Opinion
Lowe is right: New York’s soaring rents shows why freezes won’t work
William Bennett
Money contributorNew York: “The rent is too damn high”. The iconic and endlessly memeable phrase that went viral in 2010 is proving timeless, as New York faces the worst housing affordability crisis in more than two decades.
Despite having the largest rent control scheme in the nation, rental prices soared to record highs in July, with the average rent in Manhattan hitting $US5588 ($8596) – a 9 per cent increase year-on-year and a 30 per cent increase compared to pre-pandemic levels.
Apartments overlooking Central Park have fetched in excess of $US50 million.Credit: iStock
For metropolitan New York, the rent-to-income ratio (the percentage of income that goes towards rent) is a staggering 67 per cent, more than double the threshold of 30 per cent that we would consider “rental stressed” in Australia, according to Moody’s.
Back home, Australian rents are also skyrocketing, rising 6.7 per cent annually in the June quarter, the largest increase since 2009. Rent remains the primary driver of the housing cost component of the CPI, our main measure of inflation.
As talk grows over the introduction of rent controls in Victoria, I thought it would be worth investigating how rent controls “work” in the world’s most expensive city. A city where housing has become so unaffordable half of households are failing to cover basic needs and homelessness rates have risen 18 per cent in the past year alone.
There are approximately 3.6 million homes in New York City, of which 1 million (comprising approximately 44 per cent of rentals) are covered by what is called “rent stabilisation,” which caps rent increases to a set percentage per year.
A better alternative to improve affordability would be for the state government to urgently push ahead with planning reforms.
The annual increase is determined by the Rents Guidelines Board, a committee appointed by the mayor, comprised of both tenants and landlords. In June, the board approved an increase of 3 per cent, below the overall market average of 5.3 per cent.
Over decades, landlords have unsuccessfully challenged these controls on the basis they amount to unconstitutional government taking of private property (classic America).
But do they actually work?
Economics 101 tells us that when a price cap is set below the market price, eventually shortages result as demand exceeds supply.
While caps may improve affordability for tenants in controlled units, this benefit is offset by greater cost increases in the uncontrolled rental market and reductions in the overall rental stock.
In some cases, tenants in rent-stabilised apartments are paying $1025 per month, while other unregulated units in the very same building are going for $5600 according to The New York Times.
A recent survey from the National Apartment Association (to be taken with a grain of salt), found that 70 per cent of housing providers across Minnesota, California and Oregon, said rent control policies negatively impacted their investment or development plans.
Then there is the phenomenon known as “warehousing” that is responsible for up to 60,000 vacant apartments remaining off the market.
According to landlords, warehousing occurs because rent controls make the cost of refurbishing apartments to bring them up to code unaffordable. If you ask tenants, it’s a deliberate act by “greedy” landlords to hold apartments to ransom to kill off rent stabilisation.
Last week, in his final appearance before parliament as RBA governor, Philip Lowe voiced his opposition towards rent freezes or caps: “they’re short-term fixes that both, in my judgment, make the situation worse.”
The American experience points towards him being correct.
A 2015 study of New Jersey rent controls found that over 40 years from 1970 to 2010, rent controls did not have any statistically significant effect on housing markets.
A 2019 study out of Stanford University found that when rental controls were introduced in San Francisco, while tenants benefited in the short term, landlords reduced housing supply by 15 per cent and likely drove up rents in the long term.
Then a 2022 study from Minnesota found that rent control caused property values to fall sharply, and didn’t benefit low-income renters as much as high-income renters.
For Australia, if longer rent freezes or caps are introduced at a time when interest rates are making mortgage repayments tougher, there is a risk mum and dad landlords will be forced to cut back on property maintenance or sell their investments altogether, which would only serve to reduce the overall supply of rental stock.
Back in my home state of Victoria, landlords are already being slugged with the highest property taxes in Australia despite many still failing to see their rental incomes recover to pre-pandemic levels.
A better alternative to improve affordability would be for the state government to urgently push ahead with planning reforms to streamline local approvals, relax planning and zoning for high-density developments, and provide financial incentives to landlords and developers to build more rental apartments.
Coming into a state election rent controls would be an easy vote winner (I don’t know many Labor voting landlords), but there is no evidence to suggest that they increase the supply of rental housing, which is what is needed urgently.
What is for sure is that the rent is too damn high, everywhere.
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