Phasing Out Rent Control

Rent control is a political-economic phenomenon whose harmfulness has been proven time and again. Yet it remains a goal of assorted leftist ideologues, whose views have recently prevailed in such "avant-garde" communities as Cambridge and Berkeley. Meanwhile, after some 30 years of destroying New York City's housing, rent control is slowly and painfully being phased out of the nation's largest city. Just how slow and painful that process can be is chronicled here by David Grant, a former city official. Grant's narrative should provide food for thought on the costs and benefits of gradualistic approaches to removing government controls.

If you wanted a perfect example to prove Henry Hazlitt's contention that things which look good in the short run don't always work out in the long run, you wouldn't have to look any further than the history of rent control in New York City.

After three decades of stringent controls on New York's million-plus apartments built before 1947, the consequences are just what could have been predicted from a reading of Hazlitt's Economics in One Lesson: an apartment vacancy rate of less than one percent, over 400,000 deteriorated or dilapidated apartments, a gap of $274 million between the costs of proper maintenance and the revenues actually allotted by controlled rents, and the literal abandonment of between 15,000 and 30,000 apartment units annually.

The source of this dismaying catalogue of 30 years of liberal failure? Not Hazlitt, Ludwig von Mises, or Murray Rothbard, but a 1970 official report from the recently-retired mayoral administration of no less a card-carrying liberal than John V. Lindsay himself. In assessing the cause of these devastating problems, the Lindsay Administration put its statist finger right on that old cachet of the Left, rent control.

"The old rent-controlled legislation," said Lindsay's report, "actually contributed to New York City's housing problem by (1) failing to provide sufficient revenues for proper operation and maintenance of the stock, and (2) bringing about widely varying rents for similar apartments.…Moreover, since rent levels were not tied to the costs of properly operating and maintaining buildings, rentals were often controlled at the expense of housing quality, and the law neither assured landlords of revenues sufficient to maintain their buildings satisfactorily nor assured tenants of housing that met reasonable quality standards." The result, said the Lindsay report, was "a severe housing crisis."

EASING RENT CONTROLS

Although Lindsay and his housing aides stopped short of attributing all of New York City's housing woes to rent control, they considered it of sufficient importance to press the City Council strongly (and successfully) for the first major change in the rent control system since its imposition during World War II. That change was a general easing of controls under Lindsay's much-vaunted Maximum Base Rent (MBR) system. The stringent old system that preceded Lindsay's mayoralty generally permitted rents to rise only when an apartment became vacant, and then only by 15 percent; costs, naturally, were allowed to rise without limit. Lindsay's MBR program implicitly recognized the disaster of such a policy. Through the use of a mathematical formula, the government determines a "fair rent" for each of the city's rent-controlled apartments. The total of all "fair rents" for a building is equivalent to the sum of five components, each one weighted differently: real estate taxes (which represents about 14.9 percent of a building's MBR), water and sewer charges (about 2.7 percent), operating and maintenance expenses (about 39.0 percent), vacancy and collection loss (1 percent), and return on capital value (including an allowance for interest and amortization charges, plus profit—about 42.4 percent).[1] After allowing for such factors as the floor an apartment is on and whether a building has an elevator, Maximum Base Rents are then computed for each apartment, depending on the number of rooms they have. This, then, is the MBR formula. Supposedly, it takes into account all the costs a landlord must pay, plus an 8½ percent return on capital value.

Apartments do not automatically rent at the MBR level, however, and therein lies much (although not all) that is wrong with Lindsay's program. Consider a flat which happened to rent at $75 in 1971, the year before the MBR program took effect. Suppose the mathematical formula determines the "correct" and "fair" MBR for that apartment to be $200. Under the MBR program, the rent in the apartment may increase by no more than 7.5 percent each year. So even while the city concedes that the landlord is not getting a fair return on his capital, it makes him wait 14 years for his rent to go from $75 to $200. And that assumes, of course, that costs have not risen at all in the interim, a rather unlikely assumption in an era when even Professor Samuelson is at last frightened of inflation.

Ah, but there is more. Not only is the landlord not entitled to his "fair" rent immediately, but he is not even entitled to the paltry 7.5 percent annual increases automatically. New York City being perhaps the most tenant-oriented town in the nation, the landlord must certify to the housing agency that (1) he is maintaining all essential services, (2) he has corrected all of his major violations and 80 percent of his minor violations, and (3) he is spending a sufficient amount of his money for operation and maintenance.

All of these requirements are, of course, portrayed as protection for tenants. But like the laws which protect women by limiting their working hours, the laws to protect tenants hurt them more than they help them. Most landlords under rent control have been forced to accept artificially depressed rents for so long that they have had no choice other than to let their buildings deteriorate, and they badly need extra money (not just 7.5 percent a year, either) first, before they can comply with all of the Department of Rent and Housing Maintenance's bureaucratic requirements. "One need not be an expert in housing to recognize the sadness that exists in the situation," commented Ruben Klein, a spokesman for Bronx landlords. "Reduced to its simplest terms, it may be that an owner is prepared to lose his investment rather than to correct violations because in these instances the 7.5 percent is just not enough to make any difference to him." None of this should have been surprising to Lindsay, by the way; it was all there in Chapter 18 of Economics in One Lesson, written 13 years ago. But whatever books Lindsay read, their authors did not include Henry Hazlitt.

RAND INSTITUTE STUDY

One report that the Lindsay Administration did read, since it commissioned it, was a study by the New York City Rand Institute. Labeled "Rental Housing in New York City," the report found that rent control "has left many owners with few alternatives to under-maintenance and reduction of building services." The Rand Institute suggested scrapping the traditional rent control system and substituting for it a program based on "an annual determination of the minimum rents needed to cover the full costs of providing well-maintained housing in buildings of different types." Under such a system, said the report, "rent controls should be revised to allow rent increases up to the appropriate minimum rent." A key aspect of the program, said the Rand Institute, would be "the construction of a formula for typical revenue requirements of a well-managed building, a formula that reflects market cost information and a few easily ascertainable characteristics of the building and unit." Such a mathematical formula, of course, became the kernel of the MBR program.

There are many things wrong with trying to strait-jacket the entire New York City rent-controlled housing industry in a mathematical formula, but the most obvious shortcoming in Lindsay's program is the same one that resulted in all of the difficulties that have beset New York City housing for 30 years: rents are too low, and costs are too high. According to statistics prepared by the United States Bureau of Labor Statistics, operating costs in the city's newer buildings (those built in the last 25 years) rose 7.9 percent in the past year, while most observers believe costs are rising even faster in 1974, led by fuel oil. And, the Lindsay Administration conceded, costs in older buildings—the ones that are rent-controlled—have risen even more in recent years.

Now imagine yourself to be a not atypical landlord in New York City. You have been struggling for years to turn a profit in a town where being a landlord is about as psychically and financially rewarding as being a United Jewish Appeal fund-raiser in downtown Cairo. After years of being saddled with rents of $50 and $60 a month in a city where one-bedroom uncontrolled apartments exceed $400 in some areas, you are told that you may get a 7.5 percent increase next year if you satisfy all of the tenant-oriented conditions the government has set for you. So you borrow money to remove any major violations in your buildings (and the Department of Rent and Housing Maintenance has listed no fewer than 76 such types of violations, any one of which will disqualify you from receiving your increase). You make sure that you have corrected 80 percent of all your other violations, that you are maintaining all of your "essential services" (a term the Department literally was unable even to define until the summer of 1973, although it was quick to take punitive action if a landlord failed to meet this undefinable requirement), and that you are spending enough money on operations and maintenance (more on that below). You are now in debt, but joyously so, for you will get your 7.5 percent increase.

And what happens? Your costs increase faster than your income! You are not even fortunate enough to be on a treadmill, for you are actually moving backward. With your increase, you are even less able to make needed repairs in your building, and it deteriorates even further. Who is suffering here, the landlord or the tenant—or perhaps both?

For one Manhattan landlord, Lawrence Levy (and there are thousands of other Lawrence Levys in New York City), such a plight has been all too familiar. "I got an accountant three years ago," recalled Levy recently, "and after the first year he said to me, Larry, did you ever stop to think what would have happened if the money that went into these buildings, which were bought by my father in the mid-twenties, buildings which I've inherited, did you ever think that if…that money had been put into savings banks, you'd have had a hell of a lot more money, without the aggravation?"

FORCED SPENDING

One glaring error in the formula that even city officials have conceded privately is in the requirement that the landlord spend a certain amount of his income on operation and maintenance. As one of the many requirements for receiving his 7.5 percent increase in rent, a landlord must certify that he has spent 90 percent of the operation and maintenance allowance of the MBR formula on just that—operation and maintenance of his building.

The problem with this provision is that the required dollar expenditure is based on the total MBR, which is the "ideal" rent landlords may someday be receiving, although usually not for years. In the real world, landlords may be collecting much less. For example, one Bronx landlord has a six-unit building with a total annual rent roll of only $3,096. But because his MBR exceeds $5,000, he is required by the law's formula to spend $3,070 on operation and maintenance—which leaves all of $26 for the whole year for his real estate taxes, water and sewer charges, vacancy and collection losses, and return on capital value! Nor are this landlord's circumstances that unusual; according to industry projections, between one-fourth and one-half of all New York City landlords could fail to qualify for their 7.5 percent increases in 1974, and this provision may have much to do with it.

The absurdity of requiring a landlord to spend almost more than he is bringing in may be a particularly egregious example, but it merely reflects the mentality of the whole mathematical approach. I remember well how liberals in 1964 used to deride conservatives by smirking that presidential candidate Barry Goldwater was trying to oversimplify complex issues; yet in New York City the liberal Lindsay Administration's MBR program was devised to deal with the problems of over one million apartments by a formula amazingly narrow in concept. How narrow? Well, as an example, its operation and maintenance allowance takes into account only two types of buildings (those with a "normal payroll" and those with a "high payroll") in a system of more than 70,000 buildings, each one literally unique in the whole array of factors that make up the economics of a structure.

The Lindsay Administration was not totally unaware of the complexities of real life. Its 1970 report confessed that its two-building approach will result in actual errors of up to 18 percent in over two-thirds of the "normal payroll" buildings, and errors of up to 37 percent in another quarter of the buildings. But what is a 37 percent error in a system that grants a pliant landlord a gaudy 7.5 percent increase in rentals every year? After all, Lindsay's report says, it examined several alternatives, and none seemed as good as the MBR system. Apparently, the politically conscious Administration managed to overlook one "system" as an alternative: the free market. But one cannot expect miracles.

BUREAUCRATIC NIGHTMARES

Aside from the failures inherent in the MBR system (and a whole book could be written about that), City Hall has had enormous difficulties in just administering the program. Once upon a time the rent control managers confidently expected that all of the MBR orders granting rent increases or denials for 1972 (the first year of the program) would be mailed out by January 1, 1972, and what could be more reasonable than having a system, however bad, at least in operation on time? But the government did not get its last 1972 orders out until the spring of 1973. In a master stroke of understatement in June 1973, Lindsay said that "to be sure, there have been delays in the early implementation of this ambitious program," which is a little like referring to Watergate, if you will pardon the expression, as a mere third-rate burglary.

The short-term result of the administrative fiasco was a flurry of lawsuits by angry landlords, who finally received some consolation when a New York State Supreme Court judge forced the city to issue "interim" MBR orders pending issuance of the "final" (i.e., correct) orders. (Once again, in 1974, the issuance of MBR orders under Lindsay's successor, Abraham D. Beame, has been so sluggish that landlords appear ready to go to court again to receive interim orders. Beame has not been to blame; he merely inherited the system and its maladministration.) In the process, formal protests of purportedly erroneous orders affecting some 20,000 buildings were filed by tenants as well as landlords, and many if not most of them have languished now for close to two years.

The longer-term result of the administrative bungling by the Lindsay Administration was that a disgusted City Council actually repealed the entire MBR program in toto in June 1973, thus intending to return New York City's housing to the Neanderthaloid and more restrictive rent control of old. When the courts ruled on its legality in the fall, the repeal measure was dismissed as a blatantly political violation of a superseding state law. In a strong message prior to his actual veto of the City Council's demolition of his beloved MBR program, the lame-duck Lindsay icily denounced the repeal action as "this political exercise"; as if all of New York City's three decades of rent control measures, including his own MBR program, were anything more than one huge master example of vote-buying political exercise at its worst.

This is not to say that the establishment of the MBR program did not take some courage on Lindsay's part. It did indeed, as furious tenants have not permitted him to forget. Nor has the program been a total loss. It has helped in some areas, just as any easing of controls generally helps a situation previously laden with the state's heavy arm. But even Lindsay's own people did not pretend that MBR has been a great success, either administratively or in its long-range goals. "It's very difficult for anyone to assess pro or con at this point," Nathan Leventhal, Lindsay's Commissioner of Rent and Housing Maintenance, told me last year, and for every such hedge there are a dozen blasts at the program from others.

VACANCY DECONTROL

If New York City officials—and that includes Abraham Beame, who succeeded Lindsay as mayor on January 1—really want to radically end the housing crisis that their frequent studies are so fond of re-discovering, they need not look too far for one essential step. Over Lindsay's heated and predictable cries of a sell-out to the real estate industry, a more realistic then-Governor Nelson Rockefeller and New York State Legislature mandated in 1971 that all apartments voluntarily vacated by tenants are automatically decontrolled—totally.

The results of this vacancy decontrol measure have not been easy to discern, partly because it was followed 45 days later by President Nixon's own brand of rent (and price) controls. However, according to a report by Frank Kristof, a former key member of Lindsay's housing team and now an executive with New York State's Urban Development Corporation, decontrol appears to have "spurred an encouraging amount of reinvestment in the city's existing structures" while at the same time rents have not risen as much as expected. Kristof, however, cautions that his survey is based on records voluntarily provided by industry representatives, making them somewhat unreliable.

A less tangible benefit, but a most important one in an industry so devoid of optimism in decades, has been an upswing in hope. Landlord after landlord whom I spoke to mentioned vacancy decontrol as the main reason he has stayed in business, and while some also credited the MBR program, the general feeling is that vacancy decontrol has made the difference. "If it weren't for that," said Jerome A. Weiss, one small Brooklyn landlord, "I'm afraid the 7.5 percent increase would be a drop in the ocean and would not help."

Still another advantage of vacancy decontrol, though one New York City official insists on seeing as a horrid drawback, is that—if continued—it will eventually end rent control. [2] At the present rate at which apartments are being vacated (and thus automatically decontrolled) in New York City, glumly predicted Lindsay's Housing and Development Administrator Andrew P. Kerr, rent control will be dead by 1981.

Let us hope so. Particular criticisms of rent control abound, but the facts come down to this: in a society where many industries are relatively unregulated, you cannot place heavy controls on one industry in one city and expect it to thrive. If profits are unlimited elsewhere, you cannot "guarantee" a ceiling of 8.5 percent return on capital value at some future date and expect landlords to eagerly fix up all their apartments—especially if you guarantee no floor on losses. And if you really want to help the plight of tenants, you cannot do so by making apartments less available.

David M. Grant worked for 2½ years in the Public Affairs Office of the New York City Housing and Development Administration, including a stint as director, before resigning in February 1973. He has worked as a reporter and free-lance writer, and is currently a vice president of a New York public relations firm. He lives in a nonrent-controlled apartment in Manhattan.

NOTES AND REFERENCES

[1] Strictly speaking, this equivalence is true only of buildings without commercial space—a factor that complicates the formula, but does not essentially change its effect.

[2] As of this writing, the continuation of vacancy decontrol is by no means certain. The presence of a new Governor (albeit a "conservative" one) facing the voters this November has led to widespread belief that vacancy decontrol will be modified. Beame, much to the dismay of the many real estate people who gave him considerable support in his race for mayor in 1973, has called for the repeal of vacancy decontrol, a rollback in rents, and the scrapping of MBR in favor, presumably, of a more restrictive rent control system.