A lbany has finally passed a state budget with a housing plan. The governor and legislative leaders are touting the deal, which tries to satisfy every interest group at the table. The deal is full of complex legislative language — this is New York, after all. It’s a triumph of what center-left wonk Ezra Klein calls “everything-bagel liberalism,” a mountain of mandates, conditions, and subsidies with ambitious social-justice goals. The problem is that these complex side deals have drained away the law’s ability to get shovels in the ground and ease downstate New York’s housing crunch.
The centerpiece everyone is talking about actually hurts housing supply. That’s rent regulation, misleadingly called “good-cause eviction.” The budget says that all apartments in New York City other than those built since 2009 and those owned by small landlords will be subject to a presumption that rent increases above 10 percent or 5 percent plus inflation, whichever is smaller, are “unreasonable” and not allowed. Other municipalities in the state can opt into the regulation.
Capping rents might sound good, but whenever you force prices down in a competitive market — and rental housing in New York’s cities is a competitive market with thousands of suppliers — you cause a shortage and misallocate the scarce good.
Activists often say, “Follow the science!” and, in this case, they should take their own advice. The gold-standard study of the effects of previous New York City rent-regulation programs on tenants showed that these programs led to an increase in rents for most tenants, including those in rent-stabilized units, because they discouraged rental-unit construction and conversions and because renters did not want to leave rent-stabilized units even when it would have made more sense for them to live elsewhere. To take another example, a recent study of a 1994 San Francisco rent-control law, published in the American Economic Review, found that rent control reduced renter mobility by 20 percent and rental-housing supply by 15 percent, likely causing rents to rise in the long term.
The New York law means that housing providers will have to go to housing court to secure rent increases or evictions. But the squatter problem has shown how broken the housing-court system is. We’ve seen recently how homeowners can be arrested for changing locks on a squatter without getting a judgment from housing court first, which can take months and cost thousands of dollars. Homeowners and housing providers deserve the right to control their own property without first having to prove “cause” in a lengthy judicial process.
New York State’s budget also creates a tax incentive for building “affordable housing” in the city. The new 485-x program is similar to the expired 421-a, but it has more regulations, such as a stricter affordability requirement and a requirement to pay minimum wages of up to $72.45 an hour for construction labor. The 421-a program did incentivize a lot of building but at incredible cost. A 2022 study published by the prestigious Review of Economics and Statistics revealed that the added fiscal cost of building one unit under the program was $1.6 million. There are far less costly ways to get housing to the truly needy. The only good news is that, because of the red tape around the 485-x program, it will likely get less use (but also create less housing) than 421-a did.
The element with the biggest potential for positive impact in the deal is a legislative change to let New York City raise its cap on the ratio of residential-space square footage to land area on specific lots, with historic districts exempted. It’s crazy that the state currently limits housing density in Manhattan to begin with. The very name “Manhattan” is a byword for density in the rest of the country. That’s why people move there. And, of course, artificially limiting supply drives prices up. Unfortunately, this provision also requires the owner of any lot benefiting from the raised cap to set aside “minimum percentages of permanently affordable housing equivalent to or exceeding the requirements under any mandatory inclusionary housing program.”
This is a soft form of rent control, requiring higher-than-market-rate rents from the majority of tenants to subsidize those who pay below-market rates. “Inclusionary zoning” (IZ) is predicated on an ongoing housing shortage — and contributes to it. Market rates have to be high to make the cross subsidies work, and if market rates fall, then the cross-subsidy requirement would make new development unworkable. Research in the Baltimore–Washington, D.C., area finds that this kind of mandate increases the cost of market-rate housing. Other peer-reviewed studies have consistently found a similar result: Adopting mandatory IZ increases housing costs.
The New York budget also gives certain commercial-to-residential conversions a tax break (hotel conversions don’t qualify). But, once again, accompanying affordability and prevailing-wage requirements mean that few developers are likely to take advantage of this provision, and if they do, it’ll likely be predicated on ongoing steep rises in market rents.
Finally, the budget does two very small, purely positive things. It lets New York City set up a pilot program to legalize basement apartments. This would be a small-scale program that wouldn’t result in the creation of any new units but might prevent code officers from shutting down some existing ones.
The budget also lets housing providers subject to the rent-stabilization law recoup a little more of the cost of renovating apartments when tenants leave. New York’s various rent-control programs have pushed building owners to leave tens of thousands of units vacant. The Wall Street Journal reports on one mom-and-pop housing provider who has left a unit vacant since 2021 because it would cost her $200,000 to renovate it. The new budget will let her pass on $30,000 of that cost, up from $15,000, onto renters, but this isn’t likely to do much to mitigate the ongoing damage of rent control.
New York lawmakers have managed to come up with a housing package that contains goodies for every organized lobby at the expense of a morass of new red tape. The limits, exclusions, and mandates in the bill guarantee that it won’t do much to make homes more accessible to New Yorkers.