April 25, 2003

NEW YORK CITY AND THE ECONOMICS OF HOUSING.

By James Eugene*

My prior two articles on housing examined two specific areas of concern within New York City… rent regulation and Labor Law Section 240. But housing is New York is expensive for a number of different reasons and almost all of those reasons are our own making.

There is an attitude among government types that government can somehow correct every ill, right every wrong, prevent any danger. It is certainly a noble idea, but it is not necessarily true, because sometimes the methods you use to prevent a danger create a new danger all their own. Housing is a perfect example of this.

Let's start by looking at fire safety. Everyone views it in the public's best interest to have as few deaths from fires as possible. Currently, new dwellings with 3 units or less do not require sprinklers. The City fathers have examined whether to add this requirement. In studying this issue, they learned that most dangerous fires in such dwelling types actually occur in dwellings that were constructed under the "Old Buildings Code". Thus, logic would dictate that these older buildings need sprinklers more than a new structure. However, putting sprinklers in old dwellings (a significant $5,000 to $8,000 per unit expense in a new structure) would be prohibitively expensive, and the owners of many such dwellings could not afford the cost, and those that could would need to raise rents sharply to cover the expense.

Now the reason a bill like this would never pass is because hundreds of thousands of New Yorker would experience a direct increase in the costs of housing. But indirect costs have always been another story. And their tally can be enormous.

Let's start with the handicap access bill for multiple dwellings, passed in the 1980's. Because of the need for wheelchair accessibility, units often need to be larger. Larger units means more expensive construction costs, and more expensive construction costs means… less affordable housing. This does not take into account various other costs that needed to be taken into account such as larger doors, albeit many of these costs decreased back to a more manageable level over time as home products for this market became more available. Still the handicap access bill costs.

Next, let's look at the cost of sprinklers for new multiple dwellings. Sprinklers are required in all new dwellings of four units or more. The cost of these sprinklers is $5,000 to $8,000 per unit. To a luxury development, this is insignificant, but to affordable and middle class housing, this is not chicken feed. Moreover, there is an annual cost to maintaining these sprinklers and having them inspected. Moreover, if the zoning in an area allows for less dense housing so that a builder has a choice between building three units or four or five units, a builder, in order to minimize risk, may decide to build less units if he is building in a marginal area. So not only is there an increased cost per unit due to sprinklers, the City may get fewer units as well.

Next, let's look at the Buildings Department, a current model of bureaucratic inefficiency haunted by corruption police. If it takes significant time to get plans approved, a builder is sitting on land on which he is paying interest on the loan he used to purchase the property without any benefit (a side issue is that workers in a City in need of jobs are sitting idle). That interest cost gets passed along to the buyer. If it takes significant time to get a certificate of occupancy, then a builder is sitting on land and a house on which he is paying interest for the loans related to the land and the building without any benefit. That interest cost also gets passed along to the buyer.

And remember during this process of building, the City and State collect fees and taxes, sometimes twice. For example, when a builder buys land, there is a real property transfer tax and later when he sells the land and house, there is another real property transfer tax (both the City and State collect this tax which can total up to 1.75% of the purchase price, but more commonly 1.4%). Who pays for this cost? That's right, ultimately the buyer.

Zoning also plays a factor. When politicians call for downzoning, they create a situation where fewer housing units can be built in a City desperately in need of housing. Then these same politicians call for more affordable housing and tell stories about how their constituents complain about the fact that there is no affordable housing for their adult children. Earth to politicians and constituents: there is a connection!

Additionally, Housing Court, that model of efficiency, can wreak havoc on multiple dwellings. If it takes any lengthy of time to evict someone not paying rent, who ultimately pays the legal cost of eviction and the lost rent? The other tenants. If a drug pusher is tough to evict, who pays by living in a building that is less safe? The other tenants. I agree that it is important to protect the rights of tenants facing eviction, but just as in criminal cases where the rights of the victim have begun to be examined, so must the rights of the other tenants begin to take some weight in these proceedings.

The fact is that every time the City or State places a tax on property transfers, every time they increase a building standard, every time they fail to function in a swift and efficient manner in their building related functions, the cost of housing goes up. Housing, housing, housing is a priority and this City has the advocacy groups to prove that. But often these groups ignore basic economics in favor of simply trying to get more government funding which actually is going to produce less housing than it should because of excess government regulations. The question needs to be asked, outside of money and government subsidies, what can we do to make housing more affordable? The only real place is how we set our standards and how City agencies function. Yes, there is some place where we set the standard, because the poor should not have to live in squalor. But that does not automatically mean that we can raise standards pell mell and assume that the cost is easy to absorb. Indeed, if we pass higher and tougher standards that save five lives a year, but put one thousand people in homeless and doubled up conditions, are we simply condemning them to a slower death brought about by social dysfunction?

For the past fifty years, our City has not thought through its building code changes, its housing court rules, or its urban renewal plans. We've assumed that our actions will improve things despite the fact that some of our actions flew in the face of economics. But guess what, this liberal housing policy is not immune to economics. Fifty years of assuming that in housing policies and politics have left New York City with a housing crisis. Some of the measures of the past fifty years, I would support. But other changes, as wonderful as they appear on paper, are really for a middle and upper class constituency, primarily because those in power come from that constituency and want to create such housing for the poor without any attention to economics. However, slowly but surely, our City is even beginning to price out its middle class constituency!

We need to have a different mindset each time the City passes a new standard or takes new actions… how will this impact on the cost of housing? If we ask that question, maybe some of the answers will change.

I read in one of the local county papers that Mayor Billionaire has hired more people to enforce New York City's smoking law than there are code enforcement officers at HPD. I hope this sick sense of priorities is not true.