New Yorks Bizarre Housing Tax

Worth A Look, Housing Affordability, Frontier Centre

The trail led to the Badlands.

His name is Bill Golodner, private investigator. Along with partner Bruce Frankel he hunts down absentee tenants of rent-regulated New York City apartments. Golodner’s subject was clearing a cool $1,500-plus every month by covertly subletting her digs in Manhattan while holing up in South Dakota. Her fatal mistake: Applying for a license to work in the gambling industry. That caused her true address to pop up in a search of public records.

Score one for the landlord. In New York, evicting a phony occupant makes it possible to increase the rent on an apartment. Almost everywhere else, nothing more is required than a rise in the unit’s rental value on the open market.

Readers may be surprised to find the prim New York Times tagging along while a gumshoe catches an illicit subletter in flagrante delicto. But spying on cheats who only pretend to inhabit one of the Naked City’s 1.1 million rent-regulated apartments is getting to be a big business.

Private investigator Nick Himonidis reports that surveillance for landlords has jumped from 5% to almost 20% of his work over the past 24 months. The expense of hiring a detective armed with a hidden video camera is money well spent, he explains. “It might not have made economic sense five or ten years ago. And now it does.”

Put another way, the gap between market-level and government-administered rents is widening in New York. That is to say, the misallocation of resources and landlords’ disincentives to improve their properties are on the rise. So are ludicrous incidents such as the 2005 apprehension of Bozo the Clown’s octogenarian alter ego, Larry Harmon. While living mainly in Los Angeles, Harmon continued to qualify for below-market rent by falsely claiming that his primary residence was an upscale Manhattan apartment.

Although adventure-packed, the New York Times’s January 27 front-page story omitted an essential economic point: The cost of nailing surreptitious subletters, on top of huge administrative and litigation expenses arising from disputes over rent regulation, constitutes a tax on housing. Accordingly, if New York politicians were to abolish rent control and its modified variant, rent stabilization, they could take credit for delivering a massive tax cut to the voters.

Attractive though that might sound, no such proposal appeared in the platform of any major candidate in the 2005 mayoral election. Republican Michael Bloomberg, ostensibly representing the party of free enterprise, was no more eager than the numerous aspirants for the Democratic nomination to let the market work. The debate, such as it was, revolved around the technical matter of whether rent regulation should be administered locally or at the state level, in Albany.

From the standpoint of shrewd political calculation, the candidates made the right call. Economic studies have shown that despite rhetoric characterizing rent regulation as protection for the poor against greedy landlords, the affluent disproportionately benefit. And those well-heeled winners in the game of obtaining goodies from the government have two characteristics of vital interest to politicians: They’re organized and they vote. What the poor get out of the deal is a higher proportion of leaky roofs and broken toilets than residents of non-rent-regulated cities with comparably aged housing stock.

Elected officials haven’t entirely ignored the inequities that result from tampering with rents. In fact, they’ve made the system even more cumbersome than it otherwise would be by tying rent increases to renters’ income. A landlord can hike the rent if a tenant’s household income exceeds $175,000 for two consecutive years.

What a way to run an economy! First, hold the price of a service artificially low, then increase it for those with superior ability to pay. A rational response in households near the $175,000 threshold would be to remain below it by cutting back on hours worked or service provided. The policy sets on its head the traditional notion of individual incentives as a stimulus to overall economic output.

Rent regulation, however, does not run on the principle of people moving up to a higher living standard by energetically employing their native talents. Instead, the key to success is to have parents or grandparents who happened to occupy an apartment that became rent-controlled or rent-stabilized several decades ago. Personal initiative enters into the equation when the winners of this birth-based lottery go to court to defend their right to occupy apartments they haven’t lived in for many years, if ever.

The grotesque economic distortions of rent regulation hardly constitute a new story. New York City instituted the market intervention as a temporary measure during World War II. The ill effects have long since been a staple of introductory economics textbooks. In a nearly unparalleled demonstration of unanimity, 93% of economists surveyed on the matter in the early 1990s agreed with the statement that placing a ceiling on rents reduces both the quantity and the quality of available housing.

New York’s government lumbers along, oblivious to all this. Economic reality scarcely enters the debate, much less the electoral or legislative process. The press puts true detective stories of rent regulation on page one, but the public policy angle gets less prominent coverage. Disappointingly, democracy’s greatest institutions have failed to generate a discussion, much less a resolution, of a tragically costly intrusion in the marketplace.

Martin Fridson is publisher of Leverage World, a research service focusing on the high yield bond market and author of Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace (John Wiley & Sons, Inc.)