New York City mayor-elect Zohran Mamdani swept to victory Tuesday evening on a platform of affordability, anchored by a plan to freeze rents across nearly two million rent-stabilized apartments.
TL;DR
- Zohran Mamdani's rent freeze plan is disliked by economists, who see it as masking housing shortage issues.
- Economists argue rent freezes lead to misallocation, deter investment, and reduce housing quality and supply.
- Rent freezes offer short-term tenant relief but can cause long-term market stagnation and increased prices.
- The enduring solution, according to economists, is to simplify and increase housing construction to meet demand.
Economists, without exception, dislike rent control. In a 2012 poll of top economists, just 2% agreed that rent-control laws have had “a positive impact” on the supply and quality of affordable housing. The Nobel laureate Richard Thaler even quipped in the survey that the next question should be: “Does the sun revolve around the earth?”
Why do economists revile a plan that seems to promote fairness and equity in a housing market that is clearly broken?
Seductive simplicity
For the majority of voters, imposing rent freezes appears to be a sensible solution: when costs become unaffordable, preventing further increases seems logical. For economists, this approach is akin to treating a fever by breaking the thermometer; it masks the symptom without addressing the underlying issue, the persistent housing shortage.
“Freezing rents doesn’t fix scarcity,” said David Sims, a Brigham Young University economist whose research on Massachusetts rent control remains a touchstone. “It just reshuffles who bears the cost.”
Sims' research delved into Cambridge, Mass.'s former rent-control system, which allowed tenants to remain in their homes permanently at rates below market value. The policy's aim was to ensure housing affordability, yet it resulted in what he describes as a misallocation.
“People who could do better by moving tend to stay,” he told Fortune. Elderly households retain sizable properties they've outgrown, whereas young families struggle to find adequate living areas. Eventually, the wrong individuals occupy the incorrect residences.
When Massachusetts voters repealed rent control in 1994, property values in Cambridge increased by 45%, affecting not just deregulated apartments but entire neighborhoods. Years of rent caps had evidently deterred investment and lowered property values in adjacent areas. Consequently, when these controls were eventually lifted, property owners gained the ability to improve and refurbish their Residences. As rents were frozen, previously stagnant neighborhoods began to experience a revival.
This dynamic is already evident in New York. The city's Housing and Vacancy Survey indicates that approximately 26,000 rent-stabilized units are vacant, with many in disrepair due to renovation expenses that significantly surpass what property owners are permitted to recoup. The state’s 2019 Housing Stability and Tenant Protection Act caps recoverable renovation expenses at $50,000 spread over 15 years. Renovating a century-old tenement can cost twice that, which offers owners minimal motivation to do anything other than secure the entrance.
Short-term relief, long-term pain
For those already living in rent-controlled units, the immediate advantages are clear. It offers stability to tenants allows individuals to live without the constant worry of making ends meet and lessens the likelihood of being forced to move. Economists contend that in the long run, this practice operates similarly to impeding the housing market's progress. Landlords postpone upkeep they can't recover costs for, new building projects decelerate, and the supply of available homes gradually diminishes.
A 2018 study from Stanford, conducted by Rebecca Diamond, a prominent housing market expert, revealed that San Francisco's expansion of rent control in the 1990s impacted the availability of rental units fell 15% over the next decade. To circumvent regulations, numerous property owners transformed rental units into condominiums or residences for personal use. While the policy aided current residents, it ultimately increased rental prices across the city and sped up gentrification, leading to outcomes contrary to the policymakers' original goals.
“It’s not about pitying landlords,” Sims said. The focus is on grasping what motivates people. People won't invest in something if they can't recoup their costs, much like tenants won't willingly pay higher rents.
Economists find rent freezes conceptually problematic because they suggest affordability can be mandated, disregarding the principles of supply and demand.
“It creates this belief that the problem can be solved by fiat,” Sims said. The reason rents are elevated is due to the strong desire of individuals to reside in New York. The only enduring solution is to simplify the construction of more housing that meets public demand.
He uses a visceral analogy of market pressures: Black Friday. According to Sims, shoppers no longer queue up for stores on Black Friday. However, there was a period when a $1,000 television priced at $200 would draw a crowd stretching around the block at 4:00AM, with only a select few managing to purchase the TV.
“But housing isn’t like a $200 TV,” Sims observed. “Everyone kind of needs a place to live, but if housing is priced like the $200 TV, then there’s a bunch of people in that line who don’t get it.”
Economists contend that rent control primarily benefits those already within the system while disadvantaging those seeking entry. As time passes, this can exacerbate inequality by preventing younger, less affluent, or recent residents from accessing regulated neighborhoods, which then essentially transform into exclusive enclaves.
Band-Aid policy in a broken market
Proponents of Mamdani’s proposal counter argue that the dire situation in New York necessitates temporary freezes as a moral imperative.
They contend that with median rents exceeding $4,000, the city can't afford to delay zoning changes and construction initiatives that require years to become reality. Even economists who are generally supportive caution that without corresponding actions to increase supply, a price freeze merely postpones the inevitable consequences.
“If you don’t pair a rent freeze with a credible plan to add housing,” Sims said, “you’re not solving the problem. You're merely evading responsibility instead of truly addressing the root cause.