further on rent control
(to vic, a fil-am in NYC)

Vic, a fil-am based in NYC, posted a long comment on my entry on rent control in the Philippines. He raises several points so I think his comment and my reply deserves a post of it's own.

Vic writes:

Hello, I'm Vic, a Fil/Am from New York City.I thought I'd just add some remarks. First, I own a few apartment buidings here in New York so I have some experience with rent control. I read your post with some mixed feelings. As a business man whose main objective is to ultimately make money, I HATE rent control. It definitely hinders my ability to turn a profit and selling a property with tenants under rent control is a deal breaker. But, as a person who comes from a modest backround, whose mother was a nurse and had to work two jobs to support the family and pay the rent, I can relate to those living under rent control.

There are facets to the rent control issue that you have left out. Here in NYC, for the last decade or so, gentrification of entire neighborhoods have taken place to the effect that middle income families have fled manhattan. A one bedroom apartment in a average neighborhood goes for about $2000 a month. If you are rich that is no problem but what if you are not? A family that is not rich must move further away from the city or the source of work, further putting a strain on the family income.

I also took some economics classes in college and back then I may have agreed on some of your points on looking to the market for solutions. However, I know now from experience that you cannot use the market economy as a guide line for setting public policy. We don't live in a vacuum, there are too many forces that manipulate supply and demand. One strategy for large companies here is to hold large numbers of apartments vacant. These apartments are held for some time until rents and values go up and up. You see the demand is always the same but they manipulate the supply and they make a ton of money by doing so.

Your ideas sound very much like "trickle down economics" or better known here in America as "Voodoo Economics" coined by George Bush Sr. It did not work here for the 12 years employed by Reagan and Bush and I do not think it will work there in the Philippines. The hope that the rich or property owners would reinvest into the economy utimately improving it and its positive effects would somehow trickle down to the poor is just too much to ask for.All it did was make the rich even richer. Lets face it a slum lord will never change. I personally know slum lords here in New York and there in the Philippines. Their properties are dilapidated for a reason other than lack of capital. They are content with the low rents they get even if they can get more if they improved their properties. If given more capital, they would just turn more properties into slums.Here in New York, slum lords are fined heavily for having sub-standard housing. But also given tax breaks and other concessions for building low income housing. For example for every skyscraper condo without rent control Donald Trump builds here in NYC he also has to build some housing units for the poor.

Rent control is a public policy created to help the poor stay in urban places like manila and new york. Somehow, I feel that throwing the poor unprotected into the market economy not to mention an unstable and corrupt government is too harsh. You have not addressed an answer for creation of low income housing except by saying "when supply normalizes" people may be able to get affordable housing. Even if I concede your ideas that market solutions will somehow create lower income housing, when will that take place? For the meantime, where shall the poor live? Your ideas may change the physical landscape of manila for the better but ultimately, as gentrification dictates all you will be doing is forcing the poor to relocate to further distances in the outskirts of the city not unlike leper colonies of old. My family and countless others lived under rent control and we were able to stay in manhattan. There, the salaries were higher and consequently enabled my parents to put me in the best schools. Without having the fruits of living in the city I would not be the success I am today.

Thanks, Vic. I have a few clarifications, then on to my points:

Although the two are often interchanged, "trickle down economics" (or more aptly, "trickle down effect") is the term generally used for a totally laissez-faire market approach that refuses to provide safety nets or redistributive policies. The assumption is that any wealth created in the economy will eventually trickle down to its poorest members. (Which John Kenneth Galbraith derided as "horse and sparrow" economics. i.e. ""if you feed enough oats to the horse, some will pass through to feed the sparrows.")

"Vodoo economics" was a term used to describe supply-side economics popularized in the 70's by Robert Mundell, Arthur Laffer, and Jude Wanniski -and ultimately implemented by the Reagan and Bush I administrations -which has become the doctrine of the conservative right. Basically, supply-siders believed (contrary to Keynesian -demand side economics) that "supply creates its own demand" - so putting in a tax cut gives money back to people which increases supply which creates demand.

I advocate neither. I believe in social welfare and policies for wealth redistribution. I lean towards the successes of the northern european welfare states and socialist governments. (i.e. -Nokia, a global capitalist success, is from Finland -where they pay the highest corporate and personal income taxes in the Eurozone. BUT, because of social programs - the daughter of the president of Nokia and the daughter of a janitor from Nokia -go to the SAME schools.) I also have deep theological reasons for believing in redistributive policies -so I am definitely more Keynes than von Hayek.

I also work for a non-profit that advocates, among other things, affordable housing initiatives, so I am keenly aware of the effects of runaway real estate prices on the working poor and the middle class. I have also worked alongside the National Low Income Housing Coalition (NLIC) and with the National Multi Housing Council (NMHC) on the relationship between land use, density, zoning, and housing affordability. (Here's what the NMHC thinks about rent control. -The report is called "The High Cost of Rent Control." It's a short but really good read.)

As to your points, you are comparing apples to oranges. I cannot think of any place in Manila that is actually gentrifying. NYC's problem with gentrification is driven by the shortage of land (in Manhattan) and the increasing wealth of the city. It is also driven by homeowners and condo-conversions. Rent control benefits a small number of existing tenants - but denies affordable units to new lower income entrants. A 450 sq.ft. (41 sq.m.) studio in the Village rents out (to a new tenant) for about $1,300. Low income families, with service jobs in Manhattan, are forced to long commutes and live in the outer boroughs and outside the city. (NYC would not be able to sustain this without the Metro.)

Meanwhile, long time tenants (under rent control) pay under $300 for 850 sq.ft. apartments. In 1997, Carly Simon (yes, the Carly Simon) was paying $3,000 a month for an 11 bedroom rent-controlled apartment in Upper West Side. The market rate for that unit (in 1997) would've been $15,000. Her neighbor (in the same building) was paying $900 for a 7 bedroom unit.

Gentrification is happening in American cities because the white, upper middle class (mostly gen-xers or baby boomers) are moving back into the cities -which they previously abandoned (the white flight of the 60s and the 70s). The demand for housing in NYC is a mix of middle and low income families with jobs in the city - but also from a large cohort of single, fresh college grads earning more than $50K a year in finance industry jobs.

In comparison, the middle class is a very small portion of Metro Manila's population. Over 100,000 migrants enter Metro Manila every year -looking for jobs and housing. There is a growing backlog of 2 million housing units mostly for the urban poor. And where do the poor live in Metro Manila - in shanty towns and squatter colonies which are a response to this housing backlog. (By the way, they still pay rent in to live in those shanties.)

You say, "Rent control is a public policy created to help the poor stay in urban places like manila and new york."

Here's what the NHMC had to say about it (and bear in mind the NHMC is an advocate of affordable housing):
"Rent control is most often justified as an anti-poverty strategy. Yet, there is strong evidence that higher income households -- not the poor -- are the principal beneficiaries of most rent control laws. For example, a study of rent control in New York City found that rent-controlled households with incomes greater than $75,000 received nearly twice the average subsidy of rent-controlled households with incomes below $10,000. Another study concluded that rent control had the greatest effect on rents in Manhattan, the borough with the highest average income. Similarly, a study of rent control in Berkeley and Santa Monica found that the beneficiaries of controls in those communities are "predominately white, well-educated, young professionally employed and affluent," and that rent control had substantially increased the disposable income of these tenants while "exacerbating" the problems of low-income families. And in Cambridge, Massachusetts, residents of rent-controlled housing had higher incomes and higher status occupations on average than other residents of the city, including homeowners."
Clearly rent control in NYC has benefitted you and your family -and allowed you to get to where you are today. Kudos to you for that. Policy decisions though cannot be based on individual success stories, we have to look at the long view and the greater good. Study after study has shown the failures of rent control - and like I said earlier, economists everywhere - regardless of political stripe, agree on this matter. (NYT columnist Paul Krugman, writes about rent control and says of it, "That great sacred cow-- Rent Control-- is a textbook case of Economic stupidity.")

I agree that removing rent control on its own is not going to solve the housing backlog -but it will encourage reinvestment. It will allow the segment of the market to provide decent rental housing for below $10,000. In the long run, it will provide the working poor housing choice that is better than the shanty towns they are forced to live-in now.

Government also needs to step up by reconsidering its housing program -which, since its inception, has focused on home ownership. (More on this in a succeeding post.) They should build more rental units. The money we have spent on failed low-cost housing and relocation programs would have been better spent providing direct financial assistance (ala Section 8 housing vouchers) to would be renters.


Anonymous said...

(Vic from NYC)

Hello Urbano, thank you for the response. I fully understand and appreciate your points but let me just make some clarfications of my own.

First let me just say that we both share in the belief that Manila needs to reform its low income housing policies. However, we may disagree in the particulars. I fully acknowledge that an overwhelming amount of economists share your views on rent control, but why are an overwhelming amount of tenant associations and renter organizations disagree with you and these economists. Is it a mere coincidence that landlords and giant real estate companies vehemently oppose rent control?Would National Low Income Coalition (NLIC), a group you worked with, agree on your stance to eradicate rent control? You mention the National Multi Housing Council's (NMHC) dissaproval of rent control, but are they a fair source for an opinion on the matter since they represent landlords?

For every "study" that is anti-rent control, there is an equal and opposite version. But, what is unequivocal is who really benifits from eradicating rent control. Yes, there maybe iscolated cases such as Carly Simon. However, that is not an accurate picture to view the merits of rent control. The "Carly Simon" cases are propaganda tactics that landlords use to promote their cause. As a learned man as yourself, one must know there are always certain people that find loopholes for personal benifit. Much like Bush Sr. running Willie Horton ads to make voters believe Dukakis was soft on crime.

The true benificiaries of rent control is not the rich as you claim but the poor and NOT even the middle class. As a matter of fact according to the 1993 Federal Housing Survey, the median income of stabilized tenants in NYC was only $19,000. Of 200,000 tenants under rent control that pay below $400 rent, 80% make under $25,000. One third of these people (about 70,000 housholds) pay up to half their wages on rent. I bet all these people would disagree with your statement that "rent control benifits only a small number of existing tenants."

I was not comparing NYC's state of gentrification with that of Manila's real estate situation. I was merely pointing out how gentrification has relocated the poor in NYC as will eradicating rent control in Manila. The shanty towns and dillapidated buildings you speak of is a regulatory problem not the cause of rent control. As a matter of fact, In “Scapegoating Rent Control: Masking the Causes of Homelessness,” the authors point out that 3 out of the top 4 cities in the US with the most severe homeless problems do not even have rent control laws. Detroit and St. Louis, which never had rent controls, have suffered massive abandonment. But, in Santa Monica and Berkeley, where both have rent control policies, abandonment and homelessness is not a problem. You see we used the same example cities but used different studies to prove opposite points.

The real blame of these shanty towns and run down bulidings is not rent control but rather the greed of rich landlords and banks.
Its not that builders cant make money building low income housing, its that they make a killing on building luxury skyrises instead. One can easily see the vast amount of capital being poured into the numerous skyrises being built in Manila but, how many low income housing do you see being built? Its a matter of greed.

Why not blame and hold banks accountable for not funding projects unless the profit margins are extreme. Yes, I do agree that public policy cannot be derived from individual success stories but neither can it be attained by succumbing to the greedy nature of banks, landlords and real estate companies.

In New York, only 12% of landlords own 70% of the stabilized buildings. I dont know the figures but i'd bet my lunch that only a small handfull of individuals in Manila own most of its the real estate as well. These few are the real winners of abolishing rent control. They own these shanty towns and run down buildings and now you will be giving them a license to print money. The rich will be even richer and the poor will be even poorer but to add insult to injury, they will be relocated once again.

Lastly, you say that ending rent control may encourage investment and may even lower rents. Do you have an actual example for this? (ie. a city that actually benifitted from abolishing rent control) Or are these theories confined to "studies" written by the majority of economists that support it. What about the high cost of construction, inflation, speculation; all of which will add to increased property values which consequently, will raise rents.

With all due respect, in the end, your ideas are just "theories" even if vociferously echoed by the majority of leading economists of the day. As with all theories, there is no absolute certainty. But, what is definite is the hundreds of thousands if not millions that will be adversely affected by your plan. Throwing all these people into the uncertain world of the free market economy without a safety net all for the hope of reinvestment is too big a gamble...

Anonymous said...

(Vic from NYC)

Urbano, sorry for the misspells didnt have time to proof read....wrote it over lunch...lol

Urbano dela Cruz said...

sorry vic,

not ignoring you - just haven't had time to reply.

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