"Rent control is the second-best way to destroy a city, after bombing." —Lawrence H. Summers

Zohran Mamdani, the Democratic nominee for the mayor of New York City, clearly ran a good campaign. He used social media and short-form videos to find his audience and win with the message that the city has become unattainable to most.

But it is also clear that the stock market really does not like his message. Shares of firms with exposure to New York City's real estate market reacted immediately: Vornado Realty Trust, SL Green, Equity Residential, Empire State Realty Trust, LXP Industrial Trust, and others, were all down. At the same time, the wealthy vowed to leave New York for places like Florida, as they so often do these days.

One of reasons for this negative reaction was Mamdani's commitment to not just cap rent increases, but freeze rents in rent-stabilized units for the entire duration of his term. We've spoken a lot about rent control over the years (here, here, here, and other places) but, at a high level, the problem with rent controls is that they create a strong disincentive for landlords to invest and maintain their homes and for developers to build new homes. So what ultimately happens is that you get a more rapidly aging inventory of existing homes and a reduced amount of new supply.

A full-out rent freeze takes this even further. A rent freeze does not mean that utility costs will also be frozen, that insurance and taxes will be frozen, that interest rates will be capped, and that all other landlord operating expenses will be restricted from inflating. (If this were the case, we really wouldn't have market economy.) So what a rent freeze does is ensure that, in real dollars, a landlord is able to collect

Yesterday's post tried to pit politics against the realities of how we know cities and economics work. So today, I thought I would share a set of memos from Howard Marks (of Oaktree Capital) titled Economic Reality, Political Reality (which he refers to as an oxymoron), and Shall We Repeal the Laws of Economics?

In this last one, he specifically talks about things like price gouging (starting with the grocery industry) and apartment rent controls. Each is worth a full read when you have the time, but here I'll leave you all with a few city building-related thoughts.

Marks describes economics as the study of choice. And within these choices, there are many complicated moving pieces and second-order consequences. Take, for example, rent control in New York City. What rent control does is stop the free market from being able to freely set rents. The result:

A person in favor of this arrangement would argue that it maintains affordability and diversity. What it means in purely economic terms is that some people who couldn’t afford to live in New York City if rents were set by free-market forces are able to live there if they’re lucky enough to secure an apartment with regulated rent. But other people who would like to live in New York City and can afford higher rents can’t do so because there are no apartments for them. And lastly, landlords that have apartments that are somehow unregulated can command higher rents than would be the case if additions to the supply of apartments weren’t being discouraged. It’s a matter of personal philosophy whether this is good or bad. But clearly, the laws of economics and the actions of free markets aren’t at work in New York City. Someone in government is making the decisions.

Much like inclusionary zoning in the case of new housing, the tradeoffs with regulated rents are that you get (1) less overall housing supply and (2) more expensive prices for the people that can pay market rents.

You could argue, as Marks suggests, that these are acceptable outcomes; but regardless of your opinion, there are real consequences to this policy decision. There's no such thing as a "free lunch" in economics, and consequently there's no such thing as no-cost affordable housing. The question is: Who pays?

Going back to the topic of traffic congestion from yesterday's post, Toronto's general reluctance to implement any form of road or congestion pricing is also an economic choice. We have priced our roads so cheaply that demand is always going to outstrip supply. And this is expected. What we are experiencing today is a natural market outcome.

Targeting bike lanes as part of the problem is meant to counter this by increasing road supply. Less bike lanes means more space for cars, right? But the second-order consequence of this choice is that you push people off their bikes (which take up less road space) and into cars (which take up more road space). So demand is also likely to increase.

The stark reality of solving traffic congestion is that it will require greater change. It will mean fewer people driving, more people taking transit and biking, and the people who do continue to drive will have to pay more for it.

Of course, this is not what any politician wants to talk about. As Marks says: "In the world of politics, there can be limitless benefits and something for everyone. But in economics, there are only tradeoffs." The tradeoff we have decided to make is cheap roads in exchange for crippling traffic congestion.

"Rent control is the second-best way to destroy a city, after bombing." —Lawrence H. Summers

Zohran Mamdani, the Democratic nominee for the mayor of New York City, clearly ran a good campaign. He used social media and short-form videos to find his audience and win with the message that the city has become unattainable to most.

But it is also clear that the stock market really does not like his message. Shares of firms with exposure to New York City's real estate market reacted immediately: Vornado Realty Trust, SL Green, Equity Residential, Empire State Realty Trust, LXP Industrial Trust, and others, were all down. At the same time, the wealthy vowed to leave New York for places like Florida, as they so often do these days.

One of reasons for this negative reaction was Mamdani's commitment to not just cap rent increases, but freeze rents in rent-stabilized units for the entire duration of his term. We've spoken a lot about rent control over the years (here, here, here, and other places) but, at a high level, the problem with rent controls is that they create a strong disincentive for landlords to invest and maintain their homes and for developers to build new homes. So what ultimately happens is that you get a more rapidly aging inventory of existing homes and a reduced amount of new supply.

A full-out rent freeze takes this even further. A rent freeze does not mean that utility costs will also be frozen, that insurance and taxes will be frozen, that interest rates will be capped, and that all other landlord operating expenses will be restricted from inflating. (If this were the case, we really wouldn't have market economy.) So what a rent freeze does is ensure that, in real dollars, a landlord is able to collect

Yesterday's post tried to pit politics against the realities of how we know cities and economics work. So today, I thought I would share a set of memos from Howard Marks (of Oaktree Capital) titled Economic Reality, Political Reality (which he refers to as an oxymoron), and Shall We Repeal the Laws of Economics?

In this last one, he specifically talks about things like price gouging (starting with the grocery industry) and apartment rent controls. Each is worth a full read when you have the time, but here I'll leave you all with a few city building-related thoughts.

Marks describes economics as the study of choice. And within these choices, there are many complicated moving pieces and second-order consequences. Take, for example, rent control in New York City. What rent control does is stop the free market from being able to freely set rents. The result:

A person in favor of this arrangement would argue that it maintains affordability and diversity. What it means in purely economic terms is that some people who couldn’t afford to live in New York City if rents were set by free-market forces are able to live there if they’re lucky enough to secure an apartment with regulated rent. But other people who would like to live in New York City and can afford higher rents can’t do so because there are no apartments for them. And lastly, landlords that have apartments that are somehow unregulated can command higher rents than would be the case if additions to the supply of apartments weren’t being discouraged. It’s a matter of personal philosophy whether this is good or bad. But clearly, the laws of economics and the actions of free markets aren’t at work in New York City. Someone in government is making the decisions.

Much like inclusionary zoning in the case of new housing, the tradeoffs with regulated rents are that you get (1) less overall housing supply and (2) more expensive prices for the people that can pay market rents.

You could argue, as Marks suggests, that these are acceptable outcomes; but regardless of your opinion, there are real consequences to this policy decision. There's no such thing as a "free lunch" in economics, and consequently there's no such thing as no-cost affordable housing. The question is: Who pays?

Going back to the topic of traffic congestion from yesterday's post, Toronto's general reluctance to implement any form of road or congestion pricing is also an economic choice. We have priced our roads so cheaply that demand is always going to outstrip supply. And this is expected. What we are experiencing today is a natural market outcome.

Targeting bike lanes as part of the problem is meant to counter this by increasing road supply. Less bike lanes means more space for cars, right? But the second-order consequence of this choice is that you push people off their bikes (which take up less road space) and into cars (which take up more road space). So demand is also likely to increase.

The stark reality of solving traffic congestion is that it will require greater change. It will mean fewer people driving, more people taking transit and biking, and the people who do continue to drive will have to pay more for it.

Of course, this is not what any politician wants to talk about. As Marks says: "In the world of politics, there can be limitless benefits and something for everyone. But in economics, there are only tradeoffs." The tradeoff we have decided to make is cheap roads in exchange for crippling traffic congestion.