At a recent City Journal Forum, urban specialist Peter Salins discussed the arguments of his new book, Scarcity by Design: The Legacy of New York City’s Housing Policies (Harvard University Press, $29.95), coauthored with Gerard Mildner.
PETER SALINS: In Scarcity by Design, Gerard Mildner and I look at what ails New York’s housing. We are critical of many New York City and State housing policies of the last fifty years. These policies are so entrenched that this book will not win us many new friends in the New York housing fraternity and may cost us the ones we already have. Welcome or not, the message of our book consists first in the little-contested view that housing conditions in New York are generally abysmal by contemporary urban standards. Our second, more controversial point is that these housing conditions are no one’s fault but our own. By “our own” I mean New York’s voters, politicians, and policymakers. They’re not the fault of Ronald Reagan or George Bush; they’re not the result of the recession or the product of gentrification. They are the legacy of a half century of deliberate, well-intentioned but ill-conceived city and state policies. Hence our title: Scarcity by Design.
How and why did New York’s housing policies go so far astray? We locate most of the problem in one common but pervasive mistake: an unwillingness to recognize or accept the imperatives of a private housing market. New Yorkers believe that when it comes to housing, unlike other private goods or services, the government should have the power to repeal the law of supply and demand. This belief is grounded in a popular New York attitude: that New Yorkers are entitled, if not to a free lunch, at least to a cheap one.
Dignifying, even ennobling, this attitude has been the assertion that the city must intervene in the housing market for the benefit of New York’s poor. In fact, as our book argues and documents, the poor have benefited least of all from the city’s housing policies. If anyone has benefited, it is the city’s middle class. But we argue that in the long run these policies have been counterproductive even for their supposed beneficiaries.
What policies are we talking about? There are four sets of housing policies, enforced by different agencies for different purposes, that together have created a housing supply that is of poorer quality, scarcer, and more expensive (for those not already vested in its benefits) than that of any other American city.
The first is a fifty-year regime of rent regulation that covers about 1.2 million apartments, or two-thirds of the rental stock, mostly occupied by the middle- and high-income residents of Manhattan, the Bronx, and Queens. These regulations have caused most of the affected apartment buildings to deteriorate and have sharply discouraged the construction of new rental housing.
The second set of policies is the city’s sclerotic system of overlapping development regulations including zoning, landmarking, environmental regulation, and cumbersome approval procedures. These have made it too expensive for all but the biggest developers to build anything other than luxury housing.
The third is the city’s notoriously unjust system of property taxes: It imposes a minimal burden on the city’s one- to three-family houses, and makes up the revenue shortfall by exorbitantly taxing multifamily rental units.
The fourth destructive policy has been the cornucopia of direct housing subsidies underwriting the construction and rehabilitation of over 300,000 apartments, mostly targeted at middle-income tenants, broadly understood. Not only is every one of these four policies harmful or unfair in its own right, but together they operate synergistically, reinforcing each other’s impacts.
The scenario goes like this: The profit limitations imposed by rent regulation, high property taxes on apartment buildings, and development regulations severely constrain housing supply by discouraging new housing construction and hastening deterioration of the existing stock. At the same time, the bargain rents of regulated and subsidized apartments distort the pattern of housing demand. Unregulated or unsubsidized private apartments are placed at an unfair competitive disadvantage with the regulated and subsidized stock: Middle-income beneficiaries of regulated or subsidized apartments are not going to pay twice as much to move to new apartments, even if they are somewhat bigger or better. Thus, it is only profitable for developers to build luxury housing.
The result is the city’s two-tier housing stock. One tier consists of an aging and deteriorating supply of cheap but scarce apartments. The other tier comprises a small inventory of slightly less scarce but much more expensive unregulated apartments. Eventually the worst of the regulated and subsidized stock, falls to the poor, just at the point that it becomes economically unviable. And even as the poor inherit the dregs of the regulated or unsubsidized stock, they pay as much or more than quick-witted middle-class tenants who are vested in reasonably good and cheap apartments.
What can be done to turn New York’s housing market around? Gerard Mildner and I believe that New York can still have a flourishing private housing market like that of most American cities. What fifty years of public policy have wrought, five years of a different public policy can set right. Our proposals may be politically naïve, but we believe that they would create an abundance of affordable, high-quality housing. Essentially, we call for the deregulation and desubsidization of New York’s housing, and in the spirit of our newly elected president, we offer a six-point program.
First, completely deregulate rents. This can be accomplished with such transitional measures as vacancy decontrol (deregulation of vacant apartments) to protect incumbent tenants, or luxury decontrol (deregulation of expensive apartments) to protect poor or moderate-income tenants. In any case, the goal should be the complete deregulation of rents by the year 2000.
Second, overhaul development regulations. The zoning code, landmarking laws, environmental laws, and land-use review processes should be revised to allow extensive residential development in zones currently designated nonresidential and to permit higher residential densities in all but the most developed parts of Manhattan.
Third, sell the inventory of city-owned in rem apartments to their tenants or to responsible entrepreneurs. The city is currently New York’s biggest slumlord and a major rehabilitator of the housing stock it inherits through tax foreclosure. It should get out of the business.
Fourth, privatize the entire 150,000 or so Mitchell-Lama and other publicly assisted apartments, either by selling them to their occupants as co-ops or by selling entire buildings to private housing firms. Some of this stock is already on the path to privatization under the terms of its original charters, but attempts have been made to derail this process.
Fifth, overhaul the property tax system so that rates are uniform for all classes of housing property and assessments accurately reflect current property values in all neighborhoods. Homes should not be underassessed in high-value areas or overassessed in low-value areas, and no residential property should pay a tax that exceeds 2.5 percent of its market value. (The current property tax for rental housing in New York exceeds 4 percent.)
Sixth, liberalize condo and co-op conversion laws so that where a market for apartment ownership exists, it will not be thwarted.
If we do all of these things, we would see substantial benefits in three to five years. Most importantly, the rate of private housing development would greatly increase. Fewer than 10,000 new housing units are currently being built per year in New York City. Even before the recession we rarely built more than 20,000 new units. If New York merely built at the rate of such less regulated cities as Boston and Atlanta, it would see 80,000 to 100,000 new units added each year.
In addition, existing housing would be allocated on a more rational basis. For example, people in desirable apartments would pay more than those in undesirable apartments, people in big apartments would pay more than those in small ones, and people in Manhattan would pay substantially more than people in the other boroughs.
The resulting new housing construction and the more rational allocation of existing housing would give New Yorkers much greater availability and choice in housing. We would expect the rental vacancy rate to rise from its present average of about 3.5 percent to more than 5 percent.
It is true that under our proposals the average rent would increase slightly, perhaps by 10 percent, but the rents paid by newcomers to the city or by those who must change apartments would drop substantially. Moreover, the quality of housing in New York for all classes would greatly improve. One final benefit would be an end to the bruising battles between tenants and landlords, renters and owners, the vested and unvested.
I conclude with the clear-eyed acknowledgment that the six-point program I’ve proposed has little chance of imminent passage. But we hope that by offering our analysis of New York’s housing problems, and by suggesting some radical policy options to solve them, we will help to light the way.
LOUIS WINNICK, Fund For The City Of New York: Peter Salins demonstrates that much of what’s evil about rent control is its consequences for the poor. But he omits two or three facts about the deformations under the current regime. Today, the rent on a subsidized public-housing unit is frequently higher than the rent on a private regulated apartment. The taxes on a one-family house in Staten Island or the outer reaches of Brooklyn approach those of a ghost town in Wyoming. And finally, even with the complete restoration of market pricing for housing and a rationalization of the property-tax system, the heavy regulatory burden Peter alluded to would still prevent even the most entrepreneurial actor from realizing a profit on his investment within a reasonable period of time. Around the turn of the century, Alfred White, perhaps the first wealthy person to develop housing for the poor, built a project that still exists by the waterfront in Brooklyn Heights. It took him 11 months to build those apartment houses from the time he acquired the land to the day the first tenant moved in. These days you can’t even get a building permit in New York City in 11 months.
EUGENIE BIRCH, New York City Planning Commission: I am intrigued by your idea of removing regulatory barriers to development. However, the Planning Commission recently approved a large project on the West Side. Had it gone through without citizen participation, it would be all luxury housing. Thanks to the regulatory process, however, 12 percent of the units will be affordable housing. So sometimes the regulatory process provides for certain societal needs.
PETER SALINS: The site you are referring to—the former rail yards on the West Side of Manhattan—is an unusually large parcel of land that perhaps requires a little bit more scrutiny than what is normally called for. But even for so important a parcel I would like to see a zoning ordinance and a set of companion regulations-environmental, landmarking, and so forth-that would make that site developable as-of-right. Now we have a process that subjects all development to negotiation. Essentially it becomes a game. Donald Trump, the putative developer, submitted an outrageous proposal. In response, the neighborhood said you can not build anything. The Planning Commission, quite adroitly, stepped in as an intermediary and presided over a negotiation that seems to have produced a reasonable outcome. But this costly process would have been unnecessary if clear and objective criteria governed what a developer could and could not do.
LOUIS WINNICK: It may not even have been Donald Trump’s aim to build such a project. Peter Salins mentions in his book that rent control artificially reduces the market value of a large part of the city’s rental buildings and land. The owner who can fight his way through layers of review and regulation and finally succeeds in getting the Planning Commission to allow him to build a profitable project has greatly increased the value of the vacant land without having to lay a single brick. He can, if he wishes, turn around and sell the land at a considerable profit to another builder in return for exercising his skill in negotiating with the bureaucracy. Naturally, the added cost of negotiating means the apartments will be more expensive than if they had been built as-of-right.
JOHN STOSSEL, ABC News: On the one hand you said that if housing were deregulated, the supply would increase and housing would become more affordable. Yet I think you also said that if your proposal were implemented, the average cost of housing would go up.
PETER SALINS: I was talking primarily about rent control, under which mostly middle-class tenants often do not even pay enough rent to keep their buildings in good condition. There is no question that if markets were freed of control, rents in the middle range of housing would rise—not as much as people think, but somewhat. But rents would soon decrease for tenants who are not in rent-controlled or subsidized housing, or for those who want to move within the city. The difference in cost between excessively cheap regulated apartments and very expensive apartments for everybody else would be eliminated.
JOSEPH ROSE, Citizens Housing and Planning Council: You said you are in favor of eliminating all city subsidies for housing. But if the average housing allowance available to welfare families is $312 for a family of four, and the Rent Guidelines Board estimates that the operating cost of a two-bedroom apartment is $359, don’t there have to be government subsidies to make up the difference?
PETER SALINS: There’s no question that New York’s poor, and the poor throughout the rest of the country, need housing assistance. Ideally we should find ways of letting them decide how much of their income—the combination of public assistance and whatever they can earn—they want to devote to housing. But if we do earmark assistance for specific purposes, I would rather give the poor tenant a housing voucher than have the city build and manage housing. Subsidize the tenant, don’t subsidize the stock.
EVAN GALBRAITH, Morgan Stanley: Given the fact that the rent control laws are sunset laws—passed to deal with an emergency and written to expire two years after they were adopted—isn’t it true that the governor can end rent control simply by not signing the extender bill when the current rent control bill expires? Wouldn’t it be better just to let rent control die that way than having a transitional period of vacancy or luxury decontrol?
PETER SALINS: That’s an even more dramatic approach than I have the courage to advocate, but not simply because the measures I call for—vacancy decontrol and luxury decontrol—are more acceptable politically. I don’t think you can just change the rules in midstream. You have to give New Yorkers who have gotten used to the system a chance to adapt. As far as the sunset feature goes, we need a vacancy rate greater than 5 percent across the entire stock to trigger the end of rent control under present law. But the way the system is now, we’re never going to see a vacancy rate that high. In a case that is not yet resolved, the Rent Stabilization Association has gone to court demanding the deregulation of some classes of housing which already have a greater than 5 percent vacancy rate.
CHARLES J. URSDTADT, HRE Properties: We’ve been struggling with this problem for fifty years, but I have seen only two attempts at reform since rent regulations were enacted in 1943. One was vacancy decontrol, which lasted from 1971 to 1973, when it was repealed at the urging of a Republican governor. Recently, a bill was introduced in the legislature to decontrol apartments renting for more than $2,000 a month to tenants whose income exceeds $100,000 a year. You’ve got 1.5 million apartments benefiting from one form of rent regulation or another out of a total of three million. In other words, about half the apartment dwellers in New York City are benefiting, or so they think, from rent regulation. The Legislature is not going to make the slightest move towards deregulation unless we can educate the people who arc not being subsidized to create a countervailing political force.
PETER SALINS: I’m not a political scientist, but let me suggest one thing. Nothing significant happens in a legislature without strong executive leadership. When Nelson Rockefeller was governor of New York, he was able to bring about vacancy decontrol. If he had remained governor for another term, it might not have been repealed. The legislators will always take the path of least resistance. This situation will only change if we get a governor or a mayor who is convinced of the need to deregulate housing.
STEPHEN KAGANN, New York City Council President’s Office: What does the city’s involvement as a landlord and regulator cost the city treasury?
PETER SALINS: We are talking about at least a half-billion dollars a year to rehabilitate and operate the apartments the city has taken over for tax default. Some of that money comes from borrowed capital funds; some comes from federal grants that could have been used for other things. All in all, I would say the city’s housing programs cost $1 billion a year—perhaps as much as a billion and a half.
STEPHEN KAGANN: Does that include property tax revenues?
PETER SALINS: No. Ray Horton and Betsy Roistacher from the Citizens Budget Commission have argued that the city is losing tax revenue through its housing program, but my cost estimates don’t include this additional cost.
STANLEY MOSES, Hunter College: To what extent could a new housing market under free competitive condition—like the one you envision—respond to the housing needs of die city’s poor? What proportion of the population would be left out?
PETER SALINS: The housing reformers of the New Deal era imagined that the rich and the middle class would live in unsubsidized housing and that the poor would be the beneficiaries of public intervention. But in New York, the middle class is the beneficiary of regulation. Henry Polakowski at Harvard studied the difference between market and regulated rents in all the city’s neighborhoods. He found that in poor neighborhoods the difference was very small. So poor New Yorkers are by and large unsubsidized: Many do not qualify for public housing and they do not benefit from rent control. In other words, the current system does not benefit the poor. I would like to see a system in which no one in New York is very badly housed and I would hope some of the new housing construction would be built expressly for the poor or that older buildings would filter down in reasonably good condition to the poor as new housing becomes available to the rich and the middle class. To the extent the poor still cannot afford decent housing, I would use housing vouchers.
RONALD UNZ, Wall Street Analytics: Most people agree that the current housing situation is extremely bad and it would be very difficult to get reforms through the Legislature. But in the past two years the courts have started to focus on municipal policies that amount to taking property without due process of law. Zoning might be considered such a policy. If the Supreme Court or another high-level court struck down rent control, wouldn’t that help to bring about the kinds of housing policies you have discussed today?
PETER SALINS: That would certainly help but it would still leave untouched New York’s policies regarding subsidized housing, the unfair property-tax system, restrictive laws governing conversion to co-op or condominium ownership, and restrictive development regulations.
MARILYN MAMMANO, Department Of City Planning: Roughly 90 percent of the development in New York is currently being done on an as-of-right basis. What makes you think that freeing up the remaining 10 percent from discretionary review would greatly increase the production of new housing?
PETER SALINS: One reason so much building in the outer boroughs is done as-of-right is that the developers there haven’t the patience or the money to fight the system. There are many areas of the city where you can’t build housing at all, and others where the density restrictions are very tight. Many development projects might get under way were it not for restrictive zoning regulations. The fact that no one in the boroughs fights the zoning doesn’t mean you can deduce that what little gets built is all that anyone wants to build.
HARLEY BROOKE-HITCHING, Equities Ltd.: I’m in private sector low-income housing. What rent control does to the racial structure of the city is horrifying. There are no middle-class black or Hispanic families moving into the Upper East Side because the rents of these apartments are so low that the white occupants do not move out.
PETER SALINS: The racial point you make is absolutely correct. Historically, minorities have been kept out of the best neighborhoods by simple prejudice. Moreover, the way you get the benefit of rent control is by staying in a good location for a very long time, and for a variety of reasons minorities have not been able to stay in one place for very long.
ROGER STARR, City Journal: A certain number of apartments in the big development on the Hudson River will, by rigging the rents, be made available for middle-income families who would otherwise be unable to pay the rent. In that fact we get a glimpse of everything that’s wrong with New York’s housing programs. First of all, we discount the significance of land value by asserting that we can put the middle class on expensive land no matter what that does to the city’s tax rates. If there is really a problem in housing these “unfortunates,” how will 12 percent of the apartments help ease the situation? The whole business epitomizes the folly of New York’s sentimental view of housing and land value.
PETER SALINS: It is worse than you think. Eugenie Birch, what’s the income limit for the people who will occupy these special apartments?
EUGENIE BIRCH: It is 165 percent of the median income.
PETER SALINS: There you have the New York housing paradigm in a nutshell: subsidized housing for people 65 percent better off than the average city household. If even the middle class is to be subsidized, who will be called on to pay market rents or taxes?