
The important feature in both cases is that not everyone is eligible for reduced rent. In New York, rent stabilization disappears in certain cases if the tenant leaves (vacancy decontrol); in Singapore, HDB is not available to non-resident immigrants, who form 25% of the country’s population. This is also seen in other expensive cities, including Monaco, where the minority of residents who are citizens have access to highly subsidized public housing, and Hong Kong, where half the population receives housing subsidies.
The result is parallel markets. There’s an affordable market, and an unregulated market, which is much more expensive than it would be without government involvement since there is a restricted supply of market-rate housing. Effectively, in order to prevent mass homelessness, the government increases rent for unfavored groups – expats in Singapore, relative newcomers in New York – in order to reduce that of favored groups. Rich members of the unfavored groups, for example executive expats, can easily pay the higher rent. Poor members, for example recent immigrants from developing countries, pay the rent by living in overcrowded housing.
A more pernicious result, common in New York, is landlords’ recurrent attempts to move rental units from the controlled or stabilized market to the unregulated one; although rent control is rare, it is concentrated in desirable neighborhoods that once hosted many working-class artists, such as SoHo and the West Village. Since the path of least resistance is vacancy decontrol, landlords harass such tenants in any way possible.
Immigrants who speak little English are a favored target of harassment, since they often don’t know their rights, and since many of their neighborhoods, for examples Washington Heights and Alphabet City, are desirable for college students. In contrast, students are often a standard replacement, since they have more money due to parental support, and are transient and therefore don’t complain as much about maintenance. However, everyone who is stabilized or controlled can be at risk; many of the stories I have heard come out of the Village rather than Washington Heights. Community board members know countless instances of landlords who defer maintenance, install noisy or inefficient heating and refuse tenants’ suggestions for better options, turn off the electricity or the water at inopportune times, and even engage in outright fraud. An anti-gentrification activist from West Harlem told a Columbia student group of landlords who pretend not to have received rent checks from their tenants, and then use this as an excuse to evict them.
I do not know whether the same results exist in other expensive cities with extensive rent control, for example Paris; I would appreciate help from any reader who knows the situation there. However, I posit that at least some degree of the two above issues are universal to a regime in which part of the market is regulated and part is not.
Based on admittedly partial information, I’d recommend against rent control in Tel Aviv, and for other forms of reform, including some government intervention when necessary. The differences with other land-constrained cities, in which intervention is universal, can be summed as follows:
1. Tel Aviv, while dense, is not as land-constrained as Singapore, which is limited by national borders, or New York, which is limited by the available subway infrastructure; therefore, there’s less inherent market pressure on land prices.
2. Tel Aviv’s zoning code allows much less development, and can be reformed accordingly. The 1920s-era Geddes Plan, good for its time but now in need of change, mandates setbacks of 4 meters front and back and 3 meters of each side, roughly halving the buildable area of the 20*25 lots typical of the city, and limits height to 4 stories. In addition, the city makes dividing apartments into smaller units so difficult landlords have taken to doing it illegally
3. A big portion of the problem is low purchasing power among specific groups, namely students, who do not have access to free tuition as in many progressive European countries or loans as in the US. Thus it’s not just a housing problem, as already noted by some protesters.
In general, there’s a distinction between socialism and bureaucracy. Social-democratic programs can be delivered with remarkably little bureaucracy. The Soviet Union was both socialist and bureaucratic, but Scandinavia’s quality of government is much better, as seen in its stellar rankings on corruption indices. In contrast, many developing countries impose many hurdles on starting a business without appreciable socialism, for example India’s license raj. The difficulty of building affordable market-rate housing in many cities can be traced to bureaucracy in the form of an onerous permit process, a zoning code that requires so many variations that developers are at the mercy of politicians, and similar questions that boil down to political power.
The consequence is that the process of reform must target regulations that empower kvetching community board and city leaders to make landlords’ lives miserable. Good deregulation would make it easier to build and easier to build densely, and streamline the permit process. It would not try to inflict maximum damage on tenants. The reason I’d mistrust any deregulation coming out of the present government is that its recent record – for example, cutting funding to fire services in the years leading up to the Mount Carmel fire – is not one of trying to make government better, but of trying to make government so small and inefficient it can be drowned in a bathtub. It’s exactly this attempt to destroy public services and give handouts to politically connected entrepreneurs that people in Tel Aviv are really protesting.
Pedestrian Observations 
In The Netherlands, roughly 40% of the total housing stock is in hands of hybrid entities called housing corporations. They are semi-private, not-for-profit, purpose-specific entities dedicated to development and upkeep of properties (much more the latter). The rent it can charge is controlled by a national law (easily done, since the country is mostly homogeneous and small), and maximums are based on area, services, facilities (like lifts/elevators x stairs). Housing is allocated on a waiting list-basis, in a process that is transparent (no ad-hoc committees evaluations on who deserves housing and where, like it happen in United Kingdom).
Moreover, there is the division of market between controlled rentals and non-controlled rentals, based on a rent threshold that, as for July 2011, is € 691 (US$ 980, anything below that is rent-controlled). Controlled rental properties have the maximum rent increases (annually) set by the central government. However, there is advantage on renting properties as controlled ones: a huge tax rebate scehe (huurtoeslag) meant to compensate renters (according to their income, family size etc.), making the net cost for them lower than what the owner takes. The subsidy is not available for uncontrolled rentals, with the rationale of having tax rebates appropriated by owners.
The Netherlands, though, have a serious space problem. If you take away water bodies, the density here for the whole country’s dry land is 488 hab/km². And there are not that many high-rises either, so urbanized area takes 19% of the country’s surface.
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As for the issue of dividing apartments into smaller units: that is usually problematic because it changes, fundamentally, the demographics of a certain building, a very touchy topic. I’m not aware of how housing legislation works in Israel on that regard, but in many countries there protections against such subdivisions of apartments as they either dilute the voting power of those living in non-divided apartments or cause them to become hostile to any minor adjustment that needs to be made.
I read the links you posted: such price increases up to 12:1 ratios of yearly gross income to price are just not sustainable.
While it is a good starter, there is so much to it. It is one of a small few situations where theoretical economists and empirical economists will come to the same conclusion, and share it with the neuroeconomists and classical economists, as well as they Keynesian economists and the Austrian economists. It is the classic textbook example of a perverse consequence, and even the most rogue of economists wouldn’t dare risk their reputation arguing about it.
As an urbanist, the biggest consequence you missed was this: It reduces the stock of housing…aka, deurbanization.
While the understanding of the problem is as close to universal as you will ever get with economics, the solution is a bit more difficult to agree upon. My personal preference:
1) Use means-tested vouchers for housing, where voucher qualification AND size is adjusted frequently and fairly.
2) Make it illegal for landlords to discriminate against voucher users, along with the other protected classes.
3) Accelerate the construction permitting and approval processes.
4) Deregulate zoning, allowing the construction of whatever, wherever.
Its interesting to examine the case of Section 8 housing in the US–a means-tested voucher program for low-income renters.
While it is illegal for landlords to discriminate against tenants on the grounds that part of their rental income comes from Section 8 (landlords may refuse tenants on the basis of insufficient total income), Section 8 is structured as a program which landlords have to explicitly join, for their rental properties to qualify for section 8 tenants–and the program places affirmative requirements on landlords above and beyond following basic landlord/tenant law. In some cases, Section 8 can cap rents a landlord can charge. For this reason (and for reasons of discrimination against the poor and minorities as well), many landlords simply refuse to be part of the program. In some places this can result in Section 8 tenants being caught in a catch-22–if they accept the assistance needed to find a home, a significant fraction of the market properties are no longer available to them. (A few US states require landlords to participate in Section 8; most do not.)
The really unfortunate part is that Section 8 does attempt to screen and exclude problem tenants–tenants who damage rentals or engage in criminal behavior are kicked out of the program.
To be honest, I would prefer pure cash welfare in the form of a monthly distributed negative income tax, because it would eliminate all of the inflexibilities of voucher-based welfare. The body of empirical evidence that supports cash as welfare keeps growing, with most research showing that it lifts the poverty stricken out of poverty faster and more permanently. And if you look at it from the perspective of someone who really is trying to escape from poverty, it makes all the sense in the world.
Unfortunately, cash as welfare also sets off all sorts of moral red flags in a huge proportion of people, and for that reason I think it isn’t politically viable at the moment.
In Paris, not only is it impossible to get out of rent stabilisation, but it is also near-impossible to evict a tenant even if they stop paying their rent (that is, it takes well over year if the tenant decides to contest the eviction judicially). Thus, renting an apartment is a very arduous process, where the prospective tenant has to bring all kinds of documents and guarantees, pay at least three months’ rent in deposit etc. Many landlords prefer not to rent out their apartments at all.
Reforming the Garden City-era setback requirements would be a great starting point, but from what I’ve read the city is actually headed in the opposite direction, landmarking many of the Modernist buildings in the downtown:
http://www.haaretz.com/print-edition/business/the-high-price-of-preservation-1.367356
Despite some density bonuses, this is obviously not conducive to increasing residential space in the center city, and appears to be lowering land values.
As far as rent control, although very few economists will defend it, as Danny says, the reasons for its popularity have more to do with politics than objective economics. You’ll never see a crowd of thousands gathered in support of abolishing setbacks, streamlining the permit process, amending minimum parking requirements or reforming the height limits. The benefits are too diffuse and too long term, whereas rent control offers the promise of a quick payoff based on a concept that anyone can quickly grasp. A flawless economic argument will not make much headway against a person who’s well aware he can (or expects to) personally reap the benefits of the policy while externalizing the hidden costs, especially when it’s morally justified as “sticking it” to greedy landlords and their corrupt political backers.
In Tel Aviv, you might just see people protest in favor of reducing setbacks. If you go to Google Earth and look at photos of ordinary buildings in the Old North, you’ll see that parts of the facades are made of plastic; those are illegal balcony enclosures, offering a way to increase apartment size without violating the maximum floor area ratio requirement. Legalizing occupancy in those four meters of setback could be popular with homeowners (about half of Tel Aviv’s units, if I’m not mistaken) and at worst neutral with renters; it would also make it feasible to replace the ugly plastic with a more aesthetic facade. The intense desire to enclose balconies even made it to TV – on Arab Labor, a plot point is that the (Arab) main character manages to buy an apartment in a Jewish neighborhood of Jerusalem at a discount, which turns out to be the seller’s revenge against the people in his building for not letting him enclose his balcony.
Side and back setbacks could probably not be eliminated outright, or at least it wouldn’t be as popular, but they could be nibbled away. Adding floors could also be popular, though the constituency would be smaller; most Tel Aviv apartments are owned condo-style, i.e. different units in the same building are owned by different people, so the benefits of setback elimination are widely distributed among the middle class, whereas adding floors would be about new owners. (By the way, this method of setback elimination by letting people build new additions to units is ideal for American cities as well.)
Huh…I never connected enclosed balconies with zoning regulations! They have them eeeeverywhere in Bucharest (there was a popular song about “termopane” [thermopane?] when I was there, which is the see-through material they’re built out of). I can’t imagine it’s a zoning thing there, though – Romanians aren’t nearly law-abiding enough to care about minor zoning rules like that, and obviously when all those communist blocks were built, there was no zoning code limiting what they could put and where. It’s limited to buildings built during the communist era though – I don’t think I’ve ever seen it done with an interbellum or modern building, and certainly not with any of the Brâncovenesc structures still standing.
In Tel Aviv, it’s illegal to enclose balconies. The zoning code goes into building form and not just intensity limits, as part of Geddes’ idea of a good garden city connected to nature; I’m pretty sure balconies are still required. I’m not sure whether the 4-meter front yard is from balcony line to lot line or from apartment line to lot line – I haven’t seen the code, and computing it with Google Earth is impossible because of the low resolution of satellite photos of Israel.
My late in-laws’ apartment 5th-floor apartment in Hong Kong used to have an illegal extension–only about 4 square meters or so–actually protruding from the side of the building–a type of modification which was quite popular for a very long time there. It, and many similar “enhancements” to many other buildings, were removed after a government crackdown on such things a few years back. But this goes way beyond simply enclosing the balcony to make it look like a room.
Even in the US, I can think of many homes I’ve been in where the garage is converted to an additional room–the rollup door is bolted shut or replaced with a wall, finishings are applied, carpet is installed over the slab, etc–I’m sure that in many cases, such modifications are not quite up to code. (And then there was the brouhaha in Denver a while back, where a pissed-off Realtor went through the RMLS database, noting every home with a discrepancy between the advertised square footage and that contained in the tax databases, and reported the whole lot to the code enforcement division–with many homeowners, often unaware buyers, being forced to spend thousands of dollars to remove illegal mods–in many cases, basements that had been finished but were illegal to occupy as living space due to lack of windows.
In Vancouver when they began allowing laneway housing they still required you to build (at least?) one parking spot for the laneway house, and I remember seeing a picture of one garage that had hardwood floors and appliances – clearly not intended to be used to park a car.
Stephen — I recall reading somewhere about how the neighborhood proponents of requiring off-street parking for the laneway houses were startled when they realized that although they could, by code, force builders to include garage space for laneway houses, that didn’t mean anyone was actually going to park their car in there! The laneway residents simply parked on-street like everyone else — the very thing the neighbors had feared — since on-street parking was still free and unregulated, and used the garage as living space once the code inspector had come through.
Alon: Interesting point about the balconies. The same trend of balcony enclosure is visible among older houses in most American cities as well, indicating the higher relative values of these areas as living space. Prohibiting their enclosure runs counter to the natural economics of the situation, especially when space is artificially scarce. It raises the issue of for whose benefit are the setbacks intended, and do they have any natural constituency in the city that would rise to defend them, if not homeowners or tenants.
I would add that one consequence of rent regulation schemes is widespread fraud, with both the landlord and tenants often complicit. I have no hard evidence to back this up, but I’d imagine that well over 50% of the units in Manhattan’s Chinatown (where, as I understand it, nearly every apartment has a regulated rent) are being rented fraudulently. Ditto (though to a lesser extent) with other close-in poor/immigrant neighborhoods – I have a Puerto Rican friend living in Harlem (the reason I mention that he’s from PR is that often these schemes necessitate an element of trust, and common ethnicity/language is good for that) who’s getting cheap rent by living in a RC/RS’d unit. (Also, my dad has a friend who’s a professor in Paris, and he says that he rents out his unit with a regulated rent for much of the year, despite it being against the law. So clearly this is not just an American phenomenon.)
And this is to say nothing of “key money.” When RS units come on the market in Manhattan, I would bet that the majority of them in buildings owned by small landlords end up going to either a) friends, or b) people who pay illegal key money. In buildings owned by big landlords who can’t risk that sort of fraud, I imagine the units go to very wealthy people who will have no problem paying their rent on time, and who may even make some repairs out of their own pocket.
Furthermore, I believe most people in New York who live in co-ops (at least in Manhattan) have benefited from the rent regulations one way or another. Many of them were probably only in a position to purchase their units because the regulation made it not very worthwhile for the landlords to hold onto them. And then there’re the property taxes, which are lower for co-ops because their benchmarked against units that often have regulated rents (check out the “Market Value” section here).
So, once you add in all the co-op dwellers with the people with regulated rents (which I believe is 2/3 of the rental market), it’s not hard to see why these schemes persist – most voters probably benefit from them.
What sort of fraud–tenants paying higher rents than the legally mandated rent (but still presumably lower than market rents) under the table?
There is an array of possible problems. Some more “legal”, others outright fraudulent:
– new tenant, not landlord has to cope with minor repairs (those not requiring a business permit). In properties that had been occupied for a long time, the money spent to paint all rooms, replace some wiring or fixing heating radiators can easily climb to high 4-digit or low 5-digit. If the new tenant doesn’t agree, he’ll not get the property.
– real estate agents charge unreasonable high fees from prospective renters, then split them with the landlords
– occupants of rent controlled properties sub-let them, illegally, to other people (this requires collusion between the illegal sub-renter and the original tenant). Just go on craigslist and you’ll find many such coveted offers for rooms in shared houses.
The last point in Andre’s comment is even a plot point on Friends, where it’s revealed Monica sublets her West Village loft from her rent-controlled (and dead) grandmother. I’m going to assume that the writers of the show did not make this up and this actually exists in New York.