There is little dispute that the housing market for both rentals and sales is in distress. A recent Harvard study states: “Lack of affordability defines both the for-sale and the for-rent housing markets,” which has led to higher prices, sluggish sales, and higher rates of eviction from rental units. On the progressive left, the explanation is always the same: “The nation’s largest landlords have shown their burdensome rent hikes are based on greed, not need, after reporting billions of dollars in higher profits over the last year.” The consequence of this dire movement is, according to the White House, that “[s]ome corporate landlords have taken advantage of the shortage of available units by raising rents by more than increases in their own costs—resulting in huge profits at a time when millions of Americans are struggling to cover rent each month.”
Consequently, the Biden administration has proposed that the federal government inject itself into the corporate housing market. Its new proposal is that “corporate landlords, beginning this year and for the next two years, would only be able to take advantage of faster depreciation write-offs available to owners of rental housing if they keep annual rent increases to no more than 5 percent each year.” This would cover “landlords with over fifty units in their portfolio,” accounting for some twenty million units. New construction would be exempt from this anti-gouging policy that, thankfully, requires congressional action to implement.
Congress should not bite. This proposal rests on an incorrect analysis of the underlying housing market malaise, to which it supplies exactly the wrong solution when it suggests more regulation rather than less. Trying to leverage the tax code to dragoon this select class of landlords is both unwise and unconstitutional.
Start with the so-called official diagnosis, which offers a definition of “gouging” that condemns any landlord that raises its rent by more than its increased costs whenever there is an upward movement in demand. But raising rents in these cases reflects either a shortage in supply or an increase in demand, either of which is beyond the ability of any landlord or tenant to control in this intensely competitive housing market. The free movement of prices has the desirable effect of creating situations where, on average, units go to the parties that value them the most, which increases the overall value of the system. It’s not “gouging” by either little or big landlords. Indeed, to keep the rents artificially low, as they are under many rent-control systems, encourages all sorts of intrigue. Potential buyers either line up in wasteful queues or try to jump the queue by paying bribes to some broker or to the landlord itself. The simple point here is that the White House’s implicit adoption of a public-utility model of regulation for rate increases works only with natural monopolies, where the model represents a complex effort to balance the risk of overcharging by the regulated utility with the risk of government expropriation.
Neither of those risks exists here. The proponents of this ersatz price-control scheme should first look at the massive dislocations in the New York City rent-control markets, given the adverse consequences of New York’s 2019 rent-stabilization law. This law imposed hard caps on rental increases on properties that were renting at low rates during the COVID slow-down, starting in 2020. First, the allowable rent increases in some instances were so low that landlords preferred to keep units off the market rather than be forced to accept unsustainable low rates. Then, the lenders on these stabilized units went into serious distress when the rental streams to service these mortgages started to slow up. The costs of housing services often exceed any allowable rent increase, because of overall general inflation rates. The inevitable revenue shortfall results in a deterioration of services, financial instability, or both.
There is a back-handed recognition of this point, given that the Biden administration’s proposal is said to be temporary, for two years only. But New York’s “temporary” rent-stabilization law duly renewed every three years before being made permanent in 2019, and there is nothing in President Biden’s current proposal that blocks its renewal or its expansion to small landlords. The so-called exemption for new units can likewise be reversed once the units are completed. Recently, Supreme Court Justice Clarence Thomas offered a wholly inadequate sop to landlords in his brief statement that accompanied the court’s denial of certiorari in 74 Pinehurst LLC v. New York, which sought to mount a belated frontal assault on the whole system. He suggested that some decontrol might be allowable on a case-by-case basis, which is from the outset a ludicrous approach to a systematic abuse of power that constitutes a per se physical taking forced on landlords for below-market rates.
Only two steps can stop the current housing malaise. The first is that the Biden administration must stop making appropriations like its latest unconstitutional student-loan forgiveness program, Saving on a Valuable Education (SAVE), which injects excessive liquidity into the system, driving up interest across the board. Those owners of favorable mortgages reluctant to sell and potential buyers with limited cash don’t want to pay high interest rates and are thus more willing to rent. Second, the administration should cut down the multiple regulatory hurdles to new construction, like New York’s Uniform Land Use Review Procedure (ULURP) law, to reduce delays and lower construction costs.
Worse, the Biden proposal represents an intolerable weaponization of the tax code to serve partisan ends. If this scheme is allowed to go forward, the sky is the limit for the ability of the federal government to coerce private behavior. Nothing in the White House statement or its enthusiastic endorsement from progressive sources sets any substantive limits on how broadly this newly minted power could be used. Why stop at 5 percent increases when the government can use its political heft to ban any rent increases for any landlord that wants to keep its set of depreciation benefits?
Thus, suppose that for a large project, those depreciation allowances are worth $100,000 per year, while the forgone rent increases amount to only $50,000 per year. If the government can force private parties to make the choice, this deal turns out to be perfectly sensible: both sides are better off accepting the rent caps. But note what this short-term theft does to long-term incentives. The accelerated depreciation rates have long been part of federal tax policy in depreciation. They are a form of subsidy that is intended to increase the rate of investment in preferred classes of assets. The well-understood deal has always been that a party that completes construction at a given date keeps these depreciation benefits but is subject to current fluctuations in income tax levels in keeping with the overall tax system. Biden’s new proposal rips that historic deal to shreds for those who made major investments in reliance on the stability of a legal system, which Biden now wants Congress to undermine, first here, and then elsewhere.
Indeed, this instability has already worked itself into intellectual-property law. The Biden administration has voiced a familiar complaint that drug prices or royalties are too high. One of the great achievements in intellectual-property law was the passage of the Bayh-Dole Act of 1980, which ushered in a boom in intellectual-property development. That statute contains a savings clause, never once used in more than forty years, for “march-in rights” for cases when these markets don’t work. It is simple foolishness for the government now to hold massive hearings to impose an unneeded price-control system, with the obvious power to confiscate intellectual-property rights, because things might change.
Consider, too, a similar process of expropriation through the Drug Price Negotiation Program (the “Program”), which is part of the Inflation Reduction Act. Under the Program, the government is threatening Bristol Myers Squibb, attempting to force the company to accept sharp price cuts on its key blood thinner, Eliquis, by saying it will cut it off from selling any drug to the Centers for Medicare and Medicaid Services if it doesn’t accept the imaginary “maximum fair price” for its most valuable products—a provision that was wrongly upheld in federal court in New Jersey. As in the case of rent control, it is not possible to turn the deal down. But it is possible, as in the rent-control space, to attack the scheme as a massive abuse of government monopoly power, as my colleagues and I just argued in an amicus brief to the Third Circuit.
A powerful constitutional and economic principle is at work here—just as it is in antitrust law, under which the monopolist or cartel cannot defeat the operation of the antitrust laws by showing that the buyers consented to the higher price. Instead, when the political branches fail to do their job, the courts must systematically apply the needed protection against confiscation by calling out this abuse of government power. No private cartel could engage in the chicanery that has become part of the standard Biden administration playbook, which needs to be shut down now.
