This relationship between the trends of residential rents and the trends of construction costs has been charted by our organization back to 1851, and apparently in a free market the incentive for the building of new apartment units is the fact that rent levels are apparently high enough to pay a return on the current cost of construction. After the rise in rents from 1917 to 1926 it became possible to build dwelling units for rent as rents had increased by as large a percentage as construction costs.

Had interest rates remained the same, we would expect after studying the records of the past that if rent levels today were roughly equal to the levels of construction costs, new building of dwelling units for rent during the past few years would have gone forward as a rapid rate without Government guarantees. Since interest rates are considerably lower now than they were in the twenties, it would not be necessary that rent levels be nearly so high as the levels of construction costs in order to present a real incentive to build rental units without Government guaranties.

The Government found it necessary in order to stimulate new building of rental units to allow rentals in these units far in excess of comparable rents in existing structures. This has resulted in the division of tenants into two distinct classes: (1) Those living in older units whose rents have been frozen and whose rent is being subsidized unwillingly, but at the command of the Government by the owners of the property; and (2) those persons living in new buildings whose rent more nearly approximates a free competitive rent for the quarters. The chart at the top of the following page shows a long-range comparison of residential rent levels in the United States with the levels of all wages and salaries. The rent index is the one computed by our own organization in the period prior to 1913, using the Bureau of Labor Statistics index for the period since that time. The wage index is the one computed by the New York Federal Reserve Bank and attempts to include the wages of all of the various groups in the employed population. It includes union workers, school teachers, policemen, clerks, and other occupations, attempting to depict the general wage level of the country.

The difference in trend of the two lines is very striking. Wages in 1860 were about one-fifth the level of 1926, while residential rents at that time were half of the 1926 level. The general wage level at the present time is more than 10 times the wage level of 1860, while the rent level is only slightly more than double the 1860 level. Accordingly, the average worker today can afford to live in a far better house, spending a smaller percentage of his income for housing than he has at any time in the past. This relationship is so favorable to the wage earner in comparison with the owner of real estate that it immediately brings into question the equity of rent control with its enforced subsidy to the tenant.

The chart at the bottom of the following page shows a comparison of the purchasing power of wages and rents since 1913. The wage earner in the period subsequent to 1913 has made rather consistent gains in actual purchasing power, with setbacks only in the years from 1945 to 1950. On the other hand, the owner of real estate has seen the purchasing power of his return dwindle until now it is less than two-thirds as high as it averaged in the period from 1921 to 1938, a period which represented nine good and nine bad years for real estate. Putting it another way, the purchasing power of wages is now 28 percent above 1939, while the purchasing power of money received in rents is 33 percent below this prewar year. A family having bought a small rental property as an investment on which to retire eventually has seen the purchasing power of the gross rental sink tremendously at the same time that maintenance costs and taxes were increasing. The resulting drop in net income would be considerably worse than gross rental as shown by this chart.