Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Rent Control Laws Are Unconstitutional
New York City recently implemented its far-reaching Housing Stability and Tenant Protection Act of 2019. That law enacted extensive amendments, all plaintiff protective, to New York’s 1969 Rent Stabilization Law (RSL). The Act imposes the RSL throughout the state. It also reverses the state’s earlier position on Luxury Decontrol for High Income Tenants. Formerly, when a tenant earned over $200,000 per year and paid a rent of at least $2,700 per month, the unit was decontrolled to allow the landlord the benefit of market rate rents. But under the new law, well-heeled tenants can continue to pay at most 15 percent of their gross rent on city housing.
The new act also sharply limits rent increases when landlords make improvements on a tenant’s premises. The older system allowed increases of up to 6 percent per annum, but the newer rules cap that figure at 2 percent, which makes it highly unlikely that a landlord can recover the costs of those improvements (assuming these are still made) over their useful life.
Finally, the new law also works a major change for the many units covered by the RSL but which are rented at below the regulatory cap. These below-cap rentals show how rents are in many areas constrained solely by powerful market forces: landlords cannot move up to the maximum rent levels when demand is not there. Nonetheless, the 2019 law treats the tenant’s current rent as a statutory base for calculating any future rental increases for that tenant. These landlords are now severely restricted in the extent by which they can raise rents going forward.
But this new protection to the current tenant makes it less likely that any current tenant will voluntarily leave, so that an entirely new cohort of unwilling landlords will now have to do battle before the New York City Rent Guidelines Board (RGB), which is composed of landlords, tenants, and, of course, the general public. The RGB has broad discretion to determine those increase bases using such nebulous factors as the condition of the residential real estate industry (including taxes and operating costs), the cost of living, and any other data it deems relevant to the overall operation. Individual variations in specific units are necessarily overlooked in these annual determinations.
New York’s RSL represents a massive interference with the operation of competitive markets, even though it is widely understood elsewhere that competition is the best way to maximize the welfare of tenant and landlord alike. This point is not idle speculation, but is supported by the relatively smooth operation of rental markets—no queues, no intrigue—in cities without rent control. Individual units turn over freely, so that older persons, for example, can easily relocate to cheaper and smaller units after their children have grown up.
In contrast, under the RSL regime, elderly couples, widows, and widowers are incentivized to hang on to stabilized units that could easily house young families. That inefficient underutilization of space contributes mightily to the City’s chronic housing shortage that forces late-comers to pay high rentals in the unregulated market. Indeed, rent control is a particularly insidious form of price controls. Typical price controls, which only set maximum rates, are usually abandoned because it becomes clear over time that no one wins. But rent control endures because its beneficiaries are the sitting tenants who use their voting power to retain huge subsidies that can amount easily to tens of thousands of dollars per year per tenant.
Sadly, this corrupt system has proven to be immune from constitutional attack. Yet that attack should succeed on the simple ground that its mandatory renewal provisions force landlords to surrender possession of their premises for below market rents—a classic taking without just compensation.
An examination of New York Attorney General Letitia James’ brief against a recent challenge to the RSL shows the threadbare nature of the City’s arguments. It claims the landlords’ “physical takings claim fails because the RSL does not result in any encroachment on private property.” That assertion is critical under current law, as the Supreme Court’s 1982 decision Loretto v. Teleprompter Manhattan CATV Corp. holds “that a permanent physical occupation authorized by government is a taking without regard to the public interests that it may serve.” Loretto applied that per se rule to a cable box perched on the plaintiff’s roof. So how, someone might ask, could a sitting tenant whose possession is protected by state law not be in physical occupation of the rental unit under government authorization?
Because, as Loretto concludes, “States have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails.” It then cites, without discussion, a set of collateral cases, without any functional explanation as to why they sanction rent control statutes.
The original 1920s rent control statutes were far more modest affairs, which, unlike New York’s complex scheme, only required landlords to keep rents at their historical levels for a two-year period, when wartime conditions could create a sharp increase in prices. That more modest statute was sustained by the Supreme Court in 1921 by a five-to-four vote in Block v. Hirsh, because of its “temporary” war time effect, with the Court holding that a “limit in time, to tide over a passing trouble, may well justify a law that could not be upheld as a permanent change.” The Court made good on that limitation three years later by refusing to uphold an automatic renewal of that statute in Chastleton Corp. v. Sinclair. Here, Justice Holmes (who also wrote the majority opinion in Block) again held that a “law depending upon the existence of an emergency or other certain state of facts to uphold it may cease to operate if the emergency ceases or the facts change even though valid when passed.”
Chastleton should deliver a decisive blow against the RSL, which relies on a “housing emergency” that it defines as a vacancy rate in New York City below 5 percent. Those low vacancy rates are the consequence of the very rent control law that makes sitting tenants want to stay put. This is, of course, a far cry from external necessities, like wartime conditions. The fastest way to regain a normal housing supply is to let rates rise freely until the new supply of housing brings rents back down again.
Nonetheless, the City gets matters exactly backwards when it claims that the RSL is necessary “to prevent exactions of unjust, unreasonable and oppressive rents and rental agreements and to forestall profiteering, speculation and other disruptive practices.” In practice, it is precisely the existence of this grotesque two-tier pricing system that encourages all sorts of deceptions by tenants to keep their below-market rentals. On this takings analysis, the entire system should be struck down, root and branch, regardless of any unique details.
Regrettably, it is highly unlikely that current courts will strike down RSL in its entirely. Still, there is a second set of arguments to attack the 2019 Act even if prior versions of the RSL remain. As the City acknowledges, the takings clause also involves so-called “regulatory takings” cases whereby challenges are made to various activities under a balancing test that weighs the City’s interest against that of the sitting tenant. The City pooh-poohs this line of cases by writing that “rent stabilization laws do not deprive owners of use of their property, but merely govern the landlord-tenant relationship.” But that loose formulation allows the City total discretion to cut rents below a landlord’s costs such that they would necessarily be required to operate their properties at a loss. As the 1976 California Supreme Court held in Birkenfeld v. City of Berkeley, a public utility model, used to set rates for gas and electricity, requires that rates not be “confiscatory,” so that constitutionally they must allow for a fair and reasonable rate of return on investment.
Under this model, any appreciation in the value of the underlying unit goes to the tenant. Yet at the same time, the landlord is entitled to get a reasonable rate of return on his or her sunk investments. Yet the City’s brief does not explain whether the 2019 Act pays the slightest attention to whether the law ensures a permissible rate of return. The position for landlords was already precarious under the earlier iterations of the law. Their position now could well become only more treacherous under the current statute, which imposes multiple restrictions without making a single adjustment favorable to landlords. Accordingly, the City should be made to explain how that required rate of return is assured, or why the statute looks only to the welfare of sitting tenants while ignoring the welfare of everyone else.
I regard the potential legal morass over the RSL as unfortunate. Traditionally, the raison d’être of rate regulations hearings was to prevent public utilities and common carriers from gaining monopoly returns on their investments. But since rental markets are intensely competitive, Birkenfeld’s regulatory takings model makes sense as a second best solution. It is best to scrap the entire scheme altogether, with suitable transition provisions to avoid any unnecessary disruption of New York’s rental markets. Hopefully, this Act is dispatched quickly before the new progressive trend goes national.
© 2020 by the Board of Trustees of Leland Stanford Junior University.
Published in Law
We would not be seeing rent control laws and efforts going full speed ahead if there was a rate of housing being built across the entire nation to allow for people to pay a mere 25% of their income for rent. Along with our increased need for housing, the US needs a moratorium on low skilled immigrants, as until that moratorium is imposed, there will never be enough housing.
That 25% of one’s monthly income was the norm until recently, except for certain places like New York City, LA, San Francisco Bay area and Washington DC area. Now it is the norm across the nation that people are paying at least 33% of their income for rent. And often if they live in the aforementioned places, they may be paying 60%.
How is it the nation managed to have adequate housing for all of its existence until just 12 to 15 years ago? Is it that the Big Real Estate Interests are fine with simply charging fewer and fewer people a monthly rent, as long as the rents charged are exorbitant? Or what?
The new rent control law sounds like a return and extension of the city’s World War II era law, which pretty much locked in rents on housing built pre-war while allowing more flexibility on housing built after the war.
Extending draconian limits on how much landlords can make per apartment to virtually all housing stock increases the likelihood that in bad economic times, building owners will simply walk away from their older high-maintenance properties rather than have them become absolute money pits, which is what happened during the city’s economic decline of the early 1970s. Pre-war buildings in marginal-to-failing areas simply were abandoned, which helped (literally) fuel the eventual burning of those buildings in areas of The Bronx and Brooklyn by the latter part of the decade.
Carol: “How is it the nation managed to have adequate housing for all of its existence until just 12 to 15 years ago?”
Carol, New housing construction across the country has been restricted in many places to “urban infill” housing that is 2 1/2 times as expensive to build than single family suburban housing.
In my state, California, over the last 45 friggin years, housing costs have gone through the roof due to more and more insane regulations and restrictions on growth. Add to that restrictions on infrastructure improvement for traffic, water , power and sewage that are all used as an excuse to say ‘growth is strangling us”. One could also add limits of financing through Dodd Frank for smaller businesses and other “innovations” on Wall Street.
More demand, less supply will almost always yield substantially higher prices and the growth of massive homelessness when practiced for almost a half of century. Btw, housing was cheaper and way better in LA and most of California than the rest of the Country until Jerry Brown instituted his “era of limits” in 1975. Neil Diamond even mentioned that in a song in the 1970’s.
how about build more housing units?
increase the supply of housing
it worked in tokyo
amen
price is a function of supply and demand
the bronx is burning!
i apologize in advance for this terrible term: jewish lightning
Why would anyone want to do that? (I note that you didn’t specify who should do it.)
I have said basically the same thing for quite a while. I am pleased to know I am not alone in thinking about the situation this way.
i would assume real estate developers want to build more buildings
Not if they lose money by building housing. If you have a large load upfront dealing with regulatory costs, and no guarantee you will get permission to build, and then are not allowed to sell the properties at a profitable cost (or can sell them profitably, but have no buyers because they cannot make enough through rents to recoup their purchase price) you are going to go elsewhere to develop property.
i think you are getting into the weeds too much but you raise 3 good points, all of which decrease the supply of housing units:
if you eliminate these 3 things, the supply of housing will increase
I have noticed that housing analysts point to how all the requirements that California’s rules and regs places on building when compared to the lack of such requirements in Texas indicate that a strip mall will take five years to build to completion in The Golden State, and maybe 18 to 20 months in Texas.
This is an important point to consider as even Gov Gavin Newsom’s own staff admits that the state of California has only 80% of all the housing that has been needed since 2008.
there are no zoning laws in Texas
Depends on the municipality. Houston has no zoning. Galveston does.
Most Texas cities have some zoning. It’s just a matter of how strict the application is (here in the oil patch, our local zoning laws have gotten a lot stricter in recent years because people with stick-or-brick houses for some reason don’t want double-wide rentals next to them with one oilfield worker per room living there and six muddy pickups parked in the front yard, since it depreciates the value of your own home investment).
Los Angeles and San Francisco are unaffordable because of zoning laws and Democrats