Little more than a week after a national election that brought forth commentary about how Democratic politicians’ misrule of large cities harmed the party’s credibility with voters, the New York City Council decided once again to prove those critics correct. The council approved the Fairness in Apartment Rental Expenses (FARE) Act, which prohibits real estate brokers from charging prospective tenants fees to rent an apartment. Despite the council’s self-congratulation, the bill will not help renters; in fact, it will make their plight even worse.
We can see why by considering separately two categories of rental apartments: those for which the landlord sets the rent, and those for which rent-regulation laws hold rents below market levels. Rental apartments are hard to find in New York City because housing is so tightly regulated. In the city’s most recent study, in 2023, the rental vacancy rate was just 1.4 percent, and that figure was an average of the 1.8 percent rate for unregulated apartments and the 1 percent rate for rent-regulated apartments.
Tight rental-housing markets are a boon to unregulated landlords, who can charge rents at or close to all-time highs. When those landlords get a vacancy, they look for prospective tenants willing to pay the highest rent possible. A landlord who uses a broker’s services believes that the broker will find that rent-maximizing tenant, even though (up to now) that prospective tenant must also pay the broker’s fee.
Enter the FARE Act, which requires the landlord, not the prospective tenant, to pay the broker. Since the maximum market rent already accounts for the broker’s fee, the landlord will just fold the fee into the rent. So the prospective tenant pays the fee with or without the FARE Act.
The bill’s sponsor, Council Member Chi Ossé, denies this, but his argument that the market rent is set independent of the broker’s fee is unconvincing. Renters were already willing to pay both before, and they will be willing to pay an equivalent combined amount in the future.
Consider some analogous examples of transactions where fees included in the sellers’ costs get passed on to a willing buyer. In the early days of online retailing, shoppers balked at paying shipping fees, so retailers universally began to offer “free shipping,” usually for purchases over a modest minimum amount. But shipping continued to be an expense for retailers. So, who pays for shipping? You do, of course. Retailers simply include shipping costs in their markup over the wholesale price.
Here is another example. In the recent presidential campaign, we got a fairly robust discussion about who pays for tariffs. If there is one thing that most economists, conservative and liberal, agree on, it is that the final consumer, not the foreign seller, pays the cost of a tariff on imported goods.
So, for unregulated rentals, the city council’s argument that the FARE Act makes housing more affordable is entirely flimflam. There’s no way to prevent the cost from being passed on to a willing renter. Rentals will be as expensive as they were before.
For rent-regulated units, it’s worse. The problem goes back to the state legislature’s passage of the punitive (for landlords) rent-stabilization amendments in 2019. These amendments included the elimination of vacancy allowances and other mechanisms by which rents could rise on vacant apartments close to market levels.
The legislature failed to explain how well-below-market vacant apartments would be allocated to new tenants, if not by price. Landlords, meantime, remained profit-motivated and sought ways to realize the market value of their real-estate assets despite the legislature’s effort to punish them. One way was to arrange with a broker to demand high fees—substantially higher than the typical 15 percent of a year’s rent—much of which could be kicked back to the landlord. That fee would be set by willing renters who would pay for access to an apartment with below-market rent. If you’re a New York politician, you might see that transaction as an outrage. But an economist might see it as a rational way to allocate a scarce resource. Either way, under the FARE Act it is outlawed.
The city council, however, has not explained any better than the legislature did how the scarce resource of below-market rental housing will be allocated in the future. Perhaps the council has finally beaten the market into oblivion, and from now on landlords will just pick lucky renters by lottery—or, far more likely, landlords will continue to bargain with willing tenants, but this activity will be pushed under the table. Fewer rent-stabilized apartments will be advertised for rent. You’ll have to know somebody who knows somebody who will show you a rent-stabilized apartment, but only if you bring an envelope stuffed with hundred-dollar bills. By the time the next city study comes around, the rent-stabilized apartment vacancy rate will be even lower.
In short, all this legislative posturing and preening by the council does nothing to make housing more available and affordable. Whether the council likes it or not, they depend on private entrepreneurs to meet city residents’ demand for housing. Squashing the limited avenues left to landlords to make a profit solves nothing and worsens the city’s housing crisis.
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