OK, I’ll Tell You How to Fix New York City’s Housing Crisis …

My inbox was flooded last week in response to my column slamming the 485x tax abatement program in New York. The main response around: Well, if not 485x, then what? I’ll get to that in a bit. 

First of all, for those of you who are not aware of 485x, here is a crash course: It is nearly impossible to build an apartment building in New York City without a real estate tax abatement. For decades we had a tax abatement program called 421a. This program provided a tax abatement on new construction so long as a percentage of the apartments created were “affordable” for a period of time. It worked well, and buildings got built. Not as many as we needed, but a reasonable amount.

Then our policymakers allowed that program to sunset. Nothing happened for a while, and then a replacement program called Affordable New York was implemented. It was a watered-down version of 421a, and those temporarily rent-stabilized apartments now had to be stabilized permanently. Then Affordable New York was allowed to sunset, and nothing happened again for a period of time. 

The newest incarnation of 421a is 485x, a further watered-down version. This time the abatement comes with minimum wage requirements for construction workers that are either $40 per hour or $72.45 per hour depending on the size of the building and the development’s location. Developments under 100 units are exempt from the wage requirements. Unsurprisingly, virtually all of the applications for new rental building permits have been for 99 units or less. This is not the way to get new supply.

The overwhelming majority of the feedback I received from my column asked what I would do instead to solve the housing crisis. I have a lot of ideas, and there are national implications and local implications for my suggestions.

On a national level, housing prices are too high because the long period of low interest rates has put many homeowners in the position of being chained to their house by a 3 percent mortgage. That house may be too small or too large for them, but they are not moving. How can you move and give up a 3 percent mortgage rate? This inertia within the housing market is constraining supply. That’s why when a new house comes on the market, an immediate bidding war occurs and costs escalate. Simple economics: Lower supply (because folks are not moving) leads to higher prices.

I suggest the federal government mandate that mortgages are a personal asset that you can take with you to your next home. The caveat would have to be some type of test to make sure the loan to value was appropriate. Provided this test, who would complain? The banks, that’s who. Simple solution: Pay the bank a 1 percent fee plus administrative costs when a mortgage is transferred. The misallocation of the housing stock caused by this inertia would go away, freeing up supply and exerting significant downward pressure on housing costs.

Now, locally. In New York City, we desperately need housing at all levels of the socioeconomic spectrum. My firm, BKREA, sells a ton of land in the city, and we are constantly speaking to developers of affordable housing who would love to build buildings with 100 percent of the apartments being affordable. They make offers, but the offers are woefully low and the seller does not transact with them. Why? 

“Because the line at the Department of Housing Preservation and Development (HPD) to get financing is four to five years long. I have to build in the carry of the land in my underwriting so I can only offer X dollars” — That’s the response most of the time. 

So here’s an idea: The federal government should give New York $20 billion for the creation of affordable housing (to be doled out to the private sector by HPD so real builders can build this stuff) in exchange for the state relaxing our rent regulations so the private sector actually wants to invest in the housing stock again.

Communist policymakers would hate this, but look at the hypocrisy of their positions. They all say they want New York to be affordable for everyone, but most of the legislation that is passed has the opposite effect. The unfortunate truth is that policymakers care more about getting re-elected than they care about the well-being of their constituents. Clearly, this is not the way it should be.

The reason that housing is such a pivotal issue is the impact housing has on the mental health of people. It is much more difficult for people who are homeless or constantly threatened with eviction to make wise choices. Choices about family, including choices about children and what’s best for them, often hang in a delicate balance with the stress that financial uncertainty and instability can cause. Creating more housing is critically important for a variety of reasons.

Here are some steps to create more supply and make the city more affordable for everyone: 

Bring back the old 421a. Land values would go up. When land values go up, sellers sell. When sellers sell, buildings get built. And the labor unions will love the tens of thousands of jobs that will be created. What’s the point of having a potential job at $72.45 per hour that no one gets?

Reinstate the Major Capital Improvement and Individual Apartment Improvement programs the way they were. Tens of thousands of shuttered vacant apartments would be under gut renovation within two weeks. How much sheetrock would be sold? How many sinks, toilets, bathtubs, stoves and refrigerators would be sold? How much tile and flooring? How many jobs would be created? How much more tax revenue would the city collect? This is a total no-brainer. 

Bring back vacancy decontrol. This doesn’t negatively impact anyone. When tenants leave previously regulated apartments, those units are not getting rented at low rents to other tenants. Instead, they are nailed shut. Who does that help?

Means test all rent-regulated tenants. I really don’t believe property owners want to kick grandma out of her apartment and onto the street. If people need the subsidies that rent regulation provides, have them prove it. Why? Two reasons: Because it’s fair, and because if a tenant was certified by the state as qualifying for rent-regulated housing, the “harassment” of tenants that the advocates fear would all but disappear.

Supply and more availability of housing solve all of our housing problems. Time for our policymakers to think more about their constituents than themselves.

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.