Or anywhere, for that matter!
I wanted to discuss New York City real estate under incoming Mayor Zohran Mamdani. As I wrote on Thursday, “Being a commercial real estate guy, I can tell you right now: This will not end well.”
This is based on Mamdani’s promises to:
- “… immediately freeze the rent for all stabilized tenants…”
- “… triple the City’s production of permanently affordable, union-built, rent-stabilized homes…”
- “… overhaul the Mayor’s Office to Protect Tenants and coordinate code enforcement under one roof, making sure agencies work together to hold owners responsible for the conditions of their buildings…”
These plans might sound right and even righteous on paper. But they don’t work in real life.
It’s All About Incentive
Are New York City housing prices astronomical? The easy answer is “yes.”
A studio apartment – which has no actual bedrooms, just a bathroom and an all-use area – costs an average $3,000 per month. And that’s just an average. Many are much higher.
But none of that is necessarily the fault of landlords. New York is a high-demand market. And as a densely populated city, real estate is at a premium. Throw in the rising costs from inflation and the labyrinth that is New York bureaucracy… and it all trickles down to the rent tenants pay.
Putting all the responsibility on landlords is not the solution. It will only make things worse.
Business podcaster Xavier Miller laid this out on Thursday, writing how:
Every time politicians try to control rent or force affordability by decree, developers stop building and landlords stop maintaining. Supply dries up, the quality collapses, and the few properties that remain skyrocket in price.
There’s plenty of research to back him up. In 2019, the American Economic Review published a study that looked at the effects of an expanded rent control law in San Francisco in the early ’90s.
The study found that:
[W]hile rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law.
There’s almost no chance this time around will be different. After all, many New York City landlords are already struggling under the burdens of increased property taxes, maintenance, insurance, legal fees, and mortgages.
As a former real estate developer and landlord, I’ve put up with all those headaches before. It can be a nightmare. And the only reason that developers continue to build and maintain properties is because of the incentive that is rental income.
Freeze that rent – or limit the landlord’s ability to raise it in the face of rising costs – and you take away the incentive. Then, all you’re left with are the headaches. It’s a recipe for diminishing supply.
Worst-case scenario – the policies could leave America’s largest city in a 1970s-style lurch it hoped to never see again.
Drop Dead City
New York City’s crisis of the 1970s was caused by a variety of factors. But unchecked government spending definitely played an enormous part.
To quote The New Yorker 100‘s review of Peter Yost and Michael Rohatyn’s historical documentary on the subject:
The story set out in Drop Dead City remains startling even half a century later. In 1974, New York’s new mayor, Abraham Beame, took office believing that the city was two billion dollars in debt. For the previous four years, he’d been the city’s comptroller, so he oughta know.
However, his young successor in that office, Harrison Goldin, conducted an audit and discovered that the debt was actually about six billion dollars. The finances were in total disarray… the city was meeting payroll by issuing round after round of short-term bonds, underwritten (i.e., purchased for resale) by banks.
In order to deal with the resulting financial reality, the city’s budget was slashed. Police officers were laid off, as were firefighters, teachers, and sanitation workers – with predictable results.
Trash piled up. Property valuations fell, and wealthy residents left. In the process, many residential buildings fell into disrepair and were abandoned altogether, adding to already elevated levels of vagrancy and crime.
It wasn’t pretty, to say the least. And it could be even worse this time around, considering how the city is already in a state of crisis.
It has been ever since COVID-19 hit, the shutdowns commenced, and regulations skyrocketed.
I already mentioned on Thursday how many people have left New York City in the past five years. That’s part of the reason why:
State Comptroller Thomas P. DiNapoli recently forecast that New York City’s budget shortfall will be a whopping $13 billion within the next three years… And we’ve known for months that, since its 2023 fiscal year, NYC has spent more money than it’s received.
Footnote: I attended public high school in NYC during the 1970’s and remember the fiscal crisis well. It wasn’t pretty.
That really is a damning portrait of the results of rent control. So why do the the low IQ voters fall for Mamdani’s snake oil. I suppose you can blame it on the buy now — pay later attitude of New Yorkers .. It’s free ( but you will pay later ).
The rental market has many moving parts and rent control will just put sand in the machinery.
I think there is a lot of ignorance out there, Fred. These people have to learn their lesson the hard way, unfortunately. It seems we have to relearn all the lessons that were already learned during previous generations.