Will a Rent Freeze Fix NYC or Make it Worse?

0:00Earlier this month, I asked a crowd in Manhattan, one of New York City's most classic questions. How much do you pay in rent? I want to see it by a show of hands. How many people here rent? Look at that. That's amazing. That's like most people. Does anybody want to say how much they pay in rent? Does anybody pay the least anybody want to brag about their situation? Two bedrooms for 1,200. You, sir, and you live in New York City on the upper east side. Is that monochrome from friends with the rent control department? There's a housing crisis in America, and New York City is no exception. In response, New York City is implementing a rent freeze next month. That means that for about a year, it will be illegal for many landlords in the city to

1:02raise the rent on their tenants. But rent freezes are very controversial. Some economists think a rent freeze is a good tool to address a broken housing market, and others think it's actually harmful. The rent is too damn high. Agree or disagree? Agree. Duh. Agree but for who? Because my friend, we get $1200 a rent for $2.00 better. At this live taping at the journal, I sat down with two housing experts who have two different takes on the housing crisis. You can watch a video of our conversation on Spotify. Welcome to the journal, our show about... Timeride Knutzen. Coming up on the show, what's wrong with the rental market and how to fix it? This episode is presented by Intuit Credit Karma.

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3:12Jobs. And listeners of this show will get a $75 Sponsored Job Credit to help get your job the premium status it deserves at Indeed.com slash podcast. Disco to Indeed.com slash podcast right now and support the show by saying you heard about Indeed here. Indeed.com slash podcast, terms and conditions apply. Hirey now? Then this is a job for Indeed Sponsored Jobs. The New York City is a complicated housing market. So let's start off with some basics. Rent control has existed in New York in some form or another for nearly a century. At first, rent control kept many landlords from being able to raise rents at all. And then in the 1970s, rent regulations evolved into something called rent stabilization. Meaning rents could go up, but only by an amount set by the city's rent guidelines board or the RGB. Most apartments in New York used to be rent stabilized, but that number has shrunk over

4:12the last few decades. And today, there are about 1 million rent stabilized units in New York, which is about half of the city's rental supply. At our live event in New York a few weeks ago, I discussed the housing crisis with Emily Eisner and Kenny Burgos. Emily is the executive director and chief economist at the Fiscal Policy Institute, an independent think tank focused on economic policy in New York. And Kenny is the CEO of the New York apartment association, which represents landlords, including those that own and manage thousands of rent stabilized homes. How bad is it? How would you characterize how bad the housing situation is in New York City? OK, I would characterize it as quite bad, but I kind of do want to just take one step back quickly and say that the median rent in the city is about $17 to $1800 a month. And I just think that that's usually strikes people that's quite low when they hear it. So I just wanted to like level set on that. 30 years ago, it was about $1,000 per month and adjusting for inflation.

5:15So like accounting for all other price changes and wage changes, it's gone up by over 50%. Now it's 6, yeah, 1700, I guess. So there's been a huge shift in the distribution of rents in the city, even after accounting for a regular inflation. And it's really squeezing people's incomes and budgets such that now renters over 50% of renters are paying over 30% of their incomes in their housing costs and something like 30% of renters are paying more than 50% of their incomes and housing costs. So we're saying. So there's a rent is very expensive for a lot of people. A lot of people are in your rent burdens. Yeah, rent burdened. How would you describe the situation for landlords, Kenny? I would say right now we have a scenario where, especially in recent times, we have a high level of distress happening, particularly in the rents, they stabilize housing stock. And we'll talk more about sort of how we got there and what's happening. But basically you have a scenario where you have tenants that are unhappy about the current

6:15housing scenario and property owners that are unhappy about the current housing scenarios. So that tells you everyone is unhappy. Clearly something has to be fixed here. Affordability is obviously an issue in every city. So do you think that New York is just emblematic of what's happening everywhere or is New York uniquely bad? I mean, New York has always been known to be a very expensive city. Affordability has been the buzz word certainly for the past few years and not just the buzz word, it's a very real issue. We've all seen high inflation coming in the past few years. We've seen our own groceries increase, we've seen cost increase across the board. But I think New York has a unique experience here. One because everyone wants to come and live here because it still is a greatest city in the world. But that level of demand is being met with such a level of scarcity and lack of housing supply that it's forcing people who are looking for rents today to face an exorbitant crisis. So you said earlier, they rented to Dem high and my response has been, yeah, if you are looking for a new free market apartment, but as Emily said, that median rent being paid today in New York City, $1,600. And most people are shocked when they hear that.

7:16They didn't know that. And that is because we effectively have two different housing markets that are occurring in our city. And obviously, there's an impact on both sides into rents, stabilization in the free market. And the interplay there creates what we're seeing today. And I've heard you say that housing is the number one, cylindrical issue of our time. Emily, do you agree with that? How important do you think this issue is when it comes to sort of all of the wonderful problems that we have in front of us? Yeah. I mean, we have so many problems. So it's hard to name what's the top problem. But I mean, honest, I don't know how old you are, Kenny. But I think we're roughly the same age. And we basically came of age during the financial crisis when hundreds of thousands of people lost homes or lost their retirement income. The housing market has been at the center of American politics, yet for my entire adult life. And continues to be, I mean, housing, yeah, affordability, I think, is the most important

8:18factor in the whole affordability conversation. I agree. I am curious. Was there ever a time when the rent wasn't too damn high? We have been in a housing emergency in New York City since World War II. I can't think of another emergency that we have installed in 80 plus years. So we've been operating with this triage and mindset when it comes to housing for generations. And that's part of the problem. And I think we're at a moment where the rubbers met the road. Certainly COVID had an impact. Certainly the inflation we saw had an impact. But recent policy layer on top of that is just causing more insult to injury. And that's where we're experiencing today. So rent has probably been high for all our lives and our parents lives. But we're at this moment where it's becoming untenable. It's become untenable, not just for the tennis, but again, for property and receive and manage their buildings. Part of the reason why rents increase, not just on the rents. They've lost out of the free market side, is the cost imputed just to operate the housing. I often have these evagety people and it's interesting their mindset.

9:20Well, they'll say, well, property owner collected $2,000 rent for 20 years. Why don't they have, you know, I don't know the math, but $800,000 ready for repairs. And it's almost like ignoring as if there was no cost to run that housing. You know, there's property tax. If there's insurance, there's water and sewer bills, there's labor, there's legal. I mean, it is a full business to operate. Most since this is a city of renters, most people don't experience that. They just see the rent they pay. And so we're at this moment where it's becoming untenable to operate the housing. And like Emily said, their sterling incomes are not keeping pace. Well, where the rents are going. So can a rent freeze fix the housing market? That's next. Call us footballers back. So Hilton called to me the superstition concierge to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky.

10:21Hilton's unmatched hospitality can keep up with any superstition. Even a marching bandwick up call it 555 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for this day. This episode is brought to you by Born in Roma fragrances by Valentino Beauty, the iconic fragrance duo. Donna Born in Roma, O. Depart Fum is a feminine fragrance featuring juicy black current, central Jasmine, Woody Cashmurren and warm vanilla. Its masculine counterpart, Wilmo Born in Roma, O. Depart, has notes of fresh violet leaf, aromatic sage, green vetiver, spicy ginger and mineral salt. Shop at Macy's.com. At the center of the housing affordability debate in New York is a law that passed in 2019 called the Housing Stability Intentant Protection Act.

11:23The law made a number of changes, but the biggest ones were that it made it much more difficult for landlords to exit the rent stabilization system. And it put a very tight lid on how much landlords could raise the rent between tenants. So this 2019 law, what was it intended to do? It's touted as the most sweeping tenant protections ever passed in New York State, but really it changed the economics. And as a whole host of changes there, the most impactful one was the implementation of something that we call vacancy control, which is a regulation of an empty apartment. Well, because basically what it is, it said that when a tenant turns over, you cannot raise the rent more than a certain amount that's dictated by a rent guidelines. I'm going to pick on this guy and front using as an example. I'm sorry. So you hit $1200 to bed and rent. I'm assuming that was a succeeded apartment, just how low the level was. So someone probably had that apartment, if it wasn't him, a parent or a friend, for a few years of decades before. What the 2019 rent law says is, his apartment, when he decides to leave, has to be rented at that base level of $1200. But before that even happens, landlord has to make sure that it's brought up to the newest

12:28standard of code and code change every year, which should be required. But it's a significant cost, especially for apartments that are $700 that have been in occupancy since 1970. It's a very common in rent stabilization. So you're asking property owners to spend 50, 60, 70, $100,000, not see the return on that investment. But then the baseline rent begins at a number that's likely below the operating cost per month. For reference, the rent guidelines board, which is the regulatory body in New York City that imposes the rent freeze or the annual rent changes, their data says it costs $1350 on average just to operate the apartment. So we're seeing more and more vacancies occur. So you have empty apartments, but on top of that, it's pulling the building's valuations down, which means banks won't land on these buildings, which means that tenants living in the buildings are now undergoing even worse conditions because there's no money to be put into these properties. Do you think that broke the New York City housing market? 100%. Okay. So first of all, Kenny kindly said that the 2019 reforms to the rent stabilized housing

13:28were the greatest sort of tenant protections ever passed in New York State. I think that's true. And it also makes it much harder and reduces the incentive for landlords to try to boot out tenants. So one of the reasons that this was implemented was because there was tenant harassment that would cause tenants to leave so that a landlord could raise the rent. That's a really unpleasant experience that hopefully none of you have ever had. And you're much less likely to have it now because of that 2019 reform. So I share Kenny's concern about the housing, like maintaining the stock of housing and making sure it's up to code and stuff. But I think additionally, and I haven't even gotten into this, like most of the data on the rent stabilized housing stock suggests that its finances are okay. Now, there's a slight uptick in building problems associated with the pandemic. And that's because people deferred maintenance while we were all inside sheltering. And that makes sense to me. But I don't think we have reason enough data to see if that has actually continued.

14:28Like there's some natural churn and then there's some apartments that need some remedial help that we do need to give some capital funds to. I agree with you that some of the apartments need some help with capital spending. But it's a small number. It's not like there's a huge capital strike happening that's taking all the rents stabilized units off the market. It's a small number relative to the size of the market. I have one property owner in Upper Manhattan alone that has 75 empty apartments, 75. If you go on treaties, you right now look for an apartment below $2500, you may be fine 15. He could meaningfully quintuple 5X that amount just on his vacancies. But again, we ignore the solutions in our face because we want to force his affordability without subsidy. I want to talk about the rent freeze specifically. So Emily, you recently wrote an op-ed, the economic case for a rent freeze. So can you make that argument in 30 seconds? Okay. Yeah, we're arguing. A rent freeze is, I don't want to say easy, but it's like a thing you can do right now to

15:30bring down costs for people in the context where people's budgets are really suffering. And affordability is such a huge issue we know. It's what every politician is trying to look for answers for. And I think that Kenny's point about it being really costly for landlords is well taken. My view is that the difference between a 2% rent increase and a 0% rent increase is just not that big a deal, even for four years. There was a Moody's report that came out in June or July that said that at most 6% of the landlords will face serious risk of default with a four year rent freeze. The finances of these buildings are just not as bad as the landlord groups like to say they are. And so, so yeah, so basically I think it's like not that radical of a policy despite what

16:30you might hear. And also I will say it's not a sufficient policy. Like we need much more to actually solve the affordability crisis. Kenny, what's your case against it? Against rent freeze? Yeah, against the rent freeze. I'll give you a case four rent freeze actually. There are already rent freeze programs that have existed that we endorse. This green and green are programs the city has offered 50 years for seniors and disabled folks. It freezes their rent and credits a property on the property taxes. Why is that a good program? It accounts for costs. If you're living if you have a voucher and a little rent stabilization, even if the RGB increase rent 4% 5% your rent doesn't increase if your income hasn't moved. That's a rent freeze. That is tenant protection. That is what the government is supposed to do. Provide affordability where it's needed because it is needed. But making private property owners provide it without subsidy shouldn't be happening. We don't do anything else. We create a great program in the 60s and notice snap. Families can't afford food. We give you an EBT card or a snap benefit card to shop with dignity at a supermarket. We don't tell a supermarket owner bring your beef and your milk and your rice and your eggs down to $1. So this is how we have the dress affordability is to programs from the government.

17:34So the rent freeze is going to go into effect on October for a year. It's going to apply to one or two year leases. So what are you hearing from your members? How are they preparing for this thing which is coming right around the corner? It does not much to prepare. They are regulated by this body. They work under the guidance of the RGB every year. They are mandated by law to provide a renewal lease at a 0% now. And so they are going to have to make hard choices based on the operation of their buildings. So this is where you get more deferred maintenance. This is where repair should be happening. Maybe they get put off. Maybe you put a bandaid solution on it. You are working just within the confines of the revenue of that building. And again, I repeat, you have banks that are exiting this market. And banks are completely leaving this market any opportunity. Ocean first just recently got merged. Immediately the first thing they did was offload their rents-stabilized loans. They don't want to be in this space because the banks and the regulators can see very clearly. There is no economic case to put money in this housing stock where they will see a return. We've spent this time talking about the 1 million rents-stabilized units.

18:35But there's another 1 million that are not. How do you think that this rent freeze is going to affect the rents in the free market units? These are alluded to this earlier. But the economics of the situation are, as you said, in a constrained supply environment, the landlords have a lot of power to raise rents. We haven't talked about the- or I guess I talked a little bit about vacancy rates. But the vacancy rate in the city is 1.5%. There's really very few options for where tenants can go if they need to find new housing. And that gives landlords a lot of power to raise rents. So in that context, basically, the point of rent regulation is to stabilize rents so that landlords can't just jack rents up and up and up. What will happen with market rate units? Often people talk about like, oh, they're just going to compensate and raise the rates of the market rate units. That doesn't quite make sense to me economically. Like someone has to be willing to pay that amount. I guess, as I just said, people might just have to eat it. But it's more likely to me that people will leave than people will just eat the cost.

19:40I don't see a strong case for there to be like a pushing up of the market rate rents. Kenny, what do you think? I disagree. I mean, we're already seeing again asking rents have gone up and you don't have to connect that to the recent rent freeze. But again, if you have a constrained supply environment, and more importantly, if you have- people may not know a mixed regulated building and owners who have told this to, if half my units are rent regulated, I mean, I have no control what those friends are, but the other half of free market. And again, my property taxes are up, my insurance is up, all my costs are up. But the city says your rent regulated apartments are a 0% for the next two years. Guess who's paying for that increase? The free market neighbors. This is why you have this two tiered system in New York City where there are people paying $800 for a three-bedroom apartment. And if you look for a three-bedroom today, you're probably going to be paying $7,000. The cost just gets pushed out somewhere. You can't ignore the cost and I think this is what has been a policy for so long and now we're paying the price. Okay, we are just about out of time. So I'm going to ask one final, very complicated question.

20:42This is obviously a supply and demand issue. There's not enough supply of housing and there's a lot more demand for the housing that is constrained. So how, what is the best idea out there to try to increase the supply of housing? It will baby build, but on top of that, you've got to get these vacant units back online. It's not to say that we're looking for the end of rent stabilization or rent control, but it's about the tenancy. You have to get the owner, the ability to invest in that unit, get them back online and then you protect the tenant. That next tenant of that apartment gets a new release every year, pays a small increase or nothing if the mayor continues on with how he likes. So it's like, protect the tenants, let's get the supply back online because you bring 60,000 units back to New York City. In modern history, we have never built that many units in a single year and I can tell you right now, our property owners can bring those apartments in months. Not years. I have projects that I've worked on as a staffer in the City Council that are just now coming up because it's going through layers of bureaucracy and euler processes and seek room for which thankfully that's changed in New York.

21:43But if we wait simply to build new housing that costs 800,000 plus per unit, we're not only going to be waiting for a long time, we're also going to be landing at rent much, much higher than the meeting rent in New York City today. Yeah, I agree, Bill, baby, build. I mean, I think that the mayor is taking all hands on debt approach to adding housing supply to the market. That includes regulatory changes, permitting reforms. The state government is also doing a bunch of work on this. And then I would just add like adding capital funds into the housing market to both make improvements to affordable housing units and add new units to the market. Amazing. Well, thank you guys so much for being here. That's all for today. Sunday, September 27th. The journal is a co-production of Spotify and the Wall Street Journal. Additional reporting in this episode by Rebecca Pichoto.

22:46Thanks for listening. See you tomorrow.