Session 11
— Markets and Government Policy
Case Study 3.11e "Rent Control in New York"
Directions: Complete the following case study and record your answers on a separate sheet of paper.
Topic: The definitions of rent and price controls and why they are used. New York City still has some rent-controlled apartments to address the needs of consumers.
Objective: To analyze of government intervention in the free market and why such intervention occurs. New York City's rent control policies are a good example of price controls created to benefit consumers in the face of high prices. However, these policies have resulted in the exact problem they were intended to solve.
| Key Terms: | demand | ownership |
| direct burden | price | |
| free market | rent control | |
| Careers: | economist | real estate agent |
| Web Site Links: | www.housingnyc.com | |
| www.tenant.net | ||
At different times in the history of the United States, the government has declared wage, price and rent controls. Often such action is taken during periods of economic difficulty or of war. While most of these actions have been temporary and deregulated once the crisis, economic or political, has passed, some have remained. In the 1940s there were a number of price and rent controls to help consumers deal with the problems of the war effort. In terms of housing, during World War II most construction dealt with the war effort, and very few houses or apartments were being built. In the free market, rent prices skyrocketed as demand exceeded supply. In order to curb future housing problems and inflation, the government implemented rent controls. In a rent-controlled property, the landlord or building owner was no longer able to increase the rent above a government-mandated price.
CS Question #1: What is rent control?
In New York City many rent controls were retained even after World War II and national deregulation. The reason was the pitiful state of housing in the city. Free markets have, sadly, been unable to provide an adequate supply of decent and affordable housing in New York. In order to prevent housing problems, unrest and economic fluctuations, rent controls were kept in New York, covering over 71,000 households. After the war, over two million new apartments were built and were added to the rent control program. Another similar program is called rent stabilization. Rent stabilization allows the landlord to increase the rent, but only within mandated bounds set by the government.
The rent control system was created to provide reasonable rental prices for every consumer. The system intended to put both wealthy and poor tenants on an equal footing with landlords. In many ways, rent control benefits low-income consumers. However, it was never intended as a social welfare program. While much concern was expressed for the poor residents of New York, the rent control laws were created to benefit everyone by providing stable rents. If left to the free market, rents in New York could easily become inflated beyond general affordability, pricing out many poorer and middle-class residents.
CS Question #2: What is the objective of rent control?
In many ways, rent control has been successful in New York City. Despite very low vacancy rates, affordable housing is available to city residents. When compared to tenants living in other cities with high rents, like Los Angeles, San Francisco and Boston, the tenants in New York benefit greatly from rent controls. According to a study conducted by the Citizens Budget Commission, a resident of New York City spends 38.9 percent of his or her income on rent. Residents of other high-rent cities can spend up to 48.5 percent of their income on rent. Higher-income New Yorkers, however, have gained less, spending between 9.5 percent and 10 percent of their income on rent - on par with their counterparts in other cities. Rent control has created a cushion for the lower and middle classes that allows them to compete in the rental market and find reasonable housing. As construction increases and more apartments are provided, rent control could become less important. If enough apartments become available, prices will fall on their own. Until then, however, New York will hold on to some number of rent controlled apartments.
CS Question #3: Who benefits most from rent control?
Rent control in New York has created low vacancy rates. There are two reasons this has occurred. First, fewer landlords are willing to supply housing. New York is a huge metropolis and home to many businesses. Because the rent controls do not apply to businesses or other organizations, landlords can earn greater profits by commercializing their rental space. Second, more individuals are moving into the city for housing because of the decreased price. These two factors continue to result in the demand exceeding the supply - in other words, a shortage. Remember that this is the very reason rent control was implemented in New York in the first place: to solve the shortage of housing, which drives up prices. Rent control, as a price ceiling, upsets the equilibrium of supply and demand. The inability of supply and demand to interact naturally creates a housing shortage.
Rent control in New York has also created a black market for housing. Because of the high demand, individuals will pay rent that is above the artificial equilibrium. Suppliers make illegal agreements to violate the price ceiling. Individuals also participate in the black market by illegally subletting their apartments for higher rent without notifying the owner.
CS Question#4: How does rent control negatively affect the market for housing in New York?
Further Thought: