Testimony: Public Meeting, NYC Rent Guidelines Board

Invited Testimony: Tom Waters and Victor Bach, Housing Policy Analysts, Community Service Society of New York

Thank you for the opportunity to present our concerns about the potential impact of rent guidelines on low-income New Yorkers.

The decisions of this board are among the most important factors influencing the well-being for the hundreds of thousands of low-income households who live in rent-regulated apartments – still the largest group by housing type within New York’s low-income population. (“Low-income” describes households with incomes below twice the federal poverty threshold or about $38,100 for a family of three.) Table 1 shows the number of households in the city by income and housing type. Note that rent-regulated tenants with Section 8 vouchers are counted with the public and subsidized tenants in this table.

 

Table 1: New York City households by income and housing type

 

In each of the last three years, this board has set guidelines that provided needed relief to tenants. Instead of focusing exclusively on landlords’ expenses, these guidelines reflect consideration of tenants’ economic situation as well as that of landlords. We applaud this and urge the board to continue this pattern.

This year is the first year in which it is possible to examine the initial effects of the lower guidelines through the Census Bureau’s most recently released American Community Survey data, which was taken in 2015. This evidence suggests that although both rents and incomes for low-income renters rose from 2014 to 2015, overall housing affordability for these tenants improved modestly for the first time since 2007, but remained far worse than it was before the 2007 financial crisis and subsequent Great Recession. Continued improvement in the city’s unemployment rate suggests that income gains have likely continued since 2015, and the Rent Guidelines Board’s zero percent guidelines in 2015 and 2016 offer hope that the affordability measures may also have further improved. But it is still far from clear that tenants have truly recovered.

The 2015 American Community Survey includes information on rents, incomes, and rent burdens but is somewhat imprecise for our purposes, because the ACS does not distinguish between rent-stabilized and other rents, and because in 2015, some but not all rent-stabilized rents were affected by the guidelines that this board voted in 2014. Nevertheless, it is plausible to interpret the 2015 ACS data as partially influenced by the 2014 guidelines.

From 2014 to 2015, the ACS found that the median contract rent for low-income renters in New York City (those with incomes less than twice the federal poverty threshold) increased from $950 to $980 per month, an increase of 3.2 percent in a year when inflation was only 0.1 percent. This relatively large increase is not that surprising, however, given that it partially reflects the influence of the 2013 rent guidelines and includes unregulated rents. The ACS also found that the median income for low-income New Yorkers increased by 3.5 percent.

Figure 1 and Table 2 show how median rent and median income for low-income New Yorkers have evolved since 2007 in non-inflation-adjusted dollars, along with the cumulative rent increase allowed under one-year guidelines for comparison.

As a result of these changes in rent and income, the median rent burden (or share of household income devoted to rent) for low-income New Yorkers actually decreased for the first time since 2007, from 53 percent to 52 percent. The same changes also led to an increase in the amount of income that low-income renters had left over after paying rent, from $306 to $322 per month per household member. However, the median rent burden remains well above its pre-recession level of 48 percent in 2007, while the median residual income per capita remains well below its 2007 level of $354 in inflation-adjusted 2015 dollars.

Figure 2 and Table 3 show how rent burdens and residual income have evolved since 2007.

 

Figure 1: Rents and incomes for low-income New York renters since 2007, with cumulative effect of one-year rent guidelines

 

Table 2: Rents and incomes for low-income New York renters since 2007, with cumulative effect of one-year rent guidelines (not adjusted for inflation)

 

Figure 2: Rent burdens and residual income per capita for low-income New York renters since 2007 (in inflation-adjusted 2015 dollars)

 

Table 3: Rent burdens and residual income per capita for low-income New York renters since 2007 (in inflation-adjusted 2015 dollars)

Although the effects of the low rent guidelines order in 2014 are not visually detectable in the incomes shown in Figure 1, it remains plausible that the improved conditions for low-income tenants seen in Figure 2 are partially due to the board’s action. It will be difficult to draw any firm conclusions, however, at least until data from the 2017 New York City Housing and Vacancy Survey become available next year and in 2019, making it possible to distinguish changes in rent for regulated and unregulated apartments.

The most useful information we have so far on economic conditions since 2015 is the unemployment rate for New York City, which is estimated monthly by the Census Bureau and Bureau of Labor Statistics. This indicator is strongly linked to income for low-income New Yorkers, and it continued to improve through February 2017, completely recovering its pre-recession level, as shown in Figure 3. Thus it is reasonable to expect that incomes have also continued to improve.

 

Figure 3: Unemployment rate in New York City since 2007

 

The overall picture, then, is that tenants turned the corner in 2015, thanks to an improving economy with an assist from this board’s action, but that they had not recovered to the condition they were in in 2007. It is likely that both income and affordability have continued to improve since then, given the improving unemployment rate and the low rent guidelines set in 2015 and 2016, but it is not at all clear that tenant conditions have returned to 2007, when they already reflected a severe affordability crisis.

* * *

We have also been asked about the role of the Price Index of Operating Costs in leading to excessive increases during the Great Recession. The Price Index has proved in most years to be a good indicator of changes in landlords’ costs, but it failed to indicate costs accurately in 2009, 2010, and 2011. Figure 4 shows changes in landlord’s actual costs from 1999 to 2017, as measured in the Rent Guidelines Board’s analysis of the Real Property Income and Expense data, along with the costs that would be projected for those same years based on the Price Index, with 1999’s costs set to 100. The two series align very nicely until 2009, when the Price Index was 4 percent but actual costs increased by only 0.1 percent. The divergence beginning in that year is clearly visible.

 

Figure 4: Landlord’s operating costs as measured from Real Property Income and Expense data and as projected by the Price Index of Operating Costs, 1999 to 2017.

 

It is likely that the divergence between the Price Index and actual costs occurred because the recession changed landlords’ behavior. If so, the change in behavior lasted three years. In 2010 and 2011, landlords’ costs rose by 2 and 2.5 percent less than the Price Index projected, but in subsequent years, costs were always within 1 percent of the Price Index. The good fit between the index and costs can be seen in Figure 5, which shows the same data as Figure 5, but with 2011 as the baseline year.

 

Figure 5: Landlord’s operating costs as measured from Real Property Income and Expense data and as projected by the Price Index of Operating Costs, 2011 to 2017.

 

During each of three years when the Price Index diverged from actual costs, this board issued guidelines that were close to 60 or 65 percent of the Price Index. Because landlords’ costs are about 60 or 65 percent of their income from rent and other sources, this meant that the increases would have provided landlords just enough money to pay the increased costs – if costs had in fact turned out to track the Price Index in those years. This was the typical pattern of the board’s guidelines during the Bloomberg administration.

If the Price Index had been low enough for those three years to accurately forecast actual costs, the board might well have issued lower guidelines. The Price Index increased cumulatively by 14.1 percent during those years. Had the board issued guidelines of exactly 65 percent of the Price Index each year, the cumulative effect would have been 9 percent, and the cumulative effect of the actual guidelines was 9.3 percent. But if the board had issued guidelines equal to exactly 65 percent of the actual cost increases, their cumulative effect would have been an increase of only 3.3 percent. Thus it can be said that the divergence between the Price Index and actual costs led to an excess increase of six percent over three years, relative to the Bloomberg-era Rent Guidelines Board’s usual practice.[1]

This raises the question: Has the board already corrected this problem through the low guidelines issued in 2014, 2015, and 2016? The answer is no. Because the increase in landlords’ costs from 2014 to 2015, as observed in the Real Property Income and Expense data, was very low, and the change projected for 2015 to 2016 by the Price Index is actually negative, rents now stand higher than they would if the board had issued guidelines each year that were accurately reflective of actual cost changes from 2008 to 2015 and the Price Index for 2015 to 2016. In fact, a rent guideline of zero this year would roughly return rents to where they would be if it had not been for the original divergence of the Price Index followed by the board’s corrective action.

 

We recommend that the rent guidelines for the coming year be zero for one-year leases and two percent for two-year leases, in order to continue repairing the damage to affordability done during the recession.

Ultimately, this board must find a way to institutionalize the practice of setting guidelines that reflect changes in both landlords’ costs and tenants’ incomes. This could involve sticking close to the past practice of setting guidelines close to 60 or 65 percent of the price index in most years, but setting lower guidelines when economic downturns reduce tenant incomes, and occasionally adjusting the guidelines to correct past errors.

In 2014, the board set a one percent guidelines for one-year leases in a clear effort to correct for excessive increases during the recession. In the next two years, it set zero guidelines reflecting the low or negative price indexes of those years. This year the price index is 6.2 percent, 65 percent of which is about 4 percent. But given the likelihood that tenants’ finances have not fully recovered since the recession, we believe it is prudent to continue to bend toward tenants for another year. Growth in landlords’ net operating income has been robust, even growing by 10.8 percent in the year following the one percent guideline in 2014. This strongly suggests that landlords can absorb another year of course correction.

 

 

[1] The Community Service Society believes that the board should have set increases even lower than this cost-based standard, because it should have taken tenants’ reduced income into account as well.

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