The Dead Hand Of Rent Control


Normally, the public takes little notice when the United States Supreme Court refuses to review a decision from the lower courts. That was, however, not the case in connection with 74 Pinehurst (2023), which allowed to stand the misnamed Housing Stability and Tenant Protection Act of 2019. The act was passed by the progressive forces in the New York State legislature to tighten the squeeze on landlords throughout New York City. Its key provisions all cut in one direction, which is to entrench and expand the city’s 1969 rent stabilization law (RSL), under which landlord rents are regulated as if they were public utilities whose rent increases are in the first instance pegged to state-determined increases in cost.

More specifically, the 2019 act reduces the freedom of landlords to evict tenants at the end of a lease or to impose rent increases both to cover costs and to capture the gain in market values of their properties. At one time, high-value rent control units were subject to “vacancy decontrol” when rents reached a certain level. In addition, the permissible level of rent control increases was sharply curtailed on those apartments that were renting, as many in New York City were, below the existing RSL cap, such that the current rent became the new rent cap, even for units whose rents were reduced during COVID, and the rent increases that once allowed for capital improvements were all sharply cut. There were no offsetting adjustments made in favor of the landlords. The price crunch was so palpable that even as early as October 2022, sixty thousand RSL units were empty, close to twofold the level of a year prior.

In 74 Pinehurst, the Second Circuit made quick work of the challenges to the rent control laws, relying in large measure on the balancing test first adopted in connection with the Supreme Court’s decision in Penn Central Transportation Co. v. City of New York (1978), which applied a balancing test highly favorable to the government in all cases in which the state’s regulation only restricted the use of the property, but allowed the government lots of room in imposing these regulations. This principle does not on its face seem to apply to rental cases where the tenant is now allowed to remain in possession of the property. Nonetheless, in one of its worst decisions ever, the Supreme Court held in Yee v. City of Escondido (1992) that the same rule applied to landlords who “voluntarily” let in a tenant for a period of, say, one year, only to be told by the government that the tenant had to be allowed to remain on the premises, more or less forever, at below-market rates, unless they do things that sane tenants never do—not pay rent, create nuisances, or engage in illegal activities. The entire sorry scheme thus results in long-term disintegration in rental markets because unlike ordinary systems of price control that have no targeted beneficiaries, rent control gives the exclusive right of renewal to sitting tenants, who now exercise their huge political clout to keep the system in place permanently.

The increased magnitude of new restrictions made the situation worse, and the landlords’ well-orchestrated campaign (for which I wrote an amicus brief with the Buckeye Institute) sought to hear a case where the facts were most favorable to the plaintiffs. But it was not meant to be, for the court turned that petition down with only a concurrence offered by Justice Thomas, which stated that he hoped that the facts would be more fully fleshed out in a future individual challenge so that it might be possible to do either an “as applied” challenge of the scheme, to ask whether specific regulations could be struck down for specific reasons, or a facial challenge that would look at the full institutional arrangements of government rent control.

The court’s decision and Thomas’s brief multiple equivocations have thrown these real estate markets into turmoil. As the Wall Street Journal explained, the immediate short-term consequence of that decision was that New York Community Bancorp took a sharp hit because its portfolio contained a large chunk of newly vulnerable loans on rent-stabilized units whose credit rating tanked and whose share value plunged, leading the bank to think of selling assets even as it raised $1 billion in new capital.

In addition, it seems almost axiomatic that new investments in rental housing will dry up, given the prospect of future regulation such as the current proposal percolating throughout Albany to impose a ”good cause” eviction restriction that makes rent control universal by preventing a landlord from evicting a tenant who refuses to accept a rent increase of either 3 percent or 1.5 times the consumer price index, unless the landlord is prepared to spend a small fortune asking for the increases in a housing court whose pro-tenant sympathies are baked into the law. It is strangulation by degree, with devastating consequences: landlords on the edge, rental units sitting idle, and real estate taxes slashed to reflect the reduced value of these units. In the meantime, many rent-controlled units that could house a family of three of four remain occupied by a widow or widower who finds it cheaper to stay, leading to further losses in occupancy.

It is important to know to place the blame for this blame squarely on the courts for their refusal to apply the unmistakable logic of the takings clause: “nor shall private property be taken for public use, without just compensation.” The courts run roughshod over that provision in each of its particulars.

First, private property does not apply only to someone with outright ownership. It also applies when property is broken into constituent interests—leases, mortgages, easements, and covenants—each of which deserves its own protection. When the tenant overstays a lease, it is a clear taking of the landlord’s right to reclaim the property immediately, and when the state blocks that removal, the first response is that this taking is for the benefit of the sitting tenant and thus not for a public use, even though misguided Supreme Court case law, most notably Kelo v. New London, lets any kind of asserted indirect public benefit allow for the state to act.

But even if that were the case, where is the just compensation when the landlord is forced to accept an amount equal to a small part of the fair market value, which is far less than is owed? If the state wants for whatever reason to subsidize one class of tenants at the expense of everyone else, then let it follow Justice Scalia’s suggestion in Pennell v. San Jose (1988) to rent out the property at market rates from its owner, and then relet it to the preferred tenant at a lower rent. That way, the public at large has to pick up the tab by putting the cost of the regulation on budget to increase democratic awareness of the wealth transfer.

Finally, the rent control cases are relatively easy because in no way can the regulation of landlord activity be justified on the ground that it is needed to prevent some type of public nuisance—e.g., smells, noises, or emission—or even to protect, as some cases allow, the character of the neighborhood. Nor can these rules be justified as ways to protect against various forms of public necessity, like hurricanes or earthquakes—for any shortage in available units stems largely from the unwillingness of protected tenants to give up great deals, not from the forces of nature.

And so, we can now point our fingers at the huge gap in Justice Thomas’s ill-fated statement in 74 Pinehurst. He buys into to the alternative regime of property rights concocted out of whole cloth in the rent control cases, which then leads him to believe that these cases are harder and more contextualized that they really are. The allegations raised in the complaint were enough to show the theft of the reversion by government action, without having to move forward with a detailed examination of the irrelevant particulars of thousands of cases. That is not the way to put an end to the scourge of rent control.

Instead, what is needed is a systematic approach to the transition problem created by close to a century of misguided price controls in New York City. There is no way that New York, with its poor civic culture and depleted coffers, could raise the cash to compensate for decades of massive landlord losses, without taxing the landlords it wants to compensate. So, the needed solution has to come without direct transfers, which means that the courts have to clean up the legislative and administrative mess by a simple imperfect and effective remedy. Order that all controlled and stabilized rents go up each year by, say, 5 or 10 percent, with no exceptions until market rates are re-established, and the slow-growing cancer that now promises to wreck rental markets for landlords and tenants alike can be excised from the body politic.

© 2023 by the Board of Trustees of Leland Stanford Junior University

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  1. Bryan G. Stephens Thatcher
    Bryan G. Stephens

    It all is so avoidable

    • #1
  2. genferei Member

    © 2023 ?

    • #2
  3. Zafar Member

    Truly. Mumbai is the result of rent control since WWII.

    • #3
  4. Duane Oyen Member
    Duane Oyen

    It seems to me that the Court doesn’t feel any obligation to bail NY out of its mess; Richard’s position assumes that anyone wants to fix the mess. 

    Why should we worry about New York’s real estate disasters?

    Let the rental market tank, thus stonewalling any investment, the sane people move to a sane state, and the properties remaining are filled with “undocumented” people awaiting their immigration hearings. 

    • #4
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