New York’s self-inflicted housing crunch

People who live in New York City know that its frenetic pace can induce anxiety. In part, that angst stems from living in a highly congested city brimming with energy.

The New York City skyline with the Statue of Liberty in the foreground. NYC and other big cities like San Francisco are both experiencing a housing crunch.

But there’s also the anxiety from New York’s crazy-quilt pattern of land use regulation, which a New York Times editorial recently labeled “High-Rise Anxiety.” The unease stems from the many overlapping restrictions both on new construction and the utilization of existing facilities. These regulations have created a two-tier system in which some prosper handsomely while others scramble to make ends meet.

The current housing crunch in New York, and in other cities like San Francisco, is attributable to the complex set of prohibitions and subsidies that shape these markets. Under the modern administrative law system, private property rights are of little consequence when a developer is trying to build. What matters ultimately is that all of the relevant “stakeholders” have a right to participate in an endless negotiation process before anything gets done. The de facto presumption is against changes in both new and existing housing markets. The building permit is the unit of political currency, and each requires enormous inside connections, patience, and luck to obtain. It can take developers many years to obtain their precious permits, if they get them at all.

This permit impasse stems largely from the progressive view of administrative law. Its initial proposition is that markets fail for two reasons: first, they allow for exploitation of vulnerable tenants. Second, they ignore external effects on third parties.

As to the first, the alleged villains are unscrupulous landlords, whose drive for higher rents must be countered by a rent stabilization program to protect sitting tenants. The New York program was first put into place in 1969, where it was sold as “emergency legislation,” originally for three-year terms, routinely renewed. (The latest renewal was for four years.) The trigger to end rent stabilization is a vacancy rate of 5 percent or more, which will never happen for units that are priced below market rates. Hence rents are allowed to rise, if at all, only in accordance with an administrative rate formula tied to costs rather than to greater demand. The law thus leaves the landlord with all the downside in a weak rental market, while allowing tenants to not only pay in perpetuity only a fraction of market value for their units, but to be also protected from eviction at the end of the lease. At root, rent stabilization is a form of price controls on steroids.

By tying the price caps to the protection of sitting tenants, the law generates its own powerful local base of political support. If you could tweak the law so that the landlord that complies with the rent cap could select whatever tenant he wants at the expiration of an existing lease, then the entire system would collapse like a house of cards. Local tenants will not vote to ensure low rents for new arrivals. It is the territorial basis of this regulatory system that allows it to endure long after other price control systems, such as those for gasoline at the pump, bit the dust.

The second justification for regulation stems from the impact of new development on nearby communities. Everyone has a deep interest in whom their neighbors are and will be, and this is particularly true in New York, where population density puts people in close contact with one another. The city law puts current residents in a position of dominance, relative to their landlords, through the creation of an elaborate system of community development boards, officially described as follows:

Community boards are local representative bodies. There are 59 community boards throughout the City, and each one consists of up to 50 unsalaried members, half of whom are nominated by their district’s City Council members. Board members are selected and appointed by the Borough Presidents from among active, involved people of each community and must reside, work, or have some other significant interest in the community.

These intensely local boards make sure that outsiders have to face an uphill battle to secure the needed permissions to build new projects, because these will always have some real, if often exaggerated, impact on nearby residents. It takes little imagination to see that the members of these boards will often have their own axes to grind, which explains why so many well-positioned people are keen to serve on these boards without compensation.

These boards are especially active in responding to gentrification, which does not benefit sitting tenants, even if it improves the overall position of the city. In responding to this issue, the New York Times supports Mayor Bill de Blasio’s “big idea” to rezone neighborhoods to require developers to include a certain number of affordable housing units in a new project, while strengthening the rent stabilization law. This two-prong approach is risky. Such affordable housing provisions have mushroomed all throughout New York, having received a constitutional blessing in state courts.

One way to fund an affordable housing program is through direct public subsidies, given to eligible tenants who qualify for assistance. The relative advantage of this system, as the late Justice Scalia recognized in Pennell v. San Jose (1988), is that it puts the public subsidy on-budget, where democratic processes can determine both its size and the preferred beneficiaries. But voters resist these subsidies for just this reason: powerful political forces will vie to direct the largest share of the subsidies to themselves.

Indeed, it was just these political forces that recently undid New York’s long standing 421-a program that allowed for the construction of affordable housing, subsidized by a complex system of tax-exemptions, but applicable only in poorer neighborhoods. That program was not renewed in January 2016 because Governor Andrew Cuomo refused to back it unless it required developers to pay construction workers, yet another stakeholder, union-level wages that would have raised, by one estimate, construction costs by 13 percent—or roughly $45,000 per unit.

The tragedy of this debate is that both Mayor de Blasio and Governor Cuomo are so imbued with the progressive spirit that they do not realize that the true villains here are their own restrictive land use programs that have long hobbled New York’s housing markets. Their common position is misguided even by progressive standards. Rent stabilization laws necessarily distort prices in local housing markets by giving sitting tenants perverse incentives to stay in their current housing units. It is just too costly to give up a current subsidy on a large unit to pay higher market rates on an unregulated smaller unit elsewhere in town. So the rigidity in ownership leads to a systematic underutilization of existing housing that chews up valuable public resources while simultaneously reducing the city’s tax base. Any responsible social welfare calculation has to take into account the countless numbers of individuals, in and out of New York, whose own opportunities are systematically constrained by the current rules.

A similar critique is properly directed at the extensive veto rights given to neighbors. The common law, from its earliest days, long recognized that special rules were needed to deal with harmful interactions with neighbors. The judge-made nuisance law protected people against pollution, noise, vibration, and other similar hazards. All of these restrictions add to the overall value of land by stopping antisocial forms of behavior. The easy verification of this proposition comes from a close look at the various planned developments that include voluntary covenants that protect against these asocial behaviors. No one, regardless of wealth or political persuasion, advocates a relaxation of these guidelines, or protests the efforts of local governments to block activities that threaten the health and safety of a neighborhood. Nor does anyone think that a local government goes beyond its proper function by making sure that current and future infrastructure, on such matters as public utilities and street access, can support construction or expansion.

Most strikingly, none of the current land use disputes are about these issues. Instead, the argument here is that the class of recognized externalities that call for government regulation goes far beyond these limited cases, to include rules that allow one set of neighbors to decide the wealth and ethnicity of their potential neighbors. The difference in the two approaches is astounding. Nuisance disputes are rarities in today’s cities for the simple reason that no one wants to rent or buy in a pig sty. But when the composition of the community—by age, race, income, disability, or family status—becomes grist for the public mills, externalities are always everywhere, even for new construction projects built on vacant land.

The situation gets more convoluted when new developments have to manage issues like views and light, landmark status, and neighborhood character, which are always fair game for public deliberation. The current legal worldview starts from the premise that renting or owning in a given community gives an expanded entitlement to block or limit the activities of other people, without having to pay these latecomers any compensation for the loss or curtailment of their own property rights. The correct solution is this: the government can condemn these development rights for their fair market value. But don’t hold your breath.

In shifting away from the common law approach, the law does not solve the problem of externalities. It magnifies it. The older common law rules wisely recognized that the “harm principle” is hopelessly broad as stated. That principle, as announced by John Stuart Mill in On Liberty, holds: “That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his ill, is to prevent harm to others.” Virtually every human action produces some effects that will leave someone worse off, especially in dense urban settings. Hence, the only way to make this plausible-sounding principle work is by limiting its application, as is done in the law of nuisance. The public deliberations of large classes of harms, including the blocking of views, must be treated as nonactionable, that is, outside the scope of legal protection on the simple ground that the overall social welfare is better advanced if these ubiquitous losses are systematically ignored.

The willingness to use the narrower definition of harm—one that deals with force, fraud, and monopoly—was never universally observed prior to the rise of the modern system of land use regulation. But legislatures, courts, and the public gave it far more respect than it receives today. Hence this grim warning: so long as every externality counts in administrative proceedings, all sides in the current land use disputes will contribute to high levels of anxiety that are a necessary consequence of the modern progressive state.

Author: Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.