The High Cost of New York’s Rent Freeze

The Rent Guidelines Board’s vote provides relief to some tenants while leaving the city’s deeper housing problems unresolved.

Courtesy Selcuk Acar/Anadolu via Getty Images

In 1971, the Swedish economist Assar Lindbeck offered a famous critique of rent control: “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Since then, economists have distinguished between different forms of rent regulation. The “first-generation” systems Lindbeck had in mind impose fixed nominal price ceilings: rents remain frozen even if landlords’ operating costs rise, and the rental price carries over when one tenant leaves and another moves in. By contrast, “second-generation” systems limit how much rents may rise during a tenancy, often through formulas that account for inflation or operating costs, while allowing rents to move closer to market levels when an apartment becomes vacant.

Second-generation systems provide tenants with stability and predictable increases, though at some cost to housing efficiency. New York City’s rent-stabilization system, for all its flaws, has generally fallen within this category. Each year, the Rent Guidelines Board—of which I am a public member—sets permissible increases for regulated leases after reviewing changes in landlords’ operating costs and tenants’ incomes. Prior to the passage of the Housing Stability and Tenant Protection Act in 2019, landlords also had greater latitude to raise rents when apartments turned over or after making improvements. Since then, however, those avenues have been sharply restricted, leaving the annual increases approved by the board as the principal means of keeping regulated rents aligned with rising costs.

On Thursday, the Rent Guidelines Board formally adopted Mayor Zohran Mamdani’s proposed rent freeze, approving a zero-percent increase on both one- and two-year leases for the city’s roughly one million rent-stabilized apartments. The vote moves us one step closer to the first-generation rent-control model that Lindbeck described, threatening the long-term viability of a large share of the city’s rental housing.

The historical record suggests that such freezes carry severe long-term costs. Mumbai, for instance, froze rents in 1947 as a temporary relief measure; the consequences are still visible today in dilapidated buildings so starved of maintenance that many have fallen down. New York City has experienced a version of this dynamic, too, in the form of the nickel subway fare. Held at 5 cents from 1904 to 1948, the fare slowly bankrupted the private transit companies that had built out the system, until they collapsed into public ownership and the system entered a long decline that took decades to reverse.

The lesson is that freezing the price of a service indefinitely while its costs continue to rise does not produce cheap or abundant service. Instead, it produces deteriorating assets and, eventually, public bailouts and takeovers.

The central argument for a rent freeze is tenant affordability. But it’s important to keep in mind that rent stabilization is not an antipoverty program. After the 2019 regulation changes, eligibility for rent stabilization in New York City has not depended on a tenant’s income or assets. The benefit is tied to the apartment, not the household, and goes to whoever happens to hold the lease.

The mayor himself is a good example. Before moving to Gracie Mansion, Zohran Mamdani spent seven years in a rent-stabilized one-bedroom apartment in Astoria that rented for around $2,300 per month. There is nothing unusual or scandalous about that. Stabilized apartments are allocated by tenure and chance—whoever happens to secure a lease when one becomes available—rather than by income or need. Roughly 30 percent of households in rent-stabilized housing earn six-figure incomes.

The protection offered by a stabilized lease is effectively a transferable property right, one that can be held for life and, in practice, is often passed down to other family members. A rent freeze increases the value of that right, turning the benefit into something closer to a lottery prize than targeted welfare assistance.

Any subsidy has to be paid for by someone. One approach is to provide it through explicit city programs that are both budgeted and targeted. Programs such as the Senior Citizen Rent Increase Exemption and the Disability Rent Increase Exemption, for example, freeze rents for elderly and disabled households while compensating owners through public support. Rent control is instead an off-balance-sheet subsidy—it passes the cost of keeping rents below their underlying expenses onto property owners and, eventually, the broader public.

The mechanisms of this cost shift are largely a matter of consensus among economists. The most careful study of modern rent control, published by Rebecca Diamond, Tim McQuade, and Franklin Qian in the American Economic Review, found that extending rent control in San Francisco reduced the supply of rental housing by 15 percent as owners converted units to condominiums or redeveloped them for other uses. Tenant mobility fell by 20 percent. The lost supply pushed up market rents across the city, offsetting the gains to protected tenants.

Jason Furman, who chaired President Obama’s Council of Economic Advisers, has put the professional consensus more bluntly: “Rent control has been about as disgraced as any economic policy in the tool kit.”

The most immediate effects of a rent freeze appear in maintenance and building quality. Around 10 percent of rent-stabilized buildings currently have negative net operating income, meaning that their operating costs exceed their revenues. Housing violations, one indication of poor building conditions, are also more common in buildings with larger shares of rent-stabilized units.

By widening the gap between market rents and rent-stabilized rents, a freeze also reduces the incentive to invest in building quality because tenants have little incentive to leave their existing units and surrender a below-market lease. Freezes therefore mean that landlords have both fewer resources and less incentive to make improvements.

Existing tenants who are fortunate enough to hold stabilized leases benefit, but even that benefit comes at a cost, though it often becomes visible when their circumstances change. For instance, a household that has another child, or whose children move out, may find it difficult to trade up or down because leaving means surrendering the discount and reentering the market at much higher rents. The economist Edward Glaeser has documented substantial housing mismatch among residents in rent-stabilized units. Tenants remain in apartments that no longer fit their needs, even as the buildings themselves deteriorate.

The largest costs, however, are borne by outsiders. The combination of a rent freeze and vacancy controls can make it financially unviable for landlords to rehabilitate vacant apartments and return them to the market. The state’s Division of Housing and Community Renewal estimates that as many as 57,000 rent-stabilized units are currently vacant. While some of these housing units are surely in a transitional state, the number points to deeper problems with the underlying economics of maintaining such units in the city.

Longer tenancies, combined with the challenges of accessing newly vacant stabilized units, make it increasingly difficult for New Yorkers to find housing. People moving to the city, along with current residents who need to move, are pushed almost entirely into the market-rate portion of the housing stock. The city’s housing market is effectively breathing with only one lung.

That pressure drives up market-rate rents. Politicians often point to extremely high-listing rental prices, which are typically well beyond the rents most people pay in the city. This mismatch is a product of a two-tier housing system that privileges insiders but forces outsiders to pay exorbitant rents.

The freeze will also affect future housing supply. Tax-abatement programs such as 485-x provide property-tax relief in exchange for affordability requirements, including the designation of some apartments as rent stabilized. If these new units are also subject to rent freezes, this worsens the economics of new building construction in ways that could make some projects impossible to finance.

The long-term condition of rent-stabilized buildings is even more troubling. One part of the stabilized stock consists of mixed buildings with both market-rate and regulated apartments. These properties may be able to absorb a rent freeze through revenues from their market-rate units. But a large share of the stock consists of buildings that are predominantly or entirely rent stabilized.

These buildings have few ways to increase revenue beyond the adjustments allowed by the Rent Guidelines Board. Freezing their rents while their expenses remain uncapped is therefore a threat to their long-term financial viability. The nonprofit lender Community Preservation Corporation estimates that roughly a third of its rent-stabilized mortgages do not generate enough income to cover mortgage payments.

The city has been through this cycle before. During the 1960s, 1970s, and 1980s, large numbers of rent-regulated properties fell into financial distress, which resulted in foreclosures and eventual takeover by the city. Further freezes could produce similar results by making more properties financially unviable.

To be sure, the city has begun gingerly addressing the cost side of the equation. It has created emergency-insurance programs for stabilized housing, acknowledging that premiums for these buildings have risen sharply since before the pandemic. There is also renewed discussion of reforming property taxes, which consume roughly a third of rental revenue in many stabilized buildings. A recent NYU Furman Center report highlighted the inequities in the city’s property tax assessments for rent-stabilized buildings, driven by outdated valuation rules and caps.

Addressing these costs would go a long way toward making a rent freeze viable. So far, however, the support offered has not been commensurate with the financial strain that a rent freeze would impose. Fiscal support from the city could help stabilize these units—for instance, through expanded assistance from city-preservation authorities. But that would shift the cost to taxpayers and come with significant opportunity costs, including less money available for programs that produce new housing.

The rent freeze is a victory for the tenant movement, which is unlikely to stop here. Calls are already growing for a future rent rollback, which would mean nominal declines in rental revenue. Turning the ratchet further, without corresponding reductions in costs, threatens to turn a large portion of the rental stock into an expanded version of the New York City Housing Authority: more buildings owned or effectively controlled by government and increasingly dependent on public support.

Residents might continue to enjoy low rents, but at the cost of being trapped in units that no longer fit their needs, and with few alternatives and steadily deteriorating conditions. Prospective residents would face even fewer options and would be crowded into the market-rate sector, where rents would rise further.

A better option is to undertake the harder reforms needed to make housing more affordable and accessible—that is, build more of it. Expanding supply is the only genuine way to improve housing affordability, accessibility, and building conditions. For households that still need help, means-tested vouchers can provide targeted assistance without granting broad subsidies to long-tenured tenants or gradually undermining the viability of the city’s existing housing stock.

The rent-freeze vote may provide immediate relief to some tenants. It does nothing to address the housing shortage that made rents so high in the first place.

Arpit Gupta is a senior fellow with the Manhattan Institute and an Associate Professor of Finance at New York University’s Stern School of Business.