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Capital Crunch: What a Recession Would Mean for NYC’s Housing

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Capital Crunch: What a Recession Would Mean for NYC’s Housing

February 28, 2020

With the recent plunge in stock prices and other signs — such as an inverted U.S. Treasury debt yield curve — suggesting an elevated risk of a slowing economy, New York City housing observers need to think about what could happen in the event of a recession. Under Mayor Bill de Blasio, Governor Andrew Cuomo, and Democratic majorities in the City Council and both houses of the state legislature, New York City has gone further toward “decommodifying” housing than any other city in the country: Driving private investment out of housing and substituting public funding for private. While private housing investment may also take a hit in the event of a recession, the city’s over-reliance on public subsidies both worsens housing scarcity and impedes the role that privately financed housing could otherwise play in leading the economic recovery.

How the city put itself on the hook for the capital needs of its housing stock

De Blasio and the council have enacted the strictest mandatory inclusionary zoning program in the country. This requires that developments that benefit from rezonings provide affordable housing. The program’s requirements are so demanding that they are only economically feasible in the most affluent parts of the city — the neighborhoods whose elected officials also happen to be most staunchly opposed to new housing development of any sort. As a result, most rezonings that lead to actual new housing occur in less affluent parts of the city and involve heavy public subsidies.

The state legislature has enacted punitive rent regulations that provide little incentive for landlords to reinvest in building-wide systems or improvements to individual apartments. As a result, rehabilitation of existing privately-owned housing, too, will increasingly be a public responsibility. Finally, the New York City Housing Authority (NYCHA) has capital needs of as much as $40 billion to bring its 174,000 units into code compliance. NYCHA historically has relied mainly on federal funding but with the federal outlook uncertain, the city now has increased exposure to long-term funding commitments.

All these demands add up. The city’s latest biennial ten-year capital strategy, published in April 2019, calls for $9.7 billion in capital spending for the Department of Housing Preservation and Development, for City Fiscal Years 2020-2029. (The city’s fiscal year runs from July 1st to June 30th.) This includes $2.9 billion for new housing construction, $3.7 billion for preservation of existing housing, and $2.4 billion to construct special needs housing (for seniors, persons with disabilities and supportive housing for the formerly homeless). All but $320 million — an amount expected from federal sources — are city funds, raised through municipal bonds. Additionally, the ten-year plan commits $3 billion of city funds to meet NYCHA’s need for renovating its buildings.

How it makes NYC vulnerable

If a recession were to happen soon, it would throw all of these commitments into doubt. New York City’s capital spending is cyclical. It rises in good economic times, and falls in recessions. The chart above shows annual capital spending by purpose, adjusted by inflation, from the New York City Comptroller's Comprehensive Annual Financial Reports. What's clear from the chart is that capital spending went down sharply in the early part of the past decade. Although the global financial crisis hit the city in the fall of 2008 (during CFY 2009), spending did not fall until CFY 2011, and hit its low point in CFY 2015, the first full fiscal year of de Blasio’s administration. This is perhaps because the momentum of past commitments carries forward for a year or two even after cuts are made to new spending, while a decision to reverse the trend also takes time to go into effect. Over the last cycle, real annual capital spending fell by about 30 percent, from $12.5 to $8.65 billion.

The city cuts capital spending in adverse economic conditions to save money on debt service, which helps balance the expense (operating) budget. The cuts have to be focused on the larger categories, which were then education, transportation, and environmental protection. To these categories we must now add housing, which has grown from a low of $387 million in real capital spending in CFY 2011 to $1.7 billion in CFY 2019. Additionally, the ten-year capital plan commits $8.7 billion for the construction of new jail facilities to replace those on Rikers Island, front-loaded through CFY 2026. And the plan doesn’t include the $3 billion city contribution that’s part of the MTA’s latest five-year capital program.

The potential crunch as increasing demands for public spending face diminishing revenues would create difficult choices and political dynamics for the Mayor and the Council. Decisions to protect one category require others to fall more than average. The city can try to postpone the day of reckoning by raising taxes rather than cutting spending. It has the ability to raise property taxes without state legislative approval, as former Mayor Bloomberg did in the steep recession following the 9/11 attacks. However, raising taxes during a recession is always economically questionable and politically fraught. The city would probably not be able to avoid spending cuts entirely in a downturn.

Maybe the latest alarms are false. Perhaps the national economy will continue powering forward. However, the United States is already in one of the longest business cycle expansions on record. New York City is living more on the edge than most New Yorkers appreciate. It can’t just stop the renewal and replacement of its capital infrastructure to preserve discretionary expenditures. That’s been tried, with disastrous results. New Yorkers with long memories can recall the deterioration of the subways and East River bridges in the aftermath of the city’s 1970’s fiscal crisis. Given that a day of economic reckoning may not be far off, it is useful for the city to do some contingency planning now.

The city needs to bring in private capital where it can substitute for public borrowing. Some of the services the city provides are privatized elsewhere in the U.S., or in other countries. There’s likely potential for investment there, but housing really stands out. No other U.S. city spends remotely as much public money on housing as New York does, and every city relies much more on private investment. Few cities are as ideologically hostile to such investment as New York City’s current political leadership. And yet, with few exceptions, most cities house their population better, and more affordably.

Housing often leads the economy out of recession, as falling interest rates spur investment. That’s what happened in New York City after 9/11, as new housing permits rose from 16,856 in 2001 to 31,599 in 2005. New York City should let private housing development take the lead again, complementing and extending public funds the city does devote to housing. By harnessing private investment, New York can solve its housing problem in a way that is neither possible nor ultimately fiscally sustainable through public investment. What’s more, by lowering the barriers to private housing growth, it can also spur post-recession recovery.

Eric Kober is an adjunct fellow at the Manhattan Institute. He retired in 2017 as director of housing, economic and infrastructure planning at the New York City Department of City Planning.

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