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.
Paris is the first city in France to implement some form of residential rent control. The first came in 2014 (enacted in the market in 2015), but this was later removed in 2017. The second came in 2019, and this current program remains in place until November 2026, at which time it will be reviewed.
But given that it has already been in place for a number of years, people have started to analyze it's effectiveness. Here is a study by Atelier Parisien d'Urbanisme (APUR) that was published this month.
The report is in French, but I can tell you that, what they did, was compare the Paris region to 8 other cities in France -- all of which do not have the same rent controls. They were: Aix-en-Provence, Grenoble, Marseille, Nantes, Nice, Strasbourg, Toulon, et Toulouse. These were allegedly chosen because their housing markets are thought to be similar to that of Paris'.
What they found was that from July 2019 to July 2023, legislated controls in Paris lowered rents by approximately 4.2%, compared to where they would have been without any market intervention.
At the same time, they noticed that these same controls seemed to become more effective over time. From July 2019 to June 2020, they lowered rents by 2.5%, but from July 2022 to June 2023, they lowered rents by 5.9%.
Finally, they also found that the controls seemed to impact smaller places the most. For apartments between 8 and 18 m2, rents were 10.2% lower than expected during July 2019 and July 2023.
This is all interesting stuff, but in many ways, it is expected. Rent controls are intended to depress rental growth. That's the whole point. And based on this data from APUR, it is working in Paris.
But the really tough questions pertain to the possible knock-on effects. If rents are 4.2% lower, but operating costs are now growing faster than rents, then this is a problem for the housing market. You're on an unsustainable path.
And if lower rents mean that fewer developers are going to build new housing, then this is also a problem, because less supply will eventually translate into more upward pressure on rents. I don't know for sure that this is happening in Paris, right now, but these are crucial considerations.
It's never as simple as just looking at rents and thinking lower is better for long-term affordability.
It is estimated that about 1% of the total housing stock in New York City is rent controlled (2019 figure), which is something different than rent stabilized.
Generally the way the former works is that you have to have been living continuously in the home since July 1, 1971, and the building itself needs to have been constructed before 1947. If this is the case, then in theory, you should have seen relatively minor rent increases over the years.
This was the case for the late real estate agent, Alice Mason, who died at the beginning of this year at the age of 100:
She never left the rent-stabilized [controlled?] apartment where she held her storied dinners, in a century-old building on East 72nd Street. (In Manhattan real estate parlance, it was a classic eight, a gracious prewar layout that included three bedrooms and two maid’s rooms.) In 2011, the developer Harry Macklowe bought the building for a reported $70 million and began to turn the units into condos, buying out the tenants to do so. But Ms. Mason refused to give up her apartment. When she moved there in 1962, the rent was $400 a month. At her death, it was $2,476. The apartment below her, in the same line, was recently on the market for just under $10 million.
Green, Penelope. “Alice Mason, Real Estate Fixer and Hostess to the Elite, Dies at 100.” The New York Times, 13 Jan. 2024, www.nytimes.com/2024/01/11/style/alice-mason-dead.html.
For better or for worse, this is an obviously awesome deal, and reason enough to never move and have family members move in with you before you die so that you can try and pass down this asset for generations to come.