The 8.7 Percent Solution

Why Rudy Should Call for a Rent Freeze

For years, Mayor Rudy Giuliani's unrelenting control of the Rent Guidelines Board has had landlords and tenants alike agreeing that the agency's acronym, RGB, really stands for Rudy Giuliani's Boys. But the mayor's recent antics—installing a new chair at the last minute and hustling two other new appointments just in time for a key vote—have made the board more Giuliani-esque than ever.

On May 9, a phalanx of police surrounded the College of Insurance, where the board was holding its meeting to adopt preliminary rent hikes for 2.4 million stabilized tenants. Inside, officers lined up along the auditorium's walls. Cops were discreetly tucked into each corner of the room. Press photographers and camera crews were barred. The dais itself was a mirror of the mayor's sensibilities, loaded exclusively with men, most of whom were white. Rather than filling the three recent vacancies with women or people of color, Giuliani demonstrated his vast range by appointing three more white men.

Stunningly, Giuliani says he made the personnel changes so tenants could get a fair shake. In the dailies, he decried last year's vote, in which the board ignored his wishes for hikes lower than the 4 and 6 percent levels it set, respectively, for one-and two-year leases. This year, after a temporary glitch, the board set preliminary hikes of 3 and 5 percent—just what the mayor ordered.

Giuliani's pretense that he is acting out of concern for renters is insulting. In his eight-year reign, he has consistently undermined agencies that help tenants and has instead favored landlords. His housing office has slashed the number of lawyers who prosecute renegade owners; its priority has been dumping city-owned apartments into the hands of private landlords. Owners who arguably should be jailed are instead "supported" with grants and technical aid. Giuliani's buildings department has routinely turned a blind eye to illegal conversion and construction. He has backed a regressive lead-paint law and pushed bills to let landlords self-certify that they've made repairs. The mayor so miscalculates the enormity of the housing crisis, he had the nerve to boast of an affordable housing plan that would produce a paltry 10,000 units over four years.

If fairness for tenants is what Rudy Giuliani craves, he should make an unprecedented demand when the board casts its final vote on June 20: no rent hikes this year. He should also ditch the poor tax, which tacks an additional monthly increase onto low-rent apartments. The logic? One RGB report shows the prices of goods landlords buy have jumped 8.7 percent. Another study shows that landlords are also generating record-high net-operating income—exactly 8.7 percent. The math seems obvious. As a class, landlords are at worst breaking even.

Landlords, of course, will say it's faulty to freeze rents just because the rise in one report, the PIOC, or Price Index of Operating Costs, matches the rise in another, the I&E, or Income and Expense study. Pairing the two would be worse than mixing apples and oranges, they'll say, especially because it threatens their butter, and maybe even their bread.

The truth is, the PIOC, which measures the price of goods and services landlords buy, is flawed. It does not take into account that landlords' actual costs are often less than prices vendors quote to RGB researchers. It does not consider that temporary spikes in fuel prices lead to permanent rent hikes, or that when higher tax bills bump up the PIOC (as they have this year), it's not because of a tax hike, but because real estate values have risen so enormously. In short, the PIOC often overstates landlords' expenses.

The I&E has problems too. It relies on landlords to honestly report data to the city's finance department. Two city audits found that 15 percent of the costs landlords claimed were not legitimate, and that landlords exaggerated expenses by 8 percent. The I&E does reflect the fact that landlords boost their incomes beyond RGB hikes through windfalls when units are deregulated or when they make capital improvements.

Now consider tenants: While their median incomes rose 2.8 percent during the 1990s, their rents rose 10.8 percent. In the late 1990s, the real median household income of rent-stabilized tenants actually slid .5 percent. Nearly 48 percent of tenants spend more than a third of their income on rent; 18 percent shell out more than half their income for rent.

By law, the RGB must consider certain economic conditions in setting rates. It does that by gathering and crunching data, which both landlords and tenants manipulate for their own ends. But in the end the question of rent is a simple proposition of equity: The financial allure of landlording rests on an economic exploitation that can persist only when the supply and demand of an essential commodity—housing—are grossly out of kilter. Those who control that commodity are by and large private profit seekers who chose real estate over some other investment. Most tenants have no option besides renting.

According to the I&E report, the average landlord netted $177,000 in pretax dollars in 1999—more than six times the real, median household income of a rent-stabilized tenant ($27,000). If it's fairness the mayor is after, he can start by freezing rents.

 
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