Who Are Worse, Renters or Owners?
Slate's Matthew Yglesias has a nice post pointing out the insane distortions that homeowners have inflicted on public policy. Once you own a home, you want its value to go up as much as possible. But what's good for individuals is bad for the country:
"By encouraging mainstream middle class families to make large leveraged investments in houses, you create a politics around promoting housing scarcity. The problem here is that while any given person can certainly profit from the house he or she owns (or, more plausibly, the land it sits on) appreciating in value more rapidly than average, it's extremely difficult to see how a nation as a whole is going to become more prosperous by houses becoming more expensive. If we banned the construction of new cars and trucks, then America's existing stock of cars and trucks would become more valuable but this would be a way of impoverishing the country not enriching it."
The title of the post is "The Cult of Homeownership Promotes Disastrous Politics," and it's hard to argue. But it does raise an obvious question: Do renter-heavy places have better public policy?
That's hard to say. The average ratio of homeowners to renters in the country is two-to-one. There very few places that have a majority of renters, and only one -- New York City -- where the skew toward renters is as strong as the skew towards homeowners is in most of the rest of the country.
Still, I think the experience of New York is instructive. It suggests that if we shifted away from the current high rates of homeownership, we might lose some of the skewed political incentives to artificially restrict the supply of housing . . . but only by replacing them with different, equally troubling incentives.
Take this article from today's New York Times, in which tenants are suing their landlord to make him repair a building damaged by Superstorm Sandy as well as years of minimal maintenance. The landlord says that repairs would cost more than the value of the building, and wants to tear it down. Why is this a lawsuit? Because, of course, the tenants are enjoying rent-stabilized Tribeca lofts at an average rent of about $1000 a floor, when the market rate rent would be a substantial multiple of that. They would like the landlord to spend what appears to be at least $350,000 so that they can continue renting their controlled apartments. The landlord, unsurprisingly, would like to tear down the building and replace it with market-rate apartments.
Anyone who has lived in New York City for any time at all knows that these stories are a staple of New York City papers -- some tenant group is always outraged about a landlord who is scheming to evict them so that he can actually rent their apartments for what the market will pay. In the new issue of City Journal, Howard Husock explains why these stories are so common:
"About a million rental units are covered by rent stabilization, which limits how sharply a landlord can increase rent each year, and another 38,000 or so by rent control, which dictates the rent itself. Federal housing vouchers pay the rent for 120,000 more units. The city's vast public-housing system comprises 185,000 units (almost 18 percent of all the public housing in the country). All in all, some 1.3 million units -- 61 percent of occupied New York rentals, or 42 percent of all New York homes -- are price-regulated in one way or another, according to the New York City Rent Guidelines Board. In that respect, New York differs radically from most American cities."
Few New Yorkers realize how many apartments are price-controlled: Husock cites a Zogby poll showing that "a third of voters think that just 24 percent of the city's housing is buffered from the market." Most likely, they are unaware because those apartments rarely change hands. Almost all the real-estate listings are in the uncontrolled section of the markets, because people cling to their stabilized deals once they find them. So if you gauge the supply by your experience in the rental market, you'll think stabilized apartments are a small fraction.
New York has, if anything, a worse problem with housing undersupply than areas where homeowners band together to impose height limits and other restrictions that make it hard to build affordable multifamily homes. The vacancy rate in the city is currently 1.6 percent, and it almost never gets above 3 percent, because there's little incentive to build anything except luxury condos, which are unlikely to attract the eagle eye of the rent control board.
Pause for anecdata: A friend moved to Florida and went house-hunting with spouse like, well, a Manhattanite on a tight budget: Cash in hand for first and last-month's rent, credit reports printed out, a sheet full of references. They were absolutely amazed by what they could get for $1300 in a Florida townhome community -- so amazed that at the first place they saw, they said "I'll take it!" and whipped out their wad of cash. The visibly freaked out managing agent said, "Why don't you think about it for a few days."
"It'll still be here," the agent assured her. They did end up renting that place, which is when it became clear that the agent had initially assumed they were drug dealers who'd been dipping into the product. These are the depths to which New York's housing market had reduced them.
You used to hear that rent controls were a stupid vestige of the past, slowly but surely being phased out. But the city keeps stepping in to slow down the pace of decontrol. And no wonder, if renters are a majority of the city, and the majority of renters are in some sort of controlled or subsidized housing.
Meanwhile, you don't even get the benefits that should accrue to a high-renter city -- like fewer ridiculous zoning restrictions -- because rent control regulations have given tenants property-like interests in their apartments. It's nearly impossible to remove or raise the rent unless you can make a plausible case that the tenant is destroying the apartment or using it to commit felonies, or that you or an immediate family member plans to occupy the apartment. So the tenants have all the incentives of homeowners to do things like oppose nearby construction that will block their light, or flooding the neighborhood with undesirable social service recipients.
My worry, then, is that having less homeownership wouldn't necessarily mean better policy. It would mean fewer policies designed to transfer value to existing homeowners by restricting the supply of housing -- but it would mean more policies designed to transfer value to renters, by giving them quasi-property rights in their rentals and restricting prices. And once renters had those quasi-rights, we might end up with the worst of both homeowner and renter incentives. The result, at least in New York, has been insufficiently maintained housing stock and little incentive to build anything except high-end luxury housing.
So it might be better to go to the source of both problems: The idea that "the community" should be able to substantially control what gets built next to it. Of course, about the only coalition in favor of that idea is me and Matt Yglesias.
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Megan McArdle at email@example.com