When Rent Control Ended in Cambridge, Mass.

 When Rent Control Ended in Cambridge, Mass.

WEDNESDAY, OCTOBER 24, 2012

Every intro class teaches about price ceilings, and I suspect that 99% of them use rent control laws as an example. Of course, the standard lesson from a supply-and-demand diagram is that price ceilings lead to a situation where the quantity demanded exceeds the quantity supplied, and so while the price of rent-controlled apartments is lower, good luck in finding a vacancy!The slightly more sophisticated insight is what I call in my own intro textbook the problem of “many margins for action.” (Of course, if you are teaching an intro econ class, I encourage you to take a look at my Principles of Economics textbook, a high quality and lower-cost alternative to the big publishers, available here.)  Landlords who face rent control legislation can skimp on maintenance, or hunt for ways to force the renter to bear additional fees or costs. If a large number of landlords act in this way, the feeling of the neighborhood and property values for homes that are not rentals may be affected, too.Cambridge, Massachusetts, has a rent control law in place from 1970 to 1994. It was ended by a statewide vote that barely squeaked out a 51%-49% majority–and ended despite the fact that Cambridge residents favored the continuation of the law by a 60%-40% majority. The law placed limits on rents for all rental properties in Cambridge built in 1969 or earlier. In “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts,” David H. Autor, Christopher J. Palmer, and Parag A. Pathak look at what happened. (The paper is published as NBER Working Paper 18125. These working papers are not freely available on-line, but many in academia will have access through institutional memberships. Full disclosure: David Autor is editor of my own Journal of Economic Perspectives, and thus my boss.) Autor, Palmer, and Pathak have data on rents and prices in both controlled rental buildings, uncontrolled rental buildings, and owner-occupied housing. They can also make comparisons to neighboring suburbs that did not have rent controls in place. Here are a few of their more striking findings:

– The rent-controlled buildings in Cambridge, Mass., typically had rents 25%-40% below the level of uncontrolled rental buildings nearby. However, the maintenance of rent-controlled building was often subpar, with a higher incidence of issues like holes in walls or floors, chipped or peeling paint, loose railings, and the like. More broadly, owners of rent-controlled properties had no incentive to do any major fix-ups or renovations, because they would be unable to recoup the costs.

– Rent control laws are still easy to find, if not exactly widespread, in the United States. For example, “New York City’s system of rent regulation affects at least one million apartments, while cities such as San Francisco, Los Angeles, Washington DC, and many towns in California and New Jersey have various forms of rent regulation.”

– Not surprisingly, the end of rent control in 1995 meant that prices of the buildings that had formerly been rent-controlled rose. “Our statistical analysis also indicates that rent controlled properties were valued at a discount of about 50 percent relative to never-controlled properties with comparable characteristics in the same neighborhoods during the rent control era, and that the assessed values of these properties increased by approximately 18 to 25 percent after rent control ended.”

–  More surprising, it turns out that the end of rent control raised the value of all the non-controlled properties in Cambridge, too. Properties that were in a neighborhood with a higher percentage of rent-controlled properties increased in value by more than those in neighborhoods with a lower percentage of rent-controlled properties. Indeed, when rent control ended, the gains to owners of  uncontrolled properties were greater in total than the gains to the owners of rent-controlled properties. “The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is $1.8 billion. We calculate that positive spillovers from decontrol added $1.0 billion to the value of the never-controlled housing stock in Cambridge, equal to 10 percent of its total value and one-sixth of its appreciation between 1994 and 2004. Notably, direct effects on decontrolled properties are smaller than the spillovers. We estimate that rent control removal raised the value of decontrolled properties by $770 million, which is 25 percent less than the spillover effect.”

Taking all of this together, it seems to me like the way to think about rent control–at least in the form that it was enacted in Cambridge, Mass.– is that it creates a situation of low-quality and poorly-maintained housing stock, which then rents for less than uncontrolled properties. If the goal of public policy is to create lower-quality and more affordable housing, there are other ways to accomplish that goal. For example, zoning laws could require that rental complexes include a mixture of regular and small-sized rental apartments, so that the small-sized (and thus “lower quality”) apartments would rent for less. Or those with lower incomes could just receive housing vouchers.

But when rent control is enacted in a way that leads to degradation of a substantial portion of the housing stock, the costs are not just carried by landlords of those rent-controlled apartments. In fact, a majority of the costs may be as a result of spillover effects to real estate that isn’t rent-controlled. When a substantial proportion of the houses in a neighborhood are not well-maintained, everyone’s housing prices will suffer.

 

Resource: The Conversable Economist blog

Caretaker, Part II

In what promises to be a long tale, Margaret Hearn, a caretaker for two deceased sisters who has laid claim to their $291 a month, rent-controlled three-bedroom apartment on East 12th Street (see below), has given up her own $747 a month rent regulated apartment in Gramercy Park. She may be thinking that this move will help solidify her succession claim, but it is reminiscent of the days when squatters moved into vacant property and dared anyone to remove them.

                                     – Jack Freund, Executive Vice President, Rent Stabilization Association 

(Views and opinions expressed are those of the author and do not necessarily reflect the policy or position of the RSA.)

 

Caretaker, Part I: “Can You Really Claim Two Rent Controlled Apartments?”

 

Margaret Hearn Gives Up $747-a-Month Apartment

By SUZANNE ROZDEBA

 

Margaret Hearn

Margaret Hearn has given up the $747-a-month Gramercy pad she was holding on to as security, while continuing to fight for her $291-a-month, rent-controlled three-bedroom on East 12th Street.

“I don’t want to be there, it’s not home to me,” Ms. Hearn said of the 300-square-foot alcove studio in Gramercy that she has kept for 20 years. She said it was a financial burden to pay for both apartments, and that “nasty comments” from those who read about her living situation persuaded her not to renew her lease, which expires Oct. 31.

Last month, she told The Local she was fighting to keep her East Village apartment because she believes she is the rightful heir to the two sisters who in 2008, she said, asked her to share it with them.

“Win or lose, this is my home. Not because I feel entitled to it, or that I earned it, or anything like that. This is where I’m connected because of my relationship to the ladies. They were my family, and the neighborhood is my family,” she said yesterday.

Among her naysayers is Gregory Bronner, founder of NYC Renters’ Alliance for Housing Choice, who told The Local that Ms. Hearn’s fight is “a travesty for New York,” and that rent regulations should be phased out, with moderate subsidies given to the “truly needy.” He believes rent-regulated apartments “should be available to all New Yorkers” when they enter the market.

“We believe that that apartment should no longer have succession rights. She should go back to her apartment in Gramercy. She should not be allowed to inherit. From a moral perspective, it would be better used for a middle-class family looking for housing,” he said.

Ms. Hearn shot back, “First off, this apartment would be chopped up into tiny bedrooms, and would charge $5,000 a month, I believe. It’s not a question of apartments’ availability; it’s the price of apartments that makes low-income tenants feel that we’re being pushed out. Mayor Bloomberg wants us to live in a box smaller than my college dorm room.”

Ms. Hearn disagreed with Mr. Bronner’s argument that rent-regulated apartments should be phased out, arguing that many “could never afford to live in the neighborhood they grew up in, the neighborhood they have roots to” if not for the right to inherit apartments from their parents. “They’re the shopper in the community, the people that come together when the community needs them, and they bring their different cultural influences to the community,” she said.

Ms. Hearn and a lawyer for her landlord are scheduled for a deposition on Oct. 26.

Source: The Local East Village

Wherever it Exists, Rent Controls Create the Same Inequities

When rent control fails – San Francisco edition

October 9, 2012  |   Posted by: 

Rent control exists to protect the San Francisco apartment renter – who lives in an older apartment building – from price gouging by greedy landlords out to make a buck.

But as we all know, sometimes the best intentions do not produce the desired results. And though rent control has been a very successful protection method for renters for many years, more often than not these days it’s the landlords who are getting gouged by their renters.

It seems that one of the failures of rent control is the possibility of a non-finite leasing arrangement.  Renters who started in an apartment a decade ago, grew successful and prosperous and even moved out into a house or a bigger, better apartment, never ended the lease at their rent controlled place. Instead, they kept renewing it, kept paying rent, and didn’t live there.

Maybe they illegally sublet it to someone who isn’t on the lease at all. Maybe they used it for an office or a secret hideaway where they could escape from their spouse. Or maybe they moved to Marin and used it only on the occasion when they came into the city – and also sublet it for weekends to their friends.

These situations are all too common in the San Francisco rent controlled housing market, which is why some residents – and tenants rights advocates – are calling for an overhaul to rent control. Policing offenders who are abusing the system for their own personal gain should be the job of the Rent Control Board, but they lack the manpower and resources to check up on each and every tenant. And plus – that shouldn’t be necessary. Residency checks for tenancy sound like something out of a totalitarian regime, not live-and-let-live San Francisco.

The SF Chronicle reports that there are still more than 183,500 rent-controlled units, out of 222,165 apartments, in San Francisco. That’s a huge percentage of the housing stock, and gaming the system is patently unfair. How can we better self police the way rent controlled units are being used?

 

Source: Rent Cafe

Voluntary Rent Controls—Now There’s a Concept!

City Council Updates Voluntary Rent Guidelines

Resolution works as a policy statement from the city governing the rents of current tenants.

By Drew Hansen

Alexandria City Council approved a resolution Tuesday establishing the city’s voluntary rent guidelines at an increase of not more than 5 percent in situations where a tenant pays utilities and not more than 7 percent where a landlord pays utilities.

The guidelines were the recommendation of the city’s Landlord-Tenant Relations Board, which analyzed rent data, market forecasts and vacancy surveys.

The resolution works as a policy statement from the city governing the rents of current tenants, Vice Mayor Kerry Donley said. Virginia does not allow rent control and he doesn’t think it ever will.

The rent increase guidelines are largely followed by landlords in the city, officials said. The resolution has been annually revised for about 30 years.

“It is an historic practice in this city,” Donley said. “We actually reduced them a bit this year. It was 5.5 percent and 7.5 percent, respectively, last year and we brought them down a bit this year in hopes Alexandria will remain affordable for existing renters.”

The guidelines don’t cover units coming on the market or units being built.

Donley said the city is seeing a “very vibrant” rental market. Councilman Frank Fannon said about half the city is made up of renters.

“These guidelines offer some hope that existing tenants don’t receive tremendous increases,” Donley said.

Melodie Seau, division chief with the city’s Office of Housing, said her office received just 14 complaints in fiscal year 2012 of rent increases exceeding the guidelines. Seau said the city received more than 30 complaints the year prior.

The new guidelines will be sent to 102 landlords in the city who own medium- to large-sized apartments, Seau said.

 

Source: West End Alexandria Patch

Apparently, Rent Control Schemes Do Not Have to be Rational or Applied Fairly!

 

City of Hoboken prevails in aspect of litigation related to rent control

Oct 04, 2012

HOBOKEN –A Superior Court Judge ruled Thursday morning that the city of Hoboken has prevailed in part of a class action lawsuit regarding rent control, according to a press release from Hoboken City Hall.

The suit was filed against the city by a property owner, on behalf of property owners in town. The suit says the city enforced rent control laws inconsistently for almost 25 years, but then, in 2006, the city changed the laws and began enforcing them in a way that property owners could not comply with. The landlords hoped to recoup damages that they say were caused by the inconsistent enforcement, and also asked for the court to rule that the city has broken state law.

While the suit is not totally resolved, as a result of Thursday’s ruling the city will not have to pay all of the legal fees in the suit, which could have totaled more than $1 million.

The release did not specify what the next step is for the suit in general.

The city was represented by Victor A. Afanador and Marissa L. Quigley of Lite DePalma Greenberg, LLC.

Mayor Dawn Zimmer said, “It is unfortunate that so many lawsuits are filed against the City regardless of their lack of merit, but the positive results in these litigations are an important demonstration of the necessity of ensuring that the city receives the best possible legal representation.”

Source: HudsonReporter.com

Supreme Court Hears Takings Case

In oral arguments before the Supreme Court, the Federal government appears to argue that temporary flooding is never a taking of private property. This case has echoes of RSA’s amicus brief in the Harmon rent control challenge in which we argued that a temporary taking, if continued long enough, must be a taking. It will be interesting to see if the Supreme Court decision in this case (Arkansas Game and Fish Commission v. U.S.) provides any fodder for another attempt at overturning rent controls.

                                                    – Jack Freund, Executive Vice President, Rent Stabilization Association 

(Views and opinions expressed are those of the author and do not necessarily reflect the policy or position of the RSA.)

 

Justices Press Lawyers for Broad Solutions

By 

 

Justices Anthony M. Kennedy and Ruth Bader Ginsburg, first row on right, tried to pin down when government must pay for damaged property.

 

WASHINGTON — The Supreme Court heard arguments in two very different cases on Wednesday, one about flooding and the other about murder. Together, they illuminated a central preoccupation of the justices: how to fashion legal principles that will not only resolve the disputes before them but also work when applied by lower courts in countless other cases.

 

In both arguments, the lawyers with the better answer to that question seemed poised to come out ahead.

“What I want is the definition of the operable baseline that we can use in order to define whether or not there has been a taking,” Justice Anthony M. Kennedy said, for instance, to a lawyer for the Arkansas Game and Fish Commission. The commission is seeking millions of dollars from the federal government for timber it says was destroyed by intermittent flooding caused by the Army Corps of Engineers.

The lawyer, James F. Goodhart, hedged, proposing a balancing test that would weigh how substantial the government intrusion on private property was. “I guess I must say it may not be a bright line,” Mr. Goodhart said.

He returned to the point unprompted a half-hour later. “I don’t know, Justice Kennedy, where the line should be drawn,” he said.

Justice Ruth Bader Ginsburg asked whether a single flood could ever be a taking.

Mr. Goodhart responded that “it’s going to going to depend on the facts, Your Honor, in the case.”

Justice Sonia Sotomayor pressed him. “Tell me how your rule makes this a manageable situation,” she said, and he repeated his balancing test.

Edwin S. Kneedler, a lawyer for the federal government, took the more promising categorical approach, proposing two different lines. Temporary flooding is never a taking of private property, he said. And harm caused by flooding downstream from a dam, as opposed to flooding from the reservoir it creates, is also not a taking, he said.

The second distinction seemed to strike some of the justices as overreaching. Justice Antonin Scalia said, “That doesn’t seem to me particularly fair.”

Justice Kennedy said the second distinction reminded him of “the old moral of refuge that the rocket designers take.”

“You know,” he said. “I make the rockets go up. Where they come down is not my concern.”

Justice Elena Kagan was disqualified from the flooding case, Arkansas Game & Fish Commission v. United States, No. 11-597, presumably because she had worked on it as United States solicitor general.

The question in the murder case was how to decide when a state court has actually ruled on an issue. The point matters because a 1996 federal law limits federal court review of state convictions where an argument has been “adjudicated on the merits” by a state court.

But people convicted of serious crimes often make many arguments, and state courts often reject them wholesale in terse decisions. Last year, in Harrington v. Richter, the Supreme Court ruled that a state court decision was “on the merits” even though it offered no reasoning at all.

The question in the case argued on Wednesday, Johnson v. Williams, No. 11-465, was what to do about a decision that addressed one argument but said nothing about another. (That other argument was over whether the removal of a juror in a murder trial violated the Sixth Amendment’s guarantee of an impartial jury.)

Stephanie Brenan, a deputy California attorney general, said judges should be assumed to have considered all arguments presented to them whether they address them directly or not. Kurt D. Hermansen, a lawyer for the inmate, Tara Williams, said federal courts should examine the issue case by case.

Justice Kennedy proposed an alternative. “If you took $28.52 out of the state’s judicial budget and bought them all a stamp which just says, ‘We have considered and rejected all constitutional claims,’ then there would be no problem,” he said.

Ms. Brenan said such language was already implicit in all rulings.

Justice Scalia, who is often attracted to bright line rules, said allowing case-by-case determinations would produce endless litigation. “In many cases, especially capital cases,” he said, “one could argue for years over whether, in fact, there was enough indication that the court did not consider it or not, right? And every year is a reduction of sentence, so to speak.”

Source: The New York Times

This is chutzpah! Private owner is petitioned to keep apartment below market rate in honor of deceased feminist.

Petition Calls For ‘Shulamith Firestone Memorial Apartment’ For Low-Income Feminists

By MARY REINHOLZ

Acquaintances of Shulamith Firestone want the rent-stabilized apartment where the author and activist died this summer to be preserved as a residence for a low-income feminist, according to a petition obtained by The Local.

Kathie Sarachild with photo of Shulamith Firestone.

The petition, which can be read below, outlines a plan to earmark her fifth-floor walk-up at 213 East 10th Street for tenants doing “important” feminist work, who cannot afford current market rates in the rapidly gentrifying East Village. The rent would be no more than $1,000 a month.

Women’s liberation stalwarts like Kate Millett along with East Village literary agent Frances Goldin and Annette Averette, co-director of Sixth Street Community Center, are among those who have signed the petition directed at landlord Robert Perl, owner of Tower Brokerage.

Written by Fran Luck, executive director of the WBAI radio program “Joy of Resistance: Multi-Cultural Feminist Radio,” it notes that owners and developers of housing in formerly working-class neighborhoods have for decades “set aside” affordable rentals. Ms. Firestone paid about $400 a month, according to Mr. Perl, who said he had been planning to increase the rent of the next tenant in order to offset rising taxes imposed by the Bloomberg administration. A one-bedroom in the building, between First and Second Avenues, was recently leased for $2,095, according to StreetEasy.

Ms. Firestone, who in the 1960s helped organize women’s liberation groups such as Redstockings, New York Radical Women and New York Radical Feminists, was found dead in her apartment in late August. She was 67 and had long been afflicted with mental illness in the years following the 1970 publication of her influential feminist treatise, “The Dialectic of Sex.” Her book embraced technology as a way of freeing women from “the tyranny of their biology.”

“I think she was a difficult tenant,” said Ms. Goldin. “She was a disturbed person and would leave the water on and flood other apartments. She didn’t mean to do this, but if we could persuade the landlord that we could guarantee him a reasonable tenant, maybe he could become a hero. It’s worth a shot.”

Mr. Perl, who was Ms. Firestone’s landlord for 19 years (he said she lived there for a total of 30), considers himself as something of a “model landlord” and believes Ms. Firestone’s family “appreciates how she was taken care of over the years.” He pointed out that the city’s rent stabilization laws allow rent increases when tenants vacate regulated apartments, and said he wanted the highest allowable increase in order to begin renovation of the space with capital improvements.

Ms. Goldin said she didn’t know the names of prospective tenants for the proposed Shulamith Firestone Memorial Residence, but the petition notes that they would be “vetted” by a feminist committee and held to standards similar to those of other tenants. The idea emerged out of a memorial for Ms. Firestone held Sept. 23 at St. Mark’s Church.

Bowery resident Kate Millett,  one of an estimated 200 people who attended the memorial, told The Local that the petition’s proposal for a feminist tenant “in perpetuity” at Ms. Firestone’s space would be a difficult one to sell to any landlord, but, she said, “We have to try.”

Other attendees of the memorial included Ti-Grace Atkinson, a former president of the New York City chapter of the National Organization for Women, and author of “Amazon Odyssey”; Kathie Sarachild, director of Redstockings Archive for Action who is credited with creating feminist consciousness raising; and Alix Kates Shulman, author of “Memoirs of An Ex-Prom Queen,” a bestseller that also came out of second wave feminism.

Jacqui Ceballos, president of Veteran Feminists of America, lives in Phoenix and did not attend but said she is still receiving calls and e-mails from women expressing a desire to reboot the women’s liberation movement and to keep Ms. Firestone’s legacy alive.

PETITION
September 30, 2012

Because…The Feminist world, the Art world and the Lower East Side/East Village Community have just lost one of our great visionaries–Shulamith Firestone–a woman who was able to remain, work and survive in her/our neighborhood for many years because she paid a relatively low rent….

Because…the average rent being charged new renters in our neighborhood is about $2,100., and had Shulamith tried to rent here today, it would have been impossible for her to find, live and work in an apartment she could afford…

Because… the Lower East Side/East Village environment is all the poorer for the loss, due to skyrocketing rents, of the kind of creative spirits that formerly gave the neighborhood its unique character–but who are now being priced out…

Because… Shulamith’s sister feminists, friends and admirers would like to memorialize her by making it possible for a feminist(s) coming after her to be able to live in this neighborhood and do feminist work here–such work usually being either unpaid or poorly paid, and therefore requiring an affordable rent…

Because.. it is well within “fair housing practices” developed over decades for developers/owners of housing in formerly working class neighborhoods to create “set-asides” of affordable rental units for those who cannot pay market rates…

Therefore…We, the undersigned, do hereby Petition Robert Perl, owner of 213 East 10th Street, and do strongly urge him to work with us to create a “Shulamith Firestone Memorial Apartment” that would, in perpetuity, remain well below market rates and which rent would, at this time, not exceed $1,000. per month; this apartment would be reserved for a woman who is making an important contribution to the feminist movement that is not well remunerated.

Candidates for residence in such an apartment would be vetted by a committee of feminists drawn from the list below and would meet the same standards as any other tenant–with the exception of paying a lower-than-market-rate rent.

Signatures (so far)
Kate Millett, Feminist, Author: Sexual Politics

Frances Goldin, Co-Founder Cooper Square Committee, Literary Agent for Mumia Abu Jamal

Carol Giardina, Professor of Hisory, Queens College, CUNY, Author: Freedom for Women

Kathie Sarachild, Director, Redstockings Archives for Action

Ti-Grace Atkinson, radical feminist

Nellie Hester Bailey, Director, West Harlem Tenants Council

Annette Averette, Co-Director, Sixth Street Community Center

Howard Brandstein, Co-Director, Sixth Street Community Center

Rosalyn Baxandall, Distinguished Professor, SUNY-Old Westbury

Fran Luck, Executive Producer, Joy of Resistance Multicultural Feminist Radio @ WBAI

Erin Mahoney, National Women’s Liberation(NWL)

Allison Guttu, Organizer, NWL, Women of Color Caucus of NWL, Malcolm X Grassroots Movement

Amy Kesselman, Professor Emerita, SUNY-New Paltz

Roxanne Dunbar Ortiz, Professor Emeriti, California State University

Ann Snitow, Network of East-West Women

Marisa Figuereido, Redstockings

Jennifer Sunderland, Redstockings

Pete Dolack, Former Editor, New York State Green Party Newspaper

Bill Koehnlein, Brecht Forum

Marie-Claire Picher, Co-Founder,Theater of the Oppressed Laboratory

Nancy Kogel, MNN TV Producer, Reaching Out for Animal Rights (ROAR)

 

Source: The Local East Village

Portugal scraps rent controls, alarms low-earners

Portugal scraps rent controls, alarms low-earners

By Barry Hatton on October 02, 2012

LISBON, Portugal (AP) — The peaceful retirement of Teresa Dourado is about to be shattered.

The 77-year-old widow raised two children with her husband in their fourth-floor apartment behind Lisbon’s Campo Pequeno bull-ring. It has been the family home since 1966. Living alone there now among black-and-white photographs of her children and with her husband’s framed paintings, she pays a controlled rent of €100 ($128) a month. That just about allows her to get by on her monthly pension of €414.

But Portugal is scrapping its long-standing rent controls in one of the government’s most radical economic and social reforms since the ailing country needed a €78 billion bailout last year, when it was engulfed by Europe’s financial crisis. Critics say the anticipated rent hikes from next month could price thousands of families out of their homes. At the very least, the change — aimed at boosting and modernizing the economy — will add to the financial burden on those struggling to cope with pay cuts and tax hikes designed to ease the country’s crippling debt load.

“I’m already having trouble paying €100,” says Dourado. “I don’t want charity. I’ve worked all my life. I shouldn’t have to beg for anything.”

The new rent law casts aside protections that date from the early 1900s, and are seen as one of the reasons for Portugal’s economic decay. It’s all part of a plan to jettison a way of life that has been handcuffed to the past, holding back the dynamism needed to put the nation on the path of growth. The measure, long delayed due to its political toxicity, also illustrates how Europe’s financial crisis is snatching away old certainties and expectations — in this case, over something as basic as having a roof over your head.

The change in rent laws was one of the steps demanded in return for the financial lifeline provided by foreign lenders. They identified rent controls as one of the handicaps keeping Portugal mired in stagnation. Similarly, their insistence on labor reforms is taking away long-standing entitlements, such as jobs for life, which choked development, consigning Portugal to low growth and mounting debt. These are precisely the kinds of measures that have triggered massive protests across Europe in recent years, raising questions about the viability of the European project.

The goal of the new law is to free up rental accommodation, making it easier for workers to seek jobs around the country. It also aims to help people avoid racking up mortgage debt; put prime real estate to more productive uses; encourage owners to renovate buildings that are crumbling because they don’t earn enough rent money; and provide work for hard-up construction companies.

Rent controls have long enabled those on a low income to live cheaply in one of western Europe’s poorest countries. The minimum salary, earned by more than 600,000 workers, is €485 ($624) a month before tax. The average salary is around €800 ($1,030). That compares with the U.S. minimum wage of $1,317 a month and an average monthly wage of $3,500.

Portugal’s rent controls aren’t unique in Europe. Germany and the Netherlands, for example, also place some modest limits on rent increases. But their laws are nowhere near as old, comprehensive and rigid as in Portugal, where lifelong contracts with minimal, inflation-linked rent hikes have been handed down through generations.

The government says the new law contains safeguards for low earners. Increases in the rents paid by people like Dourado will be limited to between 10-25 percent over the next five years before full liberalization.

Even so, the scale of the threat to many residents is huge. Last year’s national census showed about 250,000 families are in houses with old contracts, which will now come up for price review. That’s about 1 million people — or almost 10 percent of the population.

Romao Lavadinho, president of the Lisbon Tenants’ Association, has held dozens of public meetings to explain the new law to worried tenants. In one, hundreds of people packed into Lisbon’s Sao Jorge cinema on the capital’s main avenue.

“People are in a terrible state of anxiety,” said Lavadinho, whose association has around 20,000 paying members. It’s not just low earners who are nervous, he says — lawyers, teachers and architects are among those turning up at meetings.

The rent reform hits as Portuguese struggle with other woes.

The cost of living has climbed, even as incomes have fallen sharply due to the country’s austerity drive. The sales tax on gas and electricity, for instance, has jumped to 23 percent from 6 percent, leaving people short for other expenses.

A wholesale reassessment of property values by the tax authorities will establish by how much landlords can begin to charge their tenants. Lavadinho notes that step will also hurt the middle class. In apartment blocks along Lisbon’s main avenues, he reckons, rents could jump from €200-300 a month to €1,000.

The main thrust of the new law is to unfreeze pre-1990 rental contracts. Those contracts still come under a 1910 law that, in the turmoil following the end of the Portuguese monarchy and the establishment of a Republic, sought to contain inflation. It stipulated that the initial rent could be increased only by a government-decreed annual rate, usually just a few percent.

Mindful that there are more tenants than landlords, and eyeing their electoral prospects, governments have long shied away from changing the law to any meaningful extent. The result: 150,000 households currently pay less than €50 in monthly rent, some of them in prime real estate areas, according to census data.

That is also a key to the mystery of downtown Lisbon’s shabby charm. It’s a western European capital trapped in 100-year-old laws that deny landlords the income to refurbish decaying buildings. Portugal’s National Statistics Institute, in a report last year, bluntly stated the consequences: “Lisbon can be used as a textbook case on how to destroy a city without bombing it,” it said.

Luis Menezes Leitao, president of the Lisbon Property Owners’ Association, a national body with some 10,000 members, notes that foreigners find the old law hard to believe. Some people in central Lisbon, he says, pay as little as €5 a month in rent.

“This had to be done sooner or later,” Menezes Leitao said of the legal changes. “Economically speaking, it’s unsustainable.”

Examples of what he calls “a gigantic distortion of the market” are not hard to find.

Susana Paiva’s family owns a building on Lisbon’s central Rossio square which is partly occupied by a hotel. The building’s estimated real estate value is €4.5 million, which at market prices should bring in about €30,000 a month in rent. But the 34-room hotel, whose room prices start at around €150 and rise to almost double that, pays her just €633 a month. The rental contract dates from 1919.

Paiva has one word to describe that: “ridiculous.”

She says the old-fashioned mom-and-pop stores which still abound in the area around her building are surviving only because they pay a handful of euros in rent per month. In effect, landlords are subsidizing businesses, she says.

“Low rents for businesses are pernicious in the 21st century,” Paiva said. “It means that the people running them don’t need to modernize, find new markets, become more competitive.”

By contrast, the Lisbon Commercial Association, which represents the capital’s shopkeepers, predicts the new law will bring “dramatic consequences” as stores, suddenly at the mercy of market forces, shut down and add to the country’s record unemployment rate of 15.9 percent.

Elsewhere in the center of town, a seven-story apartment building owned by Jose Gago da Graca’s family offers another bizarre example.

The tenant in apartment 2E pays €196 a month rent for a three-bedroom apartment. The occupant of 2D, across the hall, pays €1,600 a month for an identical second-floor flat.

That’s because the elderly widow in 2E has been there since 1962 and her faded blue rental contract guarantees her tenancy in perpetuity, with controls on the initial rent which was the equivalent of €14. Her neighbor, who recently moved in when the previous occupant moved out, pays the market price.

“It’s an absurd situation,” Gago da Graca said. “This is a prime, sought-after area.”

For Dourado, the elderly widow, times are hard and will likely get harder.

She vows to keep fighting the center-right government’s policies, joining street demonstrations that have become almost a weekly event.

“They’re not getting me out of here,” she says of her home, and adds a dark threat: “If I have to go I’ll go through the window, not the door.”

 

Source: Businessweek