Rent Control Regulations in the New York - Research Paper Example

Rent Control: A Case Study of New York of the of the Number Contents Contents 2 Introduction 3 History 3Objectives 3 Methods 4 Case Studies 4 Discussion 7 Evaluation 8 Conclusion 14 Recommendations 14 References 16 Introduction Rent control is a type of judicial or public rent related regulation. Rents are paid by the consumers for using real estate properties or houses to the owners for a temporary span of time. The regulation of rent helps to lower volatility in its monetary value in the market. Rent control is often used as a welfare maximizing tool by the government. The pubic authority realized that social welfare and economic development can be successfully achieved with the essence of lower income inequality. Rent control is primarily imposed to neutralize the bargaining power inequality between landlords and tenants in the market. Rent controlling rules are imposed in agricultural, business and housing tenancies (Block, 2008). This research report focuses on rent control system of the United States of America (U.S.A.) and tries to analyse its impact on the economy. History Rent control regulations in the U.S.A. were imposed by the local public pressures and anti-profiteering committees during World War I. Later on, during the World War II, new regulations of rent control were introduced in the country. New York City is known to have the longest history of rent control regulations since 1943. The Rent Stabilization Law of 1969 was introduced in New York for ensuring adequate supply of rented houses (Block, 2008). Over time, the rent control system of the U.S.A. has become more complicated. A majority of elderly, protected renters and lawyers faces great trouble in understanding the existing, complicated system of rent control (Block, 2008). Objectives The primary objectives of this research paper are: To analyze the impact created by rent control on demand and supply of rental units To estimate the effects created by rent control on tenants, properties, landlords, communities and investors of New York City To analyze the positive and negative impacts of rent control regulation in New York City To enumerate the conditions of certain regions facing no rent controls in the City Methods The research work of the paper was based on inductive research approach, according to which relevant data and information were collected before the analysis and evaluation process. The data and information used in the research paper were gathered from authentic secondary sources, such as, national newspapers, scholarly articles, books, journals and government published websites. The entire research data was collected on longitudinal basis. This implies that analysis included both time and cost dimensions. The research work could be completed in less time at a lesser cost only with the use of secondary data resources. These articles and data sources provided useful information about advantages and disadvantages generated by the rent control system in context of New York City. An argumentative analysis on rationality of the regulation was also performed based on information collected from the valuable data sources (Block, 2008). Case Studies In New York, it is often found that the charges for certain rent controlled apartments are increased due to the rise in labour and fuel costs. Various case studies argue that rents are incremented in New York City for three major causes: If the owner makes a significant new capital investment in the rented property (with approval of DHCR) If the owner faces hardships with the approval of DHCR If the tenant provides a written agreement, stating that the owner has made an investment to ensure better service provisions (Block, 2008) It is also noted that through the Senior Citizen Rent Increase Exemption program, the elder tenants of New York (above 60 years old) are able to freeze their rental rates. This highly benefits the older tenants (Navarro, 2014). A report states that landlords offering luxury rental services in New York deny providing certain essential services to tenants. These are the gym, playroom and rooftop garden usage services. Researchers claim that landlords attract high paying tenants by making expensive investments so as to assure provisions for basic necessities. Due to rent control rules, these landlords face difficulties in providing such pricy services at low rental values (Kaysen, 2014). Figure 1: Rental Status in New York City (Source: Gyourko & Linneman, 1989) The above table shows the approximate rental status of New York City. Figure 2: New York Housing Market (Source: Welch, 2013) Considering the above statistics, it can be stated that the count of rent regulated housings is maximum in Manhattan and minimum in Staten Island. The amount of rented properties in Staten Island is less because above 62% of the landlords reside in their own houses. Other rental rules are extensively practiced in Brooklyn among the sample above (Block, 2008). Discussion Rent regulation programs are known as rent stabilization and rent control is employed by numerous communities in New York. The rent control regulations in New York are imposed on buildings that have been constructed before 1947. On the contrary, rent stabilization regulations are imposed on those built prior to 1974 and post 1947 (Block, 2008). The buildings that receive the J421 and J51 tax benefits are also subjected to the rent stabilization regulations. Nonetheless, outside the city of New York, rent stabilization is known as Emergency Tenants Protection Act. Rent control in New York restricts the apartment owners from evicting the tenants. As per this regulation, the tenants are eligible to receive certain essential services from the landlords. The tenants are considered as “statutory” residents and hence, the owners need to offer them renewable leases. If any owner does not abide by regulations imposed by the rent control system of New York, then the tenants are allowed to file respective cases to the organization of DHCR (Division of Housing and Community Renewal). The DHCR collects relevant data and information against the accused owners and finally raises the appeal against them. In such cases, if owners are legally proved to violate the laws, then DHCR lowers their existing imposed rents or levies civil penalties against them (McAfee & Lewis, 2013). The rent control processes of the U.S.A. function according to the Maximum Base Rent (MBR) system. The rent values established as per the MBR are revised at the end of every two years for incorporating changes occurring in the operating costs. If a landlord provides all basic essential services to the tenants and does not breach any rules, then they are allowed to raise their rents annually by 7.5%, until it reaches the rate established by the MBR (Cuomo, 2008). Evaluation Properties In the absence of any rent control, demand and supply of rented properties clears at the market clearing equilibrium state. Figure 3: Without Rent Control (Source: Amold, 2010) Another social welfare inducing activity in the absence of any rent control is the additive summation of consumer and producer surplus. As shown in the above graph, the equilibrium rent becomes $ 1500 and 1500000 apartments are rented in that price (Block, 2008). Figure 4: Demand and Supply of Properties with Rental Regulation (Source: Amold, 2010) If the legislative authority freezes the rental rate at $ 1000 through rent control, then producer surplus gets transformed into consumer surplus. This enhances demand for the properties above market clearing level (1500000). Even so, as the supply price cannot be increased, supply of rented properties falls below the market clearing level (at 850000). As a result, similar to other price control programs, rent ceiling had generated shortage in supply of rented properties in New York. This has lowered the net social welfare, thereby creating excess demand for rented apartments in New York (Block, 2008). Landlords The rent controlling process of New York had adversely affected interests of the landlords. The landlords were not allowed to enhance the value of rents easily. This prevented them from providing adequate services to the tenants. Even though a landlord abided by all regulations related to rents and services, yet hostile tenants could file cases against him. Such circumstances forced the property owners to not make investments in these existing rented apartments and lowered the aggregate supply (Block, 2008). Tenants In very short run, the tenants in New York feared that prices of the rented apartments would be high; so, tenants were not benefited in the very short period of time after rent control implementation. Nevertheless, in long run, they have enhanced the demand for rented apartments because of receiving the services at lower costs. Also, one must notice that quality of essential rent services provided in New York had deteriorated after enactment of the rent control (Block, 2008). Investors Rent control regulation in New York had lowered quality of the rented housing services as well as the level of private investments within the country’s housing sector. This is because existing property owners were not interested to make additional expenses in their rented properties as rents could not be raised above the MBR rate. Hence, the level of private sector investments had significantly fallen in the property sector of New York after implementation of the rent control regulation. Private capitalists were not interested to make fresh Greenfield investments in the housing sector because property owners were unwilling to sell high rent estates at the ceiled rates. Moreover, capitalists regard it feasibly to make investments in sectors that generate high economic returns. The return or surplus yielded had fallen in the property sector, which lowered the level of private investments (Block, 2008). Figure 5: Declining Private Investments (Source: MarketWatch, 2012) The line graph shows that level of private investments in the U.S.A. has significantly declined in recent years, after enactment of the new rent control regulations. Communities It has been be analyzed that any type of price controlling programs is not beneficial for the communities of an economy. Maximum net social welfare can be achieved in the free market equilibrium level (Block, 2008). Regulations related to the rent control system were passed by legislators of the city for protecting interests of the tenants, especially during shortages in rented property. Rent control is a type of government introduced price ceiling regulation, which enables the legislators of New York to set the price or establish a “rent ceiling” for rented real estate or housing properties. This restricts the price establishing powers of landlords and discourages charging of incorrect rent amounts from the tenants. However, benefits of rent control can be experienced only in the long run (Block, 2008). Short Run Effect Figure 6: Impact of Rent Ceiling Demand for Rents Supply Rented Properties Pe Pc Qs Qe Qd (Source: Author’s Creation) The above figure shows the internal economic issue arising from imposition of rent control system. If the public regulating authorities established the rent ceiling level at a price (Pc) below the market clearing level of rent (Pe), then the economy experiences excess demand for rented properties. If the aggregate demand for rented properties (Qd) is more than its aggregate supply, then the economy faces severe shortage of dwelling spaces. Consequently, by implementing rent control, the New York government prevented the rent value from reaching the market clearing level, thereby creating shortage of dwellings in short run (Block, 2008). Long Run Impact In long run, additional dwellings were constructed in the housing market of the U.S.A., which helped to satisfy increased demand for the rental property to an extent. Figure 7: Long Run Impact (Source: McAfee & Lewis, 2013) The above graph shows that in short run, the supply of rented apartments could not be increased in response to the rising demand. However, the same could be improved in long run. Conclusion Social welfare is maximized in an economy that experiences minimum government control. However, public intervention is crucial in markets that have asymmetric information between the buyers and sellers. Rent ceiling process in New York was introduced in order to protect tenants from paying high rents imposed by the property owners. By imposing the restriction, the government of New York lowered the supply of rented occupancies in short run. Over time, tenants created greater demand for the rented properties in response to lowered price value (Block, 2008). Although the supply of new rented estates increased in long run, overall level of private investments made in the sector has lowered due to fall in producer’s average returns. Though the rent control system economically benefited the tenants, yet certain case studies have suggested that they are not socially happy with the control. This is because rent ceiling has made the rental service qualities inferior in nature and the landlords often refuse to provide necessary services due to the low rents offered (Block, 2008). Recommendations Such negative consequences of the rent control in New York can be minimized only with increased private investments. The private investors should be convinced that investments made within the property sector facing rent control would be safe for long run in the contemporary volatile market (Block, 2008). If private investments within the housing sector are enhanced, then higher supply of rented occupancies can be ensured. Increased supply of rented property would ultimately satisfy the growing demands and quality of rent services provided to the tenants. This would in turn enhance competition among the landlords and increased rivalry would tend to lower the free market equilibrium rental rate. Therefore, from the above context, although public intervention for social welfare maximization has proved to be beneficial, it cannot be effective without private participation (Downs, 2000). References Amold, R. A. (2010). Macroeconomics. Connecticut: Cengage Learning. Block, W. (2008). Rent Control. Retrieved from http://www.econlib.org/library/Enc/RentControl.html. Cuomo, A. M. (2008). Rent Stabilization and Rent Control. NYSHCR. Retrieved from http://www.nyshcr.org/Rent/factsheets/orafac1.pdf. Downs, A. (2000). Residential rent controls. SOCSCI. Retrieved from http://www.socsci.uci.edu/~jkbrueck/course%20readings/Downs.pdf. Gyourko, J. & Linneman, P. (1989). Equity and Efficiency Aspects of Rent Control: An Empirical Study of New York City. SOCSCI. Retrieved from http://www.socsci.uci.edu/~jkbrueck/course%20readings/gyourko%20and%20linneman2.pdf. Kaysen, R. (16 May 2014). What’s Next, a Bouncer? The New York Times. MarketWatch. (2012). Market Watch. Retrieved from http://marketwatch666.blogspot.in/2012/10/3rd-quarter-gdp-september-durable-goods.html. McAfee, R. P & Lewis, R. T. (2013). The policies of price controls. Retrieved from http://duncankennedy.net/documents/Housing%20other%20articles/Reassessing%20Rent%20Control.pdf. Navarro, M. (20 May, 2014). Albany Expands Effort to Cap Regulated Rents for Older Tenants. The New York Times. Welch, M. (2013). NY Times Horrified That Rent Control Leases Might Be Treated Like the Assets They So Obviously Are. Retrieved from http://reason.com/blog/2013/10/21/ny-times-horrified-that-rent-control-lea. Read More