Costly Complexity

Happy Tuesday and welcome to another edition of Rent Free.

I wanted to change up the newsletter's format a little bit to write about an underappreciated benefit of increasing the production of private, market-rate housing: It's an incredibly simple strategy for improving housing affordability!

If states and cities remove zoning restrictions, complex permitting processes, and the like, builders will construct more housing and prices will fall. There's endless evidence that this neat-and-tidy free market story is true.

America's non-market affordable housing strategies, in contrast, rely on a bewildering system of price controls, mandates, and subsidies to achieve the same results.

In addition to being costly to taxpayers, hard to navigate for program participants, and occasionally constitutionally problematic, this needless complexity is also self-defeating.

The beneficiaries of complex affordable housing programs often end up being a near-random group of people who are poor candidates for public subsidy. Meanwhile, many of the people who policymakers are trying to help end up being worse off. And affordable apartments that are supposed to be housing people are instead left vacant.

Three recent stories make this clear.

White House Rent Control Plan Caps Rents for Some, Kicks Others Out of Affordable Housing

Earlier this month, the White House finalized new rules that impose a 10 percent cap on annual rent increases at federally subsidized affordable housing developments.

Crucially, the White House's rent caps aren't directly rent caps but rather caps on the incomes that make one eligible for affordable housing programs. In effect, this means that the Biden administration is holding rents down for some tenants by excluding others from affordable housing completely.

Understanding how this will work requires a little bit of explanation.

Federal affordable housing programs like the Low-Income Housing Tax Credit (LIHTC) give developers tax credits to build income-restricted housing that's available only to low-income tenants making (typically) 60 percent of an area's median income. Rents are then capped at 30 percent of that income eligibility limit.

Under the Biden administration's rent cap plan, the income cut-off for a LIHTC unit (and other affordable housing programs) can only rise by 10 percent a year at most.

This is a de facto rent cap. If the income cut-off for LIHTC eligibility can only rise by 10 percent, the rents based on that income cap can likewise only rise by 10 percent.

That's a benefit for many existing tenants at LIHTC properties and participants in other federal housing programs whose incomes are often comfortably below the eligibility cut-off.

But the White House's plan does pose a problem for tenants whose incomes are closer to the eligibility cut-off and whose incomes might rise faster than that 10 percent cap. They could end up making too much money to qualify for affordable housing benefits, even if their income is still low enough to qualify them as low-income tenants that federal programs were intended to support.

This is a particular risk for people who receive disability benefits from the Department of Veterans Affairs (VA). Those payments factor in measures of inflation that federal affordable housing income limits do not. That means beneficiaries of VA programs can see their benefit payments rise above affordable housing income cut-offs.

Veterans' advocates have long complained that the difference between the VA's calculations of disability payments and the U.S. Department of Housing and Urban Development's (HUD) adjustment of income limits is excluding many veterans from affordable housing.

Already, at least 8,000 veterans are excluded from affordable housing programs because of this incongruity, said the National Coalition for Homeless Veterans (NCHV) in a February comment letter, citing a VA analysis.

The incongruity "keeps homeless veterans who sacrificed the most in military service to our country out from units designed to served them," reads the NCHV letter.

By further suppressing eligible incomes for affordable housing programs, the White House's new policy will likely make this problem worse.

In a recent FAQ for the White House's new policy, HUD said that the income eligibility cap "may impact a small number of potentially eligible households" but that a 10 percent cap is well above cost-of-living adjustments most people on fixed incomes receive.

The multifamily industry has also expressed concern that the White House's new income eligibility caps, in addition to making it harder to finance new affordable developments, would also make it harder to rent out affordable units.

"This may make it more challenging to lease up affordable properties, as the pool of income-qualified tenants will be smaller," wrote a coalition of industry representatives in a comment letter to the administration in January.

San Francisco's Empty Affordable Units

To see an example of income restrictions leaving units vacant, one need only look at San Francisco.

Like many cities, San Francisco has inclusionary zoning requirements mandating that residential developments include income-restricted, affordable units where (like federal affordable housing programs) rents are held at 30 percent of a certain percentage of an area's median income.

Because San Francisco housing is so expensive—creating affordability problems for basically all but the wealthiest residents—the city has tried to use its inclusionary zoning requirements to create housing that's affordable to people making up to 150 percent of an area's median income.

Hundreds of these middle-income units have been built in recent years. But as the San Francisco Chronicle recently reported, most of these newly constructed middle-income units are sitting empty.

Reports the Chronicle:

Building owners are having little problem leasing up market-rate apartments, where tenants don't have to go through a city-created process to prove their income. But the affordable units are a different story.

In particular, developers complain about the city's requirements that they give priority to BMR applicants who live and work in San Francisco, who were living in redeveloped properties, who already lived in the neighborhood, and more.

This adds endless red tape to the leasing process. Thanks to a slump in post-pandemic rents, many middle-income tenants are opting to skip this process and instead rent market-rate units where rents aren't that much higher.

San Francisco's progressives will often argue that there's no need to allow the construction of more market-rate units because San Francisco already has a glut of expensive, vacant units that developers are sitting on out of some sort of speculative bet. They instead argue the city should mandate and subsidize the production of "affordable" below-market-rate units.

As it turns out, San Francisco does have a problem with vacant units. But it's the affordable units that are sitting empty. Rather than misaligned profit incentives, it's the city's own rules that are keeping them vacant.

The good news is that a modest fall in demand for apartments in some neighborhoods is leading to more affordable rents for middle-income renters ill-served by the city's inclusionary zoning requirements. The better news is that one could expect the same results from a modest increase in market-rate supply.

That would certainly be the simpler thing to do.

Rent Control in New York Becomes Even More Complex

Over the weekend, New York policymakers at last finalized a housing deal that will be part of the state's 2024 budget agreement.

There's a lot in the housing deal. Perhaps the biggest change is the creation of a "good cause" eviction policy that will cap annual rent increases at the lesser of 5 percent plus inflation or 10 percent.

That's similar to statewide rent caps that exist in California and Oregon. All things considered, those aren't the strictest rent caps in the world. They're modest enough that New York's tenant advocates and socialist lawmakers are pretty upset about the deal.

The new policy is also heavily caveated by exemptions.

The 10 percent cap doesn't apply to units that are less than 30 years old or built after 2009. The cap doesn't apply to units where rents are already 245 percent of the area's median income (about $6,000 a month). Landlords who own fewer than 10 units are also exempt. The cap applies automatically to units in New York City, but upstate communities will have to affirmatively opt-in to the new program.

The new "good cause" rent cap also doesn't apply to units already covered by rent stabilization—an older, stricter form of rent control that covers about one million units in New York City and a couple upstate communities.

This all softens the blow of these rent controls. It also raises the question of who exactly the rent caps are supposed to help.

People who have non-rent stabilized apartments in New York City are already pretty affluent, notes Eric Kober, a former New York City planner and scholar at the Manhattan Institute.

"What they seem to have negotiated is that a completely random group of affluent people is going to get a very loose set of rent controls in New York City," he tells Reason. "It's a remarkably ill-considered, ill-designed piece of legislation."

New York's rent stabilization program was already pretty complex. This year's housing deal makes it even more confusing.

A long-standing complaint from the owners of rent-stabilized buildings is that the law limits their ability to pass on repair costs to tenants in the form of higher rents.

The Community Housing Improvement Program (CHIP), a trade association of building owners, estimates that 20,000 rent-stabilized units sit empty because owners can't raise rents to cover the costs of needed renovations.

The latest housing deal does modify the existing Individual Apartment Improvement (IAI) rules so that building owners can pass on $30,000 in repair costs, an increase from the current $15,000.

But the deal doesn't change how much owners are able to increase monthly rents to cover those repair costs. Essentially, they're being allowed to raise monthly rents by the same amount, but for longer.

A new three-tiered IAI system gives owners of larger buildings slightly more flexibility to pass on repair costs of up to $50,000 and increase rents by slightly more to cover these costs.

Building owners complain the new higher cap on recoupable repair costs is rendered mostly useless by the unchanged cap on allowable rent increases, as owners won't be able to pay the costs of financing those repairs.

The complexity of the new system could also see building owners sued for allegedly increasing rents more than what's allowed by the law, they argue.

"The increases to the cap will provide minor relief to a small number of buildings, but the changes in the process are fraught with legal traps that will deter most property owners from using it," said CHIP Executive Director Jay Martin in a statement. "Instead of addressing the housing shortage, Albany somehow made it worse."

Quick Links

• The U.S. Supreme Court heard oral arguments in the case of City of Grants Pass v. Johnson about whether the Eight Amendment prohibits local governments from penalizing the homeless for sleeping outside. Liberal justices seemed generally horrified by Grants Pass's position that it should be able to fine people for sleeping in public parks. Interestingly, conservative justices Brett Kavanaugh and Amy Coney Barret also were skeptical of the city's position that fining people for sleeping in public was an important tool it needed for addressing homelessness.

• Austin, Texas, passed building code amendments that prohibit developers from building windowless bedrooms. Not having natural light is unpleasant, but not having a bedroom period is probably worse.

• Illinois lawmakers' effort to repeal the state's ban on local rent control policies stalls in the Legislature.

• Meanwhile in the Netherlands, the far right is warming to the idea of rent control.

• Two British academics have a plan for solving the housing crisis without building more homes. They suggest redistributing the homes to the right people.

The post Costly Complexity appeared first on Reason.com.