The Economics of Rental Housing

Many assertions are made by landlords about the market and rents which are economically fallacious. Let us examine them in turn and propose policy to return rental housing to a sound economic basis.

First, it is asserted that the rents which landlords can claim without legislated restraints are market rate. However, this presumes an actual market in rental housing, itself based on a presumption of an actual market in real estate. Such a market does not exist, due to the mortgage loan. By increasing the bids for real estate severalfold, the mortgage loan increases the trade price for each real estate transaction to several times what an actual market could bear. Yet what is the trade price in an actual market when generic real estate is itself a liability, a “box into which you throw money”, but a negative amount? What exists in real estate is entirely a speculative bubble, propped up by new mortgage loans offered to the newly affluent executives of mercantilist companies and banks, in a changing of the guard with the elder executives, who retire to Florida or some such place.

A similar churning of high housing prices exists in rents, since real estate purchases provide an outlet for tenants. As the humble townhouse becomes a multi-million-dollar luxury estate, so also do the rents which landlords can exact rise to nearly the same level. It does not help matters that the apartment buildings have been increasingly monopolized by out-of-neighborhood, out-of-borough, or even out-of-state landlords. The monopoly pricing such landlords can exact is a further indication that there is no actual rental market, only a cartel sitting atop an immense speculative bubble.

The policy remedy addressing this first fallacy is thus to burst that bubble by abolishing the mortgage loan. Surely if the current price structure had any merit, houses and apartment buildings could be purchased without the banks providing a subsidy of four times the down payment or more. Let the defenders of the massively inflated housing prices make their case without the crutch of the mortgage, before they pontificate about “market rates”.

The second fallacy is in the padding of regulated rent increases with specious claims of so-called “capital improvements”. In every other area of physical capital, the accounting calls for a schedule of depreciation. To be consistent with that accounting practice, as well as to properly measure the economic loss coming from deterioration of the physical plant of an apartment building or other rented housing, the rents should decrease on a regular schedule. If we charitably posit the lifetime of a building under total neglect at 40 years, and equally charitably set the residual value at zero, despite real estate being an economic bad, then a simple straight-line depreciation and annual rent reduction would be 2.5% of the initial value. Only if there are verified maintenance costs which extend the useful life of the building for habitation can there be any justification for not reducing the rent. It is only after these critical maintenance tasks are completed, that any project expense can be added to the capital of the building.

The remedy in policy for this second fallacy is to establish a rent reduction schedule for all rents, and to require certification of maintenance expenses to avoid the rent reduction. The burden of proof needs to be placed on the landlords.

The third fallacy is in the treating of tenants as visitors, rather than as residents and thus citizens of the city or town where their apartments are located. The cavalier manner in which tenants are evicted, or forced out by a variety of devices, tears at the very fabric of civic republican governance. Yet this attack on residence and citizenship is endorsed by rental agreements which can only be described as feudal.

The policy remedy for this third fallacy is to require new rental contracts to recognize that tenants are residents and citizens, that they are to be secure in their possessions in their apartments from intrusions by the owner, and that their residence takes priority over the paying of rent, so that other remedies, such as loans, be made for delinquency. To this should be added other measures applying to all tenants: the tenants being consulted in verifying the effectiveness of maintenance and in gaining approval for any projects adding new capital to their building.

These remedies in policy address the three fallacies in political economy presented here as they relate to the pricing and administration of rental housing, but they do not address the third fallacy in a more fundamental way. We must consider whether rental housing should exist at all, seeing as it is and, in fact, has been antithetical to republican governance. Though we can bring tenancy closer to the assurance of place which is the birth right of any true citizen, we need to advance an alternative which supplies that assurance more naturally. That alternative is communism: the holding of real estate in common by a multi-family household for itself and its posterity. It cannot be forced any more than a family can be forcibly created. However, it can be allowed, in law and in practice, and that is all that is needed.

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