#024: When pro-housing leads to anti-housing policy
Increasingly, anti-landlord policies are being conflated with pro-housing advocacy. Why that's bad for everyone.
This topic has been nagging at me for a long time. The lack of available, affordable housing is an issue that plagues policy makers at local, state, and national levels. There is a very clear problem that is exacerbated by the combination of lack of new supply and increased demand due to a growing population and high interest rates keeping people in the rental market and constricting sales inventory.
Here’s the thing. In the US, most housing supply is privatized, meaning the available housing is subject to the forces of supply and demand. And the housing sector is big business—it’s one of the biggest drivers of the US economy. Until that changes, housing is going to be subject to market forces.
That is one of the reasons why even though the US economy is strong right now, people feel extremely negative about it. Even with strong employment and a booming stock market, people are priced out of a home or are spending too much of their paycheck on housing.
Pro-housing shouldn’t mean anti-landlord
The problem with much of the policy that claims to be pro-housing is that it’s instead anti-landlord. Those two things are not only distinct, they are actually at odds. In a privatized system, being pro-housing means you must work with—and not against—the people who build, provide, and tend to it. When a system is dependent on real estate investors to build and maintain housing supply, then making it unprofitable for them to operate means that they will exit that business.
Of course there will always be bad actors. But policy makers don’t seem to see the effect on increasing that likelihood when they throttle a private business’s operations. Every day, I work with property owners and managers around the country who want to deliver good, safe housing for their communities. The irony is that making it harder for them to run their businesses effectively is what leads to lower standards and less supply: why would I, as a business owner, improve upon or build new housing if I am not allowed to recoup those costs? Why would I invest in more responsive and proactive property management (read: capital intensive) if it eats into my thinning margins? It creates a negative incentive to improve housing standards for existing property owners, and pushes new investment out of the industry.
There are policies like New York’s Housing Stability & Tenant Protection Act of 2019, which prohibits rent-stabilized buildings from being brought up to market rate, even if significant renovations are completed, the tenant’s income rises, or the tenant vacates.
California’s Tenant Protection Act restricts landlords from raising rent “more than 10% total or 5% plus the percentage change in the cost of living – whichever is lower – over a 12-month period.”
This introduces multi-layered challenges for rent-stabilized and distressed portfolios:
Investors exit the asset class: Just one look at StreetEasy, and you’ll know a building is rent stabilized if it’s got 8+ units and the property value is a fraction of what it should be. Investors can no longer buy a rent-stabilized portfolio to renovate and bring it up to market rate, so they don’t touch them.
Deferred maintenance… forever: The basic cost of operating a building—taxes, insurance, and compliance alone—may exceed the rent roll an owner is able to get. That’s before the cost of any capital-intensive repairs and maintenance. Need a new roof? If a landlord can’t recoup the investment for a big repair in rent or eventually in the asset itself (to bullet #1), there is no financial reason to do it.
Vacancies preferred: These acts may only exacerbate the supply problem. It may make more financial sense to just let a unit sit vacant. And that’s what a lot of rent-stabilized landlords have decided to do. A REBNY survey of small landlords of rent-stabilized apartments report 25% of their units are vacant, and 1/3 cited “economic infeasibility” of unit improvements after a long tenancy as a reason for continued vacancies.
No profits = no new projects: No business owner is going to keep plodding along on a business model that can’t make money. Since 2020, California continues to fall 50% short of the 180,000 new units the state needs to solve its housing crisis. But all I hear from operators is that they don’t want to invest in a state that makes it so hard for them to be a landlord.
Just imagine if the price of gas or groceries was fixed this way. This could be one way to combat inflation, by capping prices. Instead, for every other sector, economic policy looks to lower prices through the principles of supply and demand—raising interest rates is designed to curb spending (lower demand), which in return lowers inflation.
So… what about housing supply?
Housing is different. You can’t just curb demand, unless the plan is to restrict population growth. So that leaves us with one answer: More supply.
Yet, in many of the same places where policy is pushing landlords out, building new inventory is also fraught with challenges. Not even mentioning permitting and zoning that creates a high barrier to building new housing, incentives haven’t caught up.
New York legislators let the 421-a tax abatement program lapse in 2022 because they considered it “too generous.” This was an incentive for developers to build affordable housing in new projects, and the Governor’s office estimates 30,000 units of housing in NYC are at risk as a result. A replacement initiative, 485x has been proposed to enable these projects to continue, but it still falls short in a few areas. Housing voucher programs were not created state-wide, which was a proposal that was supported by both tenant and real estate groups. Emily Goldstein, director of organizing and advocacy for the Association for Neighborhood and Housing Development lamented to The Real Deal that this should have been a “no brainer” and that “everyone who deals with housing supports this program.”
Balance is needed
The net-net is that in a system where most housing will continue to be privatized, legislators must work with housing providers to align on shared goals: access to safe and adequate housing.
The harder and more expensive the business of being a housing provider becomes, the less incentive an investor has, whether that’s in improving existing supply or creating new supply.