Why Pricing Rules for Affordable Rental Housing Backfire

Capping potential revenue chases off investors, in any industry. So does prohibiting the tools they need to responsibly manage their investments. Unfortunately, New York has done just that with housing by outlawing algorithmic pricing software by property managers.

Not all algorithmic pricing systems are created equal. In some industries, personal data is used to tailor prices to consumers’ willingness and ability to pay. That’s not the case in rental housing. Algorithmic rent pricing software analyzes market data — such as prices for comparable units, vacancy rates and demand trends — to recommend appropriate rent prices. These tools are designed to help landlords accurately and efficiently crunch numbers to price their own units to win tenants.

Rather than a blanket ban of algorithmic rent pricing, the state should reverse course and instead implement reasonable requirements around the use of nonpublic data like Nevada did — specifically, that such data must be aged at least three months, anonymized and aggregated to at least 10 properties.

Eliminating rent algorithms does not create new units to address supply, which is the most critical part of the affordability equation. It simply forces property management companies to operate amidst uncertainty, which can lead to overpricing and longer vacancies. Combine this technology ban with rent control, and a compounding effect is the result: hampered ability to optimize revenues on one hand, and those subpar revenues curtailed on the other.

Too often, rent control is introduced as a quick-fix to make city life affordable. But while it may provide short-term relief for some, the longer-term consequences far outweigh the policy’s temporary benefits. A growing body of evidence shows that rent control torpedoes new housing development and investment, the very thing necessary to effectively address the affordability concerns it seeks to rectify.

Rent control in New York City generally increases market-rate prices. By restricting landlord revenue, these caps discourage new construction and maintenance, leading to deteriorated building conditions, as well as a roughly 15% reduction in rental supply and 30% decline in rent-controlled occupancy, according to a Stanford study. Per The City Reporter, tenants in market-rate apartments are “saddled with paying for all the cost increases in the building,” with market-rate rents on new leases in Manhattan jumping 36% to $4,450 over a recent four-year period, but regulated rents increasing by only 7.5%.

Rent control acts like a price ceiling, which reduces expected returns for developers and leads to potential investment shifting away from rental housing. The result is fewer housing starts, canceled developments, and a slowdown in supply growth. These effects are problematic, because the balance between supply and demand determines rent levels; housing shortages — when more people are looking for a place to live than homes are available — drive prices up.

According to Georgetown Journal on Poverty Law & Policy’s study on New York’s rental market, the effects of rent control have been “particularly harmful for low-income and minority communities, who are disproportionately affected by rising housing costs and declining availability. The rigid regulations have made it nearly impossible for landlords to justify investing in property improvements, leading to deterioration in living conditions.”

City and state leaders shouldn’t fall for the illusion that taking control of pricing methods and levels will solve a complex problem; instead, it will lock them into a cycle of underinvestment.

Rather than tightening its grip on the market, New York City should seek to influence it by enabling the construction of more housing. That means creating incentives for developers to build, reforming zoning laws, streamlining approval processes and reducing regulatory burdens that add to construction costs.

High rents are not the result of secret corporate magic; they are the result of insufficient supply. Prices move in tandem with scarcity. If New York’s leaders truly want to help their constituents spend less on a place to lay their heads, fostering a welcoming environment for new housing development and investment is the only answer.