As mentioned in a previous issue, New York City is in a housing price bubble that shows little sign of abating (see chart "Average Price Per Foot for Condominiums in Manhattan"). However, the big story in New York City real estate this quarter was not the overheated housing market but the renewal of the rent stabilization laws.

The rent stabilization laws were renewed with vacancy decontrol left intact and rent thresholds unchanged at $2,000 per month. What was remarkable about the renewal was not that it was extended for eight years, but that the threshold is still not indexed to inflation. The rent threshold may have been intended originally only for luxury apartments, but it is now simply a matter of time before $2,000 is within reach of middle-income New Yorkers and "luxury" decontrol becomes simply vacancy decontrol.

To understand the long-term impact of the renewal of the rent stabilization laws- with vacancy decontrol left intact-it helps to first understand the impact of vacancy decontrol. In its modern form, vacancy decontrol was enacted in 1993, though there had been two high-rent decontrol periods in the 1960s. Estimates of the number of units destabilized vary widely depending on whether one asks a landlord or a tenant group. The New York City Rent Guidelines Board, which sets rent increases for stabilized apartments, recently published a comprehensive report ("Changes to the Rent Stabilized Housing Stock in New York City, 1994-2002") that estimates a net loss of 43,000 regulated stabilized units over this eight-year period. This loss in perspective represents less than 5 percent of the city's stabilized housing stock.

One would think it would be relatively easy to determine the true number of units lost by using the regulator's files (New York State Department of Housing and Community Renewal) instead of making estimates. Unfortunately, there is no master database that can reliably state the status of each unit. Because of the complexity of the task, and of the law, and the removal of meaningful penalties for landlords who do not register the status of their units, the true number of rent-regulated units in the city is unknown.

In the absence of a master database, the major source relied on by the city and landlord and tenant groups to estimate the number of city units and their regulatory status is the New York City Housing and Vacancy Survey, issued every three years since 1965.

The City of New York is required by state law to conduct a vacancy survey to determine if rent regulation should continue. The survey focuses on vacancy rates, and not the more meaningful issue of how many units are rent regulated. The vacancy rate must remain under 5 percent (according to the 2002 New York City Housing and Vacancy Survey the citywide rental vacancy rate was 2.94 percent from February to June 2002). The reason for tying rent regulation to the vacancy rate is that the system is supposed to expire if the city is no longer in a housing crisis-but the city has been in a perpetual state of crisis, defined as a vacancy rate below 5 percent, since World War II.

The Housing and Vacancy Survey works well to determine vacancy rates. The U.S. Census Bureau sends field representatives to approximately 18,000 units to physically determine whether or not they are vacant. But the current method of determining if units should be counted as rent controlled, rent stabilized, free market or other is extremely complex and relies on a variety of assumptions. For the reader who wants to further understand the methodology that the HVS uses, I direct you to the U.S. Census Bureau's "Definitions of Rent Regulation Status" at: www.census.gov/hhes/www/ housing/nychvs/2002/defin02.html

The field representatives do ask tenants what their regulatory status is during the interview process, but since few tenants understand how the rent laws work, the Census Bureau ignores their responses as a matter of policy in determining the unit's rent regulation status. In lieu of accurate data from the regulator or the tenant, the surveyors can only estimate. Accurate data is needed-whether attempting to be able to understand and invest in the local market or considering the impact of the rent laws as a legislator. Unfortunately, in New York City, an already heated argument is made only more difficult by the fact that no one knows for sure how many units we have and what their rent regulation status is.

All of this confusion notwithstanding, we still have to try to make sense of the estimates by the different groups, whether or not we believe reports are statistically reliable. To use the New York City Rent Guidelines Board report as an example, while it would seem that the loss of 43,000 rent stabilized units and their conversion to free market rents is relatively insignificant given the size of the local market, it is worth noting two key items on the chart at the right (see "Summary Table on Additions and Subtractions to the Rent Stabilized Housing Stock 1994-2002").

1. Of the units that are counted as increasing the stock of rent stabilized units, 31,159 are actually rent controlled units that were decontrolled. It is safe to assume that these units were regulated at lower rents before decontrol. Therefore, this addition to the rent stabilized housing stock is actually a loss of units that were regulated at even lower rents. Furthermore, eventually the city will run out of rent controlled units, and when it does, the net loss of rent stabilized units will be even greater. As of the report's publication date, it was estimated that there were under 60,000 rent controlled units left in the city.

2. There were 27,326 units that were decontrolled as a result of either high-rent/vacancy decontrol or highrent/ high-income decontrol. Both provisions were at the heart of the recent legislative battle. Approximately twothirds of the net loss of rent stabilized units over the last eight years can be attributed to these provisions. We can expect even more units to be destabilized as a result of these two provisions, since the $2,000 threshold is not indexed to inflation.

Additionally, while it does not appear on the chart, it should be noted that the New York City Rent Guidelines Board's report does undercount the total number of units deregulated. Registration of units that were deregulated due to highrent/ vacancy decontrol was voluntary and not required from 1994-2000. It is a reasonable assumption that some landlords did not register when they deregulated their units. This is yet one more example of the complexities of the rent regulation system.

Barring substantial new residential development under tax abatement programs that require the units to be enrolled in the rent stabilization program (such as J-51 and 421-a), rent stabilization will continue to fade away. The question then becomes what will the city be like then? Some interesting side effects of the dismantling of the rent stabilization system, other than the removal of below-market rent apartments from the rental stock, are that rent stabilization has made new construction extremely difficult in denser areas such as the residential districts of the Upper East Side and Upper West Side-where Manhattan has very few empty sites that are ready for new construction. However, as a result of the decontrol provisions, over time much of the existing substandard housing stock (e.g., fourstory walk-ups) could be deregulated, demolished, and replaced with modern high-rises. In the long run, this could help mitigate the high cost of new construction and significantly ease the housing crisis in this city by building more units. Regulation will not make the city more affordable. New construction is really the only viable long-term option.

The dismantling of rent regulation will also affect housing prices. While there are numerous reasons that the prices of condominiums in Manhattan are unsustainable, vacancy decontrol is not among them. As units continue to be decontrolled, more tenants enter the housing market-which will help support housing prices.

Finally, one could expect that the dismantling of the rent stabilization system will encourage large-scale conversion of rental buildings to owner-occupied dwellings (either cooperative or condominium) and new construction. According to preliminary results from the 2002 Housing and Vacancy Survey, 65 percent of New Yorkers rent, as opposed to a national average of 32 percent. While it is possible that there is something unusual about New Yorkers that encourages them to be partial to renting (i.e., a more transient population, cultural attitudes that favor renting), it is also possible that the lack of home ownership is due to the unique characteristics of the housing stock. Unlike the rest of America, the vast majority of the housing stock is rental only and individuals cannot purchase a unit unless the entire building is converted. As rent stabilization is dismantled, it will be easier for converters to qualify buildings for non-eviction plans, and more profitable for them, as they will not be stuck with below-market rent stabilized units. In a broader sense, the dismantling of rent stabilization laws could end up encouraging greater levels of home ownership in New York City and bring the city into line with the rest of the country.

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