2016, Vol. 43, Issue 3, pp. 743-769
Abstract: In New York City, owners violated zoning regulations and opened up their basements, garages, and other floors to rent to people (particularly low-income immigrants) priced out of the formal market. The more than 100,000 illegal dwelling units in New York City (NYC) were referred to as “granny units,” “illegal twos or threes,” or “accessory units.” Due to the safety and habitability considerations of “alter[ing] or modif[ying] of an existing building to create an additional housing unit without first obtaining approval from the New York City Department of Buildings (DOB),” the City government devoted a lot of resources to detecting and stopping such illegal conversion. Recently, however, Mayor Bill de Blasio proposed to legalize such illegal dwelling units to increase the City’s rent-regulated housing stock. The question remains as to whether crackdown or legalization is the right policy. Such illegal housing is not unique to NYC. Shenzhen, a city in south China that experienced a population explosion from 300,000 to over 10 million within three decades, faces the same problem as NYC: legal housing supply cannot catch up with the population growth, resulting in prevalent illegal housing supply. Almost half of Shenzhen’s buildings have been built illegally and now host over eight million migrant workers and low-income residents. In the past three decades, the Shenzhen city government has swung between legalization and crackdown of such illegal buildings, neither of which has resolved the problem. Due to the large number of illegal apartments, the “crackdown” option has proven to be impossible, while legalization has incurred huge information costs and encouraged more illegal constructions. In more recent years, though, the Shenzhen city government has discovered an effective policy: Keeping the city government’s zoning power intact while granting an option to owners of illegal housing to buy an exemption. The lesson from Shenzhen is that options matter at least as much as the allocation of initial entitlements. In the case of prevalent zoning violations, these options should be granted to parties that have the best information to make decisions — the numerous individual owners rather than the government. I propose that this optional zoning approach should be taken in dealing with illegal housing in New York City. Click here to download the full article.