Quick notes on why 75% of New Yorkers pay less than $2,400 for their apartments, why you've thought otherwise until right now, and why you can't seem to find those good deals
There’s always a flavor of “screw the renters” whenever I see a piece line this. There’s the assumption that renting is supposed to be a temporary state that one is only in until such time as they can purchase a home. It is assumed that renters are transient. It is also assumed that “market” rents are somehow the objective and the only way for capital to get their appropriate level of return.
What is “market” rent? Market rent is the every damn penny a landlord can charge without a unit remaining vacant. It has no relationship to the level of expenses. Further, in a situation where some units are stabilized, a landlord does not say “I had an unusual expense, so I have to raise the rent on everybody else.” If the landlord could have charged more *the landlord would have charged more to begin with*.
Besides, over the last fifty years, NYC buildings with rentals have not been owned so much for operating profits; it’s been for capital appreciation.
Build more units? Yes. Replace late-in-life buildings with larger structures? Yeah.
But do not destroy the kind of community that develops from apartments that people can spend a serious part of the rest of their lives living in.
This is excellent analysis. I did not realize that the median rent was so low. No one who enjoys below market rents is complaining that the rent is too high. So without this type of analysis, one can readily have a lopsided view of the situation. Thanks Daniel!
You may see some pushpack on the logic of scenario 2A. Let's assume the renters are rational actors. If the Landlord raises the rent above market to cover the cost of expenses, then the renters would leave.
Remember, the market sets the price for the apartment, not costs.
Of course, humans aren't actually rational. But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs.
Thanks for the comment! It poked me to write more, and I hope you like it // think it addresses the things you got at. But let me know if not.
I would lay it out like this:
"But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs." Of course, this happens all the time. I have scenario 2B about preferential rents to address that kind of thing directly--even in apartments with legal rent ceilings, we see supply and demand pull the price below the legal rent ceiling.
"Remember, the market sets the price for the apartment, not costs." I would say two things: (1) as a basic point of fact, in NYC's specific context, the market often does not set the price for apartments--just look at rent control, much of rent stabilization, and more. Many apartments are directly kept away from what the market's price mechanisms want to do. Only sometimes does the market set the price, like with market-rate units and in other cases where supply and demand cross under a legal rent ceiling, like with preferential rents. The broader point here is: when speaking about economics, one ought be embedded in context. Many abstract economic ideas ("market sets the price") simply break in the face of NYC's specific context. Preferential rents are a way they break from the basic expectations many have in the other direction about price ceilings.
But I think I understand the thrust of the critique (correct me if I'm mischaracterizing): just because a building owner might *need* extra money to make up for a budget shortfall caused by rent regulated units, that doesn't mean that they will automatically be able to command it from their market rate units (if they even have market rate units--it might be a totally non-market building). Market rate units are subject to supply and demand, and an owner who sticks their price above the strength of demand will be out of luck. The point about "the market sets the price for the apartment, not costs" means that it doesn't matter if your building is bankrupt--you can't magically command your market-rate tenants to pay whatever you need to fix that situation.
My response to that critique: sure, it can play out like that, for some buildings, in some market segments. But not in others. I'm not making a totalizing claim, just a claim about a widespread phenomenon that is real. You could imagine (although many don't have to imagine, they've lived it) this scenario: a building owner raises a unit(s)' rent a little higher than all the comparable units around them--let's just say it's to help the building's finances, although it needn't be. In your example scenario above, this owner would be punished. But in a supply constrained market like NYC, what often happens is not market discipline in the form of a lost tenant or a decreased Streeteasy rate--but price discovery in an upward direction! Lo and behold, despite the cost increase, someone bids on it, and now a higher market equilibrium is pressured into existence. Now imagine you have many buildings that are cross-pressured this way with many units that don't pull their operational cost weight. They put even more pressure on price discovery in an upward direction.
This is what I was talking about in the piece with a "high pressure" bubble and a "low pressure" bubble. The apartments with rents legally set well below market equilibrium mean you will have many more attempts at upward price discovery (certainly on the margin), and in a context of severe shortage and low vacancy, many of those will be successful, establishing a higher equilibrium price. Only the market-rate units are subject to this extra pressure.
To come back to this in summary: "But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs." Definitely. And also I can imagine this: The landlord increases rent, and finds that someone will still bid on it, the current tenant included, even if they didn't expect that, they just wanted to try to see if they could get more. Price discovery has happened, and a higher market equilibrium is established.
Yep, I totally buy that landlords here try upward price discovery more than other places due to the distortion in rents from non-market units. So market rate renters are penalized here. At the very least penalized in time negotiating down rent raises, which is a fairly common NYC experience.
This discussion also reminds me that rapid inflation is pretty brutal for NYC landlords since rent only changes once a year on market rate units. And because of good cause eviction laws, as I understand, there is a ceiling on how high market rate increases can be as well.
I think many don't yet grasp the truly sweeping nature of the price controls baked into good cause (for those following along: https://hcr.ny.gov/good-cause-eviction).
In a technical sense, I think one could say that there are essentially *no* market-rate units in NYC after Good Cause was passed, if by "market rate" one means literally "charge whatever you want." In practice, I think many apartments are still operating under the good cause price ceiling, and there's not market demand or pressure to try to poke them above it (although that is true sometimes). And: since the vacancy rate is so dire, many renters wouldn't feel like taking the time and trouble to challenge a rent increase over the legal limit, especially if they have a security deposit in limbo.
I'm still not sure how I want to characterize the nature of NYC's housing market after Good Cause. "Market rate" works, but also--it has real limits as a concept in the modern web of price controls.
Interesting graphs! Median and average only captures so much, and seeing the graphs over time is much more informative. Is anyone looking at the huge spike of $5000+ rents that appeared in the last 30 years? Even accounting for inflation, there's no such bump in the upper echelons 30 years ago. And although those apartments don't influence the availability of cheaper apartments more than indirectly (at best), I think it speaks volumes about how the city's demographics have changed over that period.
There’s always a flavor of “screw the renters” whenever I see a piece line this. There’s the assumption that renting is supposed to be a temporary state that one is only in until such time as they can purchase a home. It is assumed that renters are transient. It is also assumed that “market” rents are somehow the objective and the only way for capital to get their appropriate level of return.
What is “market” rent? Market rent is the every damn penny a landlord can charge without a unit remaining vacant. It has no relationship to the level of expenses. Further, in a situation where some units are stabilized, a landlord does not say “I had an unusual expense, so I have to raise the rent on everybody else.” If the landlord could have charged more *the landlord would have charged more to begin with*.
Besides, over the last fifty years, NYC buildings with rentals have not been owned so much for operating profits; it’s been for capital appreciation.
Build more units? Yes. Replace late-in-life buildings with larger structures? Yeah.
But do not destroy the kind of community that develops from apartments that people can spend a serious part of the rest of their lives living in.
Interesting thoughts! I don’t share the imputed assumptions you have about “pieces like this,” but thanks for reading!
This is excellent analysis. I did not realize that the median rent was so low. No one who enjoys below market rents is complaining that the rent is too high. So without this type of analysis, one can readily have a lopsided view of the situation. Thanks Daniel!
Thanks for the post and data digging!
You may see some pushpack on the logic of scenario 2A. Let's assume the renters are rational actors. If the Landlord raises the rent above market to cover the cost of expenses, then the renters would leave.
Remember, the market sets the price for the apartment, not costs.
Of course, humans aren't actually rational. But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs.
Thanks for the comment! It poked me to write more, and I hope you like it // think it addresses the things you got at. But let me know if not.
I would lay it out like this:
"But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs." Of course, this happens all the time. I have scenario 2B about preferential rents to address that kind of thing directly--even in apartments with legal rent ceilings, we see supply and demand pull the price below the legal rent ceiling.
"Remember, the market sets the price for the apartment, not costs." I would say two things: (1) as a basic point of fact, in NYC's specific context, the market often does not set the price for apartments--just look at rent control, much of rent stabilization, and more. Many apartments are directly kept away from what the market's price mechanisms want to do. Only sometimes does the market set the price, like with market-rate units and in other cases where supply and demand cross under a legal rent ceiling, like with preferential rents. The broader point here is: when speaking about economics, one ought be embedded in context. Many abstract economic ideas ("market sets the price") simply break in the face of NYC's specific context. Preferential rents are a way they break from the basic expectations many have in the other direction about price ceilings.
But I think I understand the thrust of the critique (correct me if I'm mischaracterizing): just because a building owner might *need* extra money to make up for a budget shortfall caused by rent regulated units, that doesn't mean that they will automatically be able to command it from their market rate units (if they even have market rate units--it might be a totally non-market building). Market rate units are subject to supply and demand, and an owner who sticks their price above the strength of demand will be out of luck. The point about "the market sets the price for the apartment, not costs" means that it doesn't matter if your building is bankrupt--you can't magically command your market-rate tenants to pay whatever you need to fix that situation.
My response to that critique: sure, it can play out like that, for some buildings, in some market segments. But not in others. I'm not making a totalizing claim, just a claim about a widespread phenomenon that is real. You could imagine (although many don't have to imagine, they've lived it) this scenario: a building owner raises a unit(s)' rent a little higher than all the comparable units around them--let's just say it's to help the building's finances, although it needn't be. In your example scenario above, this owner would be punished. But in a supply constrained market like NYC, what often happens is not market discipline in the form of a lost tenant or a decreased Streeteasy rate--but price discovery in an upward direction! Lo and behold, despite the cost increase, someone bids on it, and now a higher market equilibrium is pressured into existence. Now imagine you have many buildings that are cross-pressured this way with many units that don't pull their operational cost weight. They put even more pressure on price discovery in an upward direction.
This is what I was talking about in the piece with a "high pressure" bubble and a "low pressure" bubble. The apartments with rents legally set well below market equilibrium mean you will have many more attempts at upward price discovery (certainly on the margin), and in a context of severe shortage and low vacancy, many of those will be successful, establishing a higher equilibrium price. Only the market-rate units are subject to this extra pressure.
To come back to this in summary: "But you can easily envision a scenario where rents are dropping, the renters leaving when a rent increase happens. So the landlord would have to lower rents to attract a renter, regardless of costs." Definitely. And also I can imagine this: The landlord increases rent, and finds that someone will still bid on it, the current tenant included, even if they didn't expect that, they just wanted to try to see if they could get more. Price discovery has happened, and a higher market equilibrium is established.
Yep, I totally buy that landlords here try upward price discovery more than other places due to the distortion in rents from non-market units. So market rate renters are penalized here. At the very least penalized in time negotiating down rent raises, which is a fairly common NYC experience.
This discussion also reminds me that rapid inflation is pretty brutal for NYC landlords since rent only changes once a year on market rate units. And because of good cause eviction laws, as I understand, there is a ceiling on how high market rate increases can be as well.
I think many don't yet grasp the truly sweeping nature of the price controls baked into good cause (for those following along: https://hcr.ny.gov/good-cause-eviction).
In a technical sense, I think one could say that there are essentially *no* market-rate units in NYC after Good Cause was passed, if by "market rate" one means literally "charge whatever you want." In practice, I think many apartments are still operating under the good cause price ceiling, and there's not market demand or pressure to try to poke them above it (although that is true sometimes). And: since the vacancy rate is so dire, many renters wouldn't feel like taking the time and trouble to challenge a rent increase over the legal limit, especially if they have a security deposit in limbo.
I'm still not sure how I want to characterize the nature of NYC's housing market after Good Cause. "Market rate" works, but also--it has real limits as a concept in the modern web of price controls.
Daniel, always back with a banger. I just wish I had the courage to start a group to destroy every single form of rent control in NYC
Interesting graphs! Median and average only captures so much, and seeing the graphs over time is much more informative. Is anyone looking at the huge spike of $5000+ rents that appeared in the last 30 years? Even accounting for inflation, there's no such bump in the upper echelons 30 years ago. And although those apartments don't influence the availability of cheaper apartments more than indirectly (at best), I think it speaks volumes about how the city's demographics have changed over that period.
Excellent piece!
this is really interesting analysis, i had no idea the market was so... well, the word i'd want to use is 'distorted' but maybe that's a bit loaded
i wonder how this compares to other high-density high-value rental markets?
Another thing people forget is that there is cheap tents in basically every city, they just aren’t in “desirable areas”.