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Sunday, June 26, 2005

Greedy Renters

The NYT Real estate section advised us of the plight of rent-control tenants being removed from their homes in "Everybody Out? Owners Won't Renew Leases" (sounds like a description of the Kelo decision).

ent-control law, that allows tenants to remain in apartments for life that are renting at 10% to 25% of the market value, is when an owner seeks to make the residence his primary own home.The focus story, indicative of the greed of landlords, is a landlord's desire to reside in his building in, now popular, Borough Park. The owner wants the tenants, paying on average around $600 per month rent, to move out so he, his wife and infant child can live in 11,600 square feet.

Without saying the owner is lying, the writer expresses shock at the amount of room being sought by so small a family. The message is poor renters are being forced out of their homes due to the misuse of this rent-control exception. The assumption is the owner will eventually choose to leave and can then rent those apartments at the true market price, making too much money in his investment.

Rent-control is a device that rewards the initial renters at the cost of many families who are forced out of the rental market due to a shortage of apartments available for rent. Does rent control assist the poor to find affordable housing? Only when the poor are the first renters after enacting rent control. A study in San Francisco finds over 25% of the renters in rent controlled apartments earn over $100,000 (remember how Mayor Ed Koch held onto his Village apartment all through his mayorship while being provided free digs at Gracie Mansion?).

Thomas Sowell in "Applied Economics", advises that the result of rent control, like any other price control is a reduction of supply. Every big city that has these laws has no market for the new families looking for the "affordable housing" because the rent controlled tenants never move out. The owners see no need to maintain or renovate because there is no increase in revenue. Builders will refuse to build new structures without a profit in sight. With no profit in existing buildings owners will likely abandon them for assumption by the city.

Citing Sowell, 44% of San Francisco's buildings were more than 70 years old.Rent control then reduces supplies, destroys the quality of the buildings and creates a black market where under-the-table payoffs are made to either leaseholders or landlords.Remember, these "victims" are renters with no expectation of permanence in residing in these buildings. That is why people choose to own in the first place. And do not forget those families willing to pay market rents for the benefit of avoiding the 3 hour commutes to and from work. They are willing to pay more to see their families.

Going back to that 2001 San Francisco study, half of the rent-controlled apartments were occupied by one person with many of the apartments having more than one bedroom. The NYT article shows sad-faced tenants living in what looks like multi-room apartments. In NYC, this is a luxury far in excess of what they are paying.End rent control and watch the builders cease erecting just luxury apartments, the most common exception to the law. Builders will pursue the lower-end markets if there is money to be made there. Dr. Sowell's Econ 101 class is that simple.

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