More Rent Control Insanity

I personally don’t have a political affiliation. Politics in both Canada and the US have become increasingly polarized in recent years. If you’re like me, where I’m fiscally conservative, and socially liberal on some items, but not all, there’s no political party that speaks directly to me. In fact, I would propose that most people don’t agree 100% with either of the political extremes. 

One topic I’m particularly passionate about and you’ve heard me speak repeatedly is the topic of rent control. It’s not because I’m a landlord. It’s because history has proven time and again that rent controls don’t work. They don’t produce the desired results. Rent controls treat the symptom, not the root cause. 

If properties are not affordable, it’s because the free market balance of supply and demand has pushed prices up. 

Gov. Cuomo in New York delivered a blow to both landlords and tenants on last week by pledging an end to vacancy decontrol, a 24-year-old policy that has removed 150,000 apartments from rent regulations in NY state. Tenants will be celebrating, but only for a short time. The problem is that governments can’t compel investors to make investments where they will lose money. 

But the entire state government — including the Senate and governor’s office — are now in Democratic hands, with newly elected progressives pushing for much stronger tenant protections.

Cuomo responded “yes” when asked on WNYC radio whether he would sign a law to abolish vacancy decontrol if it passes the Legislature. He said “One of the big pieces in an affordable-housing program is going to be a reform of the rent regulations. It doesn’t provide additional units of affordability to the extent we need. I still believe in production and supply. But reforming the rent-regulation system, especially vacancy decontrol, can make a major difference.”

Vacancy decontrol was implemented under GOP then-Gov. George Pataki. At the time, Republicans sympathetic to landlords had leverage by threatening not to renew the entire rent-stabilization law, which was expiring.

Here is the story of a property located in mid-town Manhattan. It’s a 6-plex in the Murray Hill neighborhood on the east side. I took a close look at this property last week. This neighborhood is one of the more expensive areas in Manhattan. Here are the particulars on the property. It’s a 6 unit building. The building is fully occupied and the apartments rent at $1,136 per unit per month. This is an area where apartments routinely rent for over $4,000 per month. The asking price for the property was $4.5M. There is no way to justify the purchase of the property as an income property. The numbers don’t make any sense.

The listing was being promoted as a development site with significant air rights above it. That means that someone could theoretically go vertical, or buy one of the neighbouring properties and combine it with this property. That might create a large enough floor plate to build an actual apartment building with some scale. On its own, it made no sense as an income property, and it barely made sense as a development site. If that property sells for anywhere near the $4.5M asking price, it will be redeveloped into a condo building, and those affordable units will disappear from the market forever. 

I was in New York last week speaking with lenders and hedge fund managers. I heard about several rental property  transactions scheduled to close in the next 60 days were cancelled by the lender. The lenders are not willing to put money at risk when the math doesn’t work. We know that under rent control, assets degrade in value. The lenders I spoke with don’t want any part of that. 

Government can’t mandate banks to approve a loan that is too risky. If there isn’t financing for these income properties, they will get redeveloped. There is really no choice for a property owner.