Let our rent rates go: why rent control should stop.

Rent stabilization was introduced to New York City in the 1940's. The city's intention was to continue wartime controls in a marketplace where there was an abundance of housing stock. It was to be a temporary means to induce tenants to rent apartments by promising them a below market rent in order to fix a high vacancy problem. Sixty-three years later, the measure still exists.

In the current rental environment, rent stabilization has taken on a different role. It has caused an unbalanced rental market, the opposite of what it was intended to do. The argument for regulation is that it is the only means available to guarantee affordable rents in what is (incorrectly) perceived to be a tight housing market. With a vacancy rate in the 3% range and not enough supply to fill the demand, the greatest city in the world has the most inequitable, logic-defying rental housing market.

Currently, approximately 70% of New York City residents rent their apartments. Of that group, approximately 60% inhabit some form of rent-regulated apartment. These apartments rarely change hands. Families tend to remain in too small apartments for fear of not being able to afford anything larger, while some wealthy individuals pay a meager monthly rent for valuable real estate and some sublet their units.

This causes a "shadow market" (any form of control which curtails supply will produce an inflated demand, creating a virtual shortage of rental units. Thus alternate options emerge, albeit a black market scenario). In the case of rent regulations, the government, in its efforts to relieve this false shortage, will deliberately allow a segment of this market to go unregulated to ease pent-up demand.

Rent regulation creates housing shortages. Many newcomers are forced to overpay for housing in the shadow market, where rents are artificially inflated yet unregulated. Add to that the development of condominiums and cooperatives and a further shortage emerges, tightening the market's supply even further.

Rent regulation forces the supply of apartments to be divided between the regulated market and the shadow market. The fighter the regulated controls are, the higher the shadow market rates go. This leads to hoarding of controlled units, with tenants never vacating or subleasing the units at a shadow market rate.

This, in turn, negatively impacts regulated tenants--they can't afford to leave their apartment. At the same time, landlords falsely believe that in the long term their rents would rise fourfold if rent regulations were abolished.

According to the 2000 census data, the median rent in New York City was only $705 per month. When was the last time you heard anyone renting an apartment in Manhattan for this price?!

To understand the problem fully, it is necessary to examine cities where controls have been abolished. When regulation was removed in Massachusetts in 1997, chaos did not take hold, as many believed. After an initial bump in rents, new construction kicked in and affordable housing effortlessly ensued. Before regulation was removed, the vacancy rate was an artificial 4%. After regulation were removed, the rate rose to approximately 6%. More importantly, the middle class was able to find affordable housing in cities where they worked, which boosted the local economies.

A more local viewpoint can be taken from our own market of luxury decontrolled units. Approximately 84,000 units were decontrolled in 1998. Since then, there is an abundance of available apartments in this market segment. This oversupply has caused rents to be reduced and contributed to a 7% vacancy rate in the market of decontrolled units.

When the market is allowed to be influenced by natural causes, the dynamics actually bring the market to equilibrium. This means lower rents in a free market. Any artificial control tightens supply and increases rents.