02 July 2010

Is New York rent control irrelevant?

Economists love to use rent control in New York as an example of a price ceiling that results in shortages, since demand exceeds supply at the controlled price.

NYC rent control has two components: rental prices are not allowed to rise by more than 5 (?) percent per year, except when an apartment is vacated, when it can jump without limit. Thus, you might find a grandma paying $400 per month for the same apartment that a new arrival pays $1,200 per month to rent.

Taking shortage as given, economists have recommended lifting all rent controls and directly subsidizing "the poor" as a more efficient means of matching supply and demand, without turning out grandma onto the street.

But those stylized facts may fail to take reality into consideration. I was talking to a girl the other day who lived in east midtown (Manhattan). She said that her lease was up for renewal, and that she was negotiating the 5 percent price increase with the landlord. What was interesting is that her lease had two prices -- the allowed rent and her actual rent. The allowed rent was much higher, and the landlord wanted the increase to be based on that; she wanted it to be based on her actual rent. What was interesting is that the rent controlled price was not binding. In other words, the market was not affected by the rent control ceiling.

Assuming that I've got my facts straight [anyone? Buhler?], this means that there is no "bureaucratic" reason for of rent control. So, is there nothing to be done? To the contrary, now would be a perfect time to end rent control in New York. Most people would not see their rents change; those who did would either move to another place (since there's no shortage) or have their income topped up (if they were poor; perhaps subsidized by a tax on all NYC housing).

Bottom Line: The market is more flexible -- and easier to work with and understand -- than a bureaucracy. Time to free NYC's housing market.

3 comments:

  1. Seems like a rather small population of data from which to draw such a sweeping conclusion. :)

    Why is one form of market distortion (subsidies) preferable to another (rent control)? Both require bureaucracies. And how does a tax on housing provide a subsidy for housing?

    Isn't the real problem velocity (of price vs. income) rather than price?

    ReplyDelete
  2. @Albionwood -- one data point in a market can be meaningful :)

    Income subsidies are better than rent control b/c block income transfers are better than messing with price (at the margin). These are economic ideas: http://www.ers.usda.gov/Briefing/FarmPolicy/

    No idea what you mean by velocity...

    ReplyDelete
  3. Rent control in NYC was a "temporary" expedient during World War II. Maybe we should check to see if that guy with the funny mustache is still running things in Berlin.

    ReplyDelete

Spammers, don't bother. I delete spam.