Rent Ceilings in New York City New York City rent controls began after World War II, when greater demand for rental housing threatened to push rents higher. To keep prices from rising to their equilibrium level, city officials imposed rent ceilings. Since the quantity demanded at the ceiling price exceeded the quantity supplied, a housing shortage resulted, as was sketched out in panel (b) of Exhibit 11. Thus, the perverse response to a tight housing market was a policy that reduced the supply of housing over time. Prior to rent controls, builders in New York City completed about 30,000 housing units a year and 90,000 units in the peak year. After rent controls, new construction dropped sharply. To stimulate supply, the city periodically promised rent-ceiling exemptions for new construction. But three times the city broke that promise after the housing was built. So builders remain understandably wary. During the peak year of the last decade only about 10,000 new housing units were built. The excess demand for housing in the rent-controlled sector spilled into the free-market sector, increasing demand there. This greater demand raised rents in the free-market sector, making a rent-controlled apartment that much more attractive. New York City rent regulations now cover half the 2.1 million rental apartments in the city. Tenants in rent-controlled apartments are entitled to stay until they die, and with a little planning, they can pass along the apartment to their heirs. Rent control forces tenants into housing choices they would not otherwise make. After the kids have grown and one spouse has died, the last parent standing usually remains in an apartment too big for one person but too much of a bargain to give up. An heir will often stay for the same reason. Some people keep rent-controlled apartments as weekend retreats for decades after they have moved from New York. All this wastes valuable resources and worsens the housing shortage. Since there is excess quantity demanded for rent-controlled apartments, landlords have less incentive to keep apartments in good shape. A survey found that about 30 percent of rent-controlled housing in the United States was deteriorating versus only 8 percent of free-market housing. Similar results have been found for England and France. Sometimes the rent is so low that owners simply abandon their property. During one decade, owners abandoned a third of a million units in New York City. So rent controls reduce not only the quantity but the quality of housing available. You would think that rent control benefits the poor most, but it hasn’t worked out that way. Henry Pollakowski, an MIT housing economist, concludes that tenants in low- and moderate-income areas get little or no benefit from rent control. But rich people living in a rent-controlled apartment in the nicest part of town get a windfall. Someone in upscale sections of Manhattan might pay only $750 a month for a three-bedroom apartment that would rent for $12,000 a month on the open market. Once a tenant leaves a rent-controlled apartment, landlords can raise the rent on the next tenant and under some circumstances can escape rent controls entirely. With so much at stake, landlords under rent control have a strong incentive to oust a tenant. Some landlords have been known to pay $5,000 bounties to doormen who report tenants violating their lease (for example, the place is not the tenant’s primary residence or the tenant is illegally subletting). Landlords also hire private detectives to identify lease violators. And landlords use professional “facilitators” to negotiate with tenants about moving out. Many tenants end up getting paid hundreds of thousands of dollars for agreeing to move. Some get as much as $2 million. Facilitators can often find tenants a better apartment in the freemarket sector along with enough cash to cover the higher rent for, say, 10 years. Since the rental market is in disequilibrium, other markets, such as the market for buying out tenants, kick in. Rent Ceilings in New York City) Suppose the demand and supply curves for rental housing units have the typical shapes and that the rental housing market is in equilibrium. Then, government establishes a rent ceiling below the equilibrium level. Before you answer the questions watch the Kahn Academy video on Rent Control a. What happens to the quantity of housing available? b. What happens to the quality of housing and why? c. Who benefits from rent control? d. Who loses from rent control? e. How do landlords of rent-controlled apartments try to get tenants to leave?