[New York Diary] US Rent Control Laws Add Fuel to NYCB Crisis

The stock price of New York Community Bancorp (NYCB), a regional bank in New York, USA, has halved in just over two weeks recently. The cause was the commercial real estate downturn. Due to the rise in vacancy rates from the spread of remote work after COVID-19 and increased borrowing costs from high interest rates, defaults on commercial real estate loans have surged. Building owners have found it difficult to repay banks, and banks have faced massive losses, spreading bankruptcy concerns like wildfire.

What draws attention is that the real estate loan defaults at NYCB are not only due to the commercial real estate downturn but also another hidden reason: New York City's anti-market rent regulation laws. Currently, about 20% of NYCB's total loans, approximately $18 billion (around 24 trillion KRW), are secured by 'rent-stabilized apartments' subject to rent regulation laws.

There are about one million rent-stabilized apartments in New York City. To stabilize housing costs in this city, known for its exorbitant living expenses, New York City introduced rent-stabilized apartments that limit rent increases in exchange for tax benefits to landlords. This was a 'win-win' for both landlords and tenants. Landlords could also opt to have the rent-stabilized designation removed at any time. They could remodel apartments and raise rents to market levels. The situation changed with the introduction of a law in 2019 that limited rent increases. New York City prohibited landlords from raising rents beyond a certain percentage even if they increased the building's value through remodeling. Last year, rent increases were capped at a maximum of 3%. The purpose was to prevent the reduction of rent-stabilized apartments. Buildings aged, maintenance and management costs increased, and real estate values plummeted.

The market estimates that since the 2019 rent regulation law passed, the building values of these rent-stabilized apartments have dropped by more than 30%. Many properties are trading at half or less of the prices before 2019. A rent-stabilized apartment sold last month in Manhattan's Upper West Side was priced at only one-third of its value ten years ago. Financial institutions that provided loans to rent-stabilized apartments before the 2019 law now face concerns over loan defaults due to the sharp decline in collateral value. Currently, 14% of loans on New York City's rent-stabilized apartments are reported to be at risk of default. The law, which ignored market principles, has come back as a boomerang.

In South Korea, a similar rent regulation law called the "Lease 3 Acts" (contract renewal request right, rent increase cap, and lease reporting system) was introduced four years ago. Tenants can request contract renewal after two years, and landlords cannot raise rent by more than 5% from the previous contract. As the four-year expiration of the Lease 3 Acts approaches this July, concerns are already emerging in the market about a possible Jeonse crisis. Landlords may set deposits reflecting the accumulated rent increases they could not apply over the past four years when signing new contracts. The predictable result of this bureaucratic approach, framed by landlords as 'Gap (甲)' and tenants as 'Eul (乙),' is obvious.

There are countless cases where good intentions lead to bad outcomes. Policymakers must be wary of the balloon effect, where pressing one side causes the other to pop out. When the Lease 3 Acts were introduced in 2020, the Moon Jae-in administration cited New York's rent regulation as a model case. The rent control laws in New York City, which the Moon administration focused on at the time, are now intertwined with the commercial real estate downturn in the US, weighing heavily on regional banks. Regulations that go against the market inevitably cause side effects.

This content was produced with the assistance of AI translation services.