The Frozen City

Misguided policies keep some New Yorkers in subsidized apartments and raise costs for everyone else

by Howard Husock
It’s hard to blame New Yorkers for thinking that the city should “seek to create additional units of below–market rate affordable housing,” as 71 percent of respondents answered in a Zogby poll commissioned by the Manhattan Institute. After all, New York residents continually see evidence of a dysfunctional housing market: high rents; low vacancy rates; young adults tripled up in tiny apartments; illegal and unsafe conversions to divide old units into new ones; stratospheric prices for co-ops and condos in high-income neighborhoods. No serious political voice has argued for trying to solve these problems with anything but more subsidized construction.

In fact, the leading mayoral contenders virtually all endorse the idea that the city, by wielding zoning requirements and using its own financing, can conjure up more “affordable housing.” Christine Quinn’s website proclaims that “creating quality, affordable housing for all New Yorkers has always been a top priority” for her. Bill de Blasio wants to build 100,000 affordable homes for low-income New Yorkers over the next ten years; to preserve a similar number of existing housing units; to dedicate $1 billion from the city’s pension-fund investments to affordable housing; and to require developers in rezoned areas to include affordable housing in all new projects (or to contribute to a fund for such homes). Bill Thompson trumpets his use of city pension funds, during his tenure as comptroller, to help “finance the construction and preservation of over 43,000 units of affordable housing in New York City.” Republican Joe Lhota is an exception—but only for not saying much about the issue at all.

Such groupthink ignores the real cause of New York’s perennial housing crisis. The high rents and low vacancies aren’t the result of having too little subsidized housing. They’re the result of having too much.

In New York, it’s the norm, not the exception, for rental housing to be shielded from market forces. About a million rental units are covered by rent stabilization, which limits how sharply a landlord can increase rent each year, and another 38,000 or so by rent control, which dictates the rent itself. Federal housing vouchers pay the rent for 120,000 more units. The city’s vast public-housing system comprises 185,000 units (almost 18 percent of all the public housing in the country). All in all, some 1.3 million units—61 percent of occupied New York rentals, or 42 percent of all New York homes—are price-regulated in one way or another, according to the New York City Rent Guidelines Board. In that respect, New York differs radically from most American cities, where public-housing programs are small, subsidized construction is limited, and rent regulation is nonexistent. Many New Yorkers don’t realize how many apartments are price-controlled; as the same Zogby poll shows, fully a third of voters think that just 24 percent of the city’s housing is buffered from the market.

It may be counterintuitive to suggest that all this price-regulated housing worsens, rather than ameliorates, the city’s persistent housing shortage (the vacancy rate is generally below 3 percent) and cutthroat market. But think for a moment about the psychology of subsidized housing. If you’ve managed to snag what looks like a good deal, whether it’s a rent-stabilized apartment or a spot in public housing, you’ll probably hang on to it, even if your circumstances change and make it otherwise unattractive. Where a typical American couple with a new baby might move to a bigger apartment, or an older couple whose kids are grown might move to a smaller one, a New Yorker with an artificially low rent is likely to stay put. And that means fewer apartments on the market and higher rents for the nonregulated ones that are available.

Census data bear out that argument. Though New York likes to view itself as a place that welcomes striving, talented newcomers, the city actually has a strikingly low rate of housing turnover. That is, it’s unusually hard for newcomers to find a place to live, since current residents are staying in place. From 2007 through 2011, just 11.43 percent of New Yorkers changed residences, compared with 15.41 percent for the nation as a whole. New York’s turnover rate is by far the lowest of the country’s ten biggest cities. The difference is even larger when you compare Gotham with such boomtowns as Charlotte (whose turnover rate is 23 percent) and Austin (27 percent). There, fluid markets give residents and newcomers alike the opportunity to find the housing best suited to their needs. That opportunity is rare in New York. I call it the frozen-city phenomenon.

New York’s public-housing system offers the clearest illustration of how the city is frozen. By law, a tenant’s rent can rise no higher than 30 percent of his income. Small wonder, with that incentive not to move, that the average household in New York’s public housing spends more than 20 years there. Not only is turnover low; many households have more room than they need. As I’ve written previously in these pages, the New York City Housing Authority (NYCHA) estimates that more than a fifth of its apartments are “under-occupied,” with one or more empty bedrooms. A middle-aged tenant whose children have moved out has no incentive to move to a smaller place, since rent remains fixed at that 30 percent of income, no matter the size of the apartment. Meantime, 144,000 families, mostly single parents with young kids, languish on the waiting list for public housing.

Large as it is, New York’s public-housing empire is less than one-fifth the size of the city’s array of rent-stabilized apartments, which likewise contribute to the frozen-city phenomenon. There are no data available on under-occupancy in rent-stabilized units, but New York University’s Furman Center for Real Estate and Urban Policy reports that turnover in these is slow. In a 2011 analysis, it found that “on average, stabilized tenants have been living in their units for 12 years compared to 6 years for market-rate households.”

The low turnover rate of stabilized apartments isn’t abstract theory; it’s a fact of life that savvy New Yorkers recognize. “Rent stabilized apartments are very common (about 50 percent of all apartments) but nearly impossible to find because once you land a rent-stabilized apartment, you don’t leave it,” says the New York apartment-search website nakedapartments.com. “With rent-stabilized apartments priced $1,200 cheaper (on average) in Manhattan, it’s understandable why renters don’t leave them. . . . This limited turnover in the rent-stabilized market puts more price pressure on all other apartments.” Put another way: stabilization locks in victory for those lucky enough to have won a lottery. And those winners, it’s important to note, are not the poor. The Furman Center has found that the median income for new tenants of rent-stabilized apartments is close to $100,000.

Nor is the subsidy system going anywhere soon. For a while, the number of stabilized units had been diminishing slightly, as a result of 1997 state legislation that allowed a landlord to start charging market rates once a unit’s rent topped $2,000 and the income of the household in the unit reached $175,000. But in 2011, the state raised both of those thresholds, ensuring that deregulation would proceed more slowly, if at all. In July 2012, the New York Times reported that the change would make about 250,000 apartments likelier to remain stabilized.

Public housing and rent stabilization aren’t the only forces freezing the city’s housing stock. New York also has a long tradition of subsidizing private construction, via public funds or tax breaks, for developers who agree to various schemes that supposedly create affordable housing. The state’s Mitchell-Lama program, dating from the 1970s, provides tax incentives to developers who rent to tenants within a particular income range; it currently includes some 139,000 units in New York City. The 421a tax exemption reduces the city property tax for owners who voluntarily submit their units to rent stabilization and who let the city set their initial rents; there are now 54,000 such units. The Bloomberg administration is currently pushing its New Housing Marketplace program, a proposed $8.5 billion initiative through which the city will help finance the development of new private housing that sets aside units for low- and middle-income residents. These programs reduce turnover further, either by depressing the rents in some apartments or by limiting others to a particular variety of tenant.

How can New York begin to thaw its housing market? The obvious solution is phasing out rent stabilization and ending subsidies to developers for so-called affordable housing. But the public favors both policies so strongly that it’s hard to imagine killing them. Another solution: zoning changes and other forms of deregulation that make it easier to construct new buildings. The more apartments in New York, the more fluidly people will move among them. Thanks to the Bloomberg administration’s wise decision to allow areas formerly zoned for manufacturing to be used for new residential construction, the last few years have seen an increase in the city’s overall housing supply, from 3.27 million housing units in 2008 to 3.35 million in 2011.

To unfreeze its public housing slightly, the city should start charging higher rents for larger units, giving tens of thousands of residents in under-occupied apartments an incentive to move to a smaller place. (By charging a flat rent instead of a percentage of the tenant’s income, the change would also remove the current perverse incentive not to earn more.) Further, time limits for new tenants could slowly convert public housing from a long-term poorhouse into what it was always intended to be: the first rung on a ladder of upward mobility. Eventually, these time limits would reduce the size of the system, and projects in high-value neighborhoods could be sold to private developers, who could replace them with market-rate housing. The proceeds of these sales—hundreds of millions of dollars—could help create a maintenance endowment for the rest of the public-housing system.

As the Bloomberg administration rushes to innovate ahead of its exit, it has decided to lease the plazas and other underused public areas in eight Manhattan public-housing projects to private developers, who will erect market-rate apartment buildings there. The move offers the housing authority—which faces a huge maintenance backlog and estimates that the system needs $6 billion in capital repairs—roughly $50 million a year; the funds can be used to repair broken elevators, leaky plumbing, and damaged heating systems. It’s a good idea, though it would make even more sense to sell these eight public-housing complexes outright and to relocate their tenants, either to other NYCHA projects or to rental units covered by government vouchers. With luck, the city won’t compel the developers to set aside a certain number of “affordable units”—a common Bloomberg-era zoning regulation that would only force the market-rate tenants to pay more to subsidize a lucky few.

The administration also deserves credit for an experiment that, if expanded throughout the city, could expand the housing supply: zoning that permits the development of tiny rental “micro-units.” The common objection to this idea—that such diminutive apartments are the billionaire mayor’s idea of how the poor should live—is unfair. A city with as varied a citizenry as New York’s should have as many different types of housing as possible.

A common, if unspoken, assumption about New York is that, without the bewildering network of rules, guidelines, programs, and subsidies that currently regulate the housing market, rich people waiting in the wings would move in everywhere and force out everyone else. But that’s a delusion. It has never happened in any city, including all the lucky cities that lack New York’s arcane housing policies. And it wouldn’t happen if New York began, at long last, to thaw its frozen housing market.

What to Do

·                     Continue phasing out rent stabilization—and return to lower, pre-2011 rent and income thresholds that set the conditions for destabilization.

·                     Impose five-year time limits on new public-housing tenants.

·                     Sell the most valuable real estate in the public-housing system to finance capital improvements and maintenance in the rest of the system.