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Mr. DuLAURANCE. Well on the repairs you are allocated 10 years for carpentry
Mr. BARRETT. But you get it in advance of the 10 years. You get an increase immediately, if you prove that you are not getting a fair net operating return.
Mr. DŪLAURANCE. Yes, that is true. But if you have repairs, and you have a thousand dollars income, in order to get an increase on your repairs you have to spend $1,900-almost $2,000 because those repairs are prorated-assuming that you do not have records that go back 20 years.
Mr. BARRETT. I do not think that is true, according to what we have where I come from. If you show any expenditures at all, you: get a proportionate increase in your rent.
Mr. DuLAURANCE. Well, I have filed the D-106 form, and the D-106 form itself says:
Similarly, if a roof was replaced any time within the last 15 years, one-fifteenth of the cost may be properly charged to the test year.
Mr. BARRETT. Within the last 15 years. But we are speaking of the expenditures you have now on immediate repairs. Is it not true that the landlord says to the tenant, "If you want anything repaired, repair it yourself.” And where they are forced through, such as sanitation, et cetera, and he makes certain expenditures, if he takes it to the rent area director, he can get an increase in rent if he proves that he has legitimate bills for the immediate repairs.
Mr. DuLAURANCE. Yes, then have an increase in rent based on a 20-year amortization.
Mr. BARRETT. Well, that is right.
Mr. DuLAURANCE. 2. It requires records that the little owners, the very people you are trying to help, do not possess. In order to properly prepare these applications records must go back 20 years.
3. It forces the little owner to take a low depreciation figure-less than that permitted by the Collector of Internal Revenue.
4. Interest on mortgage indebtedness is not recognized as a proper charge by the rent director although it is by any accountant or the Collector of Internal Revenue. On the return permitted, interest on a mortgage cannot be serviced.
5. The fair net operating income formula gives a return that is neither fair nor proper. It permits less return than the Government charges for mortgage interest--and puts rental property return in the same category as Government bonds or less.
Let us look at what happens to a piece of property under the fair net operating formula as devised by the ORS We have under consideration the following property purchased at a fair market price in 1942. 2-family house (cost 1942)
$10,000.00 Present monthly rental, $45 (1942 rent, $37.50 each suite)
90.00 Yearly rental, both suites.
No increase allowed. Return on investment, 2.7 percent. The ORS states that 2.7 percent is a fair return—the same as Government bonds.
Mr. Nicholson. Is interest figured in that?
Mr. DuLAURANCE. No, sir, in example 2 we will show you that. Interest is not permitted to be figured under the fair net operating formula.
Now suppose this owner had a mortgage of $5,000 on this property at 5 percent:
EXAMPLE 2 Eormer net...
$273. 20 Interest on mortgage.-
250.00 Present net.
23. 20 No increase allowed. Return on investment, 0.23 percent. Mr. BROWN (presiding). Suppose he had a mortgage of $8,000. Mr. DuLAURANCE. It still would not be permitted. Mr. BROWN (presiding). He would go in the red then, would he not? Mr. DuLAURANCE. Yes, he would.
Mr. BROWN (presiding). But it looks to me as though the expenses might be a little large.
Mr. DuLAURANCE. Well your taxes are $235. Let us assume that, these are based somewhat on Cleveland rates which are not too high nor too low.
Suppose your house is appraised at $6,000 instead of $10,000. Your taxes are $235 per year. Your insurance is $50. Your exterior painting is $116 per year, based on a 4-year period. Your actual cost of painting a house like that, at the minimum, is $460 in Clevelandand I took the lowest figure available.
Your plumbing is $30. Your water is $18. Your heating is $30. Your roof is $20. Your downspouts are $15. Your carpentry work, $30; plastering is $10; sewers, $10; electric wiring, $5; masonry, $5; and miscellaneous, $6.
Now you may not spend for all those items in one particular year. On the other hand, your plumbing bill may be $90 instead of $30, and your total there is $580. All those amounts are reasonable, based on a survey.
Mr. BROWN (presiding). I think it would be a good idea to insert that in the record to show how the $580 is made up. I think that is very important. (The information referred to is as follows:)
Breakdown on operating expense
10 Exterior paint 116 Sewer.
10 Plumbing 30 Electric wiring
5 Water. 18 Masonry
580 Mr. McDonough. You have not accounted for income tax on the net income, have you?
Mr. DuLAURANCE. No, I have not.
: Mr. BROWN (presiding). You may proceed.
Mr. DuLAURANCE. Although accused of this in the Senate Banking and Currency Committee hearing, Mr: Woods made no attempt to justify his exorbitantly low return permitted under his so-called fair net operating formula.
Mr. Woods did not deny that his fair net operating formula was so low that mortgage interest could not be paid for under it and leave any net for the owner. He merely made the adolescent excuse that Congress intended to leave it out-thereby begging the question. Certainly Congress did not intend to force anyone with a mortgaged property to lose it—but did intend that the income would be fairwhich presupposed the ability to pay for normal financing on a piece of property. Two and seven-tenths percent can scarcely be so considered when even the FHA permits a return of 674 percent gross on investment.
In conclusion, this report has stressed the need of corrective action to permit owners of rental properties to obtain a fair return on a fair investment, and to eliminate present inequities in the granting of rent relief. There is also a strong and substantial need for judicial review of rent orders, and rent regulations; for the return of evictions to the jurisdiction of State and local courts; and for a reconstitution of many of the rent advisory boards to make them truly representative so that they can perform their important functions in an independent and unbiased manner.
However, the experience of 10 years of continuous rent controls has proven that rent control does not solve the housing problem-merely perpetuates it. Ten years of rent control have served to weaken the moral fiber of our people and made them feel that they have a vested interest in the property of others. But over and beyond all this, Government statistics produced by Government bureaus, properly interpreted, without political or personal bias, show that in decontrolled cities, in view of increased costs, rent increases have been fair and modest, thus proving conclusively that rent control is no longer necessary.
It is our association's earnest hope that this committee will recommend that all economic controls including Federal rent controls be terminated as speedily and expeditiously as possible. If the defense effort makes it impossible to terminate all economic controls including rent controls now, then the orderly decontrol of rentals can best be effected by decontrolling all areas now under Federal rent controls except for rental accommodations located in critical defense areas properly certified in the manner we have heretofore suggested.
Thank you very much, gentlemen. Mr. BROWN (presiding). Does any Member desire to interrogate the witness?
Mr. Wolcott. Mr. DuLaurance, I would like to go a little further into this question of rent increases compared to increases in all other items.
According to the Bureau of Labor Statistics, in the 1936–39 average, and up to March 15, which are the last official figures available to us, all items have increased from 99.4 to 188, an increase of 88.6.
Food has increased from 95.2 to 227.6.
Apparel has increased from 100.5 to 203.5. That is an increase of 88.6, as I have said, for all items, 132 for food, 103 for apparel.
Rent, according to the Bureau of Labor Statistics, increased from 104.3 to 140.5, or an increase of 36.2.
Fuel, electricity, and refrigeration have increased from 99 to 145.3, an increase of 46.3.
Household furnishings have increased from 101.3 to 207.6, or an increase of 105.3.
Miscellaneous items have increased from 100.7 to 170.7, an increase of 70.
Did you use the figure of 25 percent?
Mr. WOLCOTT. I think that can be adjusted readily to the Bureau of Labor Statistics record of an increase of 36.2, by taking into consideration that in January of 1951, the Office of Rent Control arbitrarily changed the method of computing rents, according to the economic indicators, and the Bureau of Labor Statistics, in January or February of 1950, showed an arbitrary increase of 8 percent.
Now deducting that 8 percent which they increased, arbitrarily, a year ago, from this 36.3, would give approximately the figure which you have used. I assume you are using the base which they formerly used in computing rent increases.
Mr. DuLAURANCE. Yes, Congressman.
Mr. Wolcott. That was very obviously done in an attempt to narrow the differential between increases in rents and increases in these other items which I mentioned, and it did not fool anyone.
Mr. DuLAURANCE. Congressman, they have two sets of figures, one called the new series and one the old series,
I used the old series set, because of the fact that that has to do with old property, with which we are dealing today.
They computed the old series set for quite a while, and did not use any new construction rentals, any new rentals. Then they decided to use the new construction rentals, which of course are much higher, so that actually their old series goes from 104 to 132, which is an increase of about 25 percent, whereas their new series, on my figures, goes to 139.8, but apparently you have more recent ones which go higher. But the new series includes the new rentals, the higher rentals, which of course weights the index.
Mr. Wolcott. It is interesting to note that in the economic indicators of, I think either January or February 1951, the printer apparently was not taken into the confidence of those who were compiling these figures, so he did not go back to this new base, and he adjusted them so the line on the charts shows this precipitous 8percent increase in 1 month, which was impossible.
Mr. DuLAURANCE. Yes, sir.
Mr. Brown (presiding). Does any other member desire to interrogate the witness?
Mr. COLE. Nothing, except that I want to comment on this wage increase of 186 percent, as compared to the rise in the rentals. I think that certainly points up the injustice involved in the situation.
Mr. DuLAURANCE. Yes; the wage increase used here, Congressman Cole, was based on wages for the building industry, which are of course the wages we use.
Mr. COLE. I see.
· Mr. DuLAURANCE. Because all labor that we use is connected with the building industry.
Mr. COLE. That is in connection with your costs, rather than the over-all increase in wages.
Mr. DuLAURANCE. That is right. That is why we also used the figure of 162 percent for building materials, because in effect, in the operation of a building, at some time or other you use practically every item that is in that index, outside of perhaps digging the foundation.
Mr. COLE. They do not give the rental industry a Capehart amendment, or a Herlong amendment, or even an industry earnings standard; do they?
Mr. DULAURANCE. No, sir; they do not.
Mr. NicHOLSON. Do I understand that in computing rent, the interest on your investment is not taken into consideration?
Mr. DuLAURANCE. No, sir; it is not, Congressman Nicholson.
Mr. Nicholson. Have you any idea why they deny anybody the right to take out the interest that has to be paid to the bank?
Mr. DuLAURANCE. The argument used by the Housing Expediter is that it would be unfair to have two pieces of property, one which has a mortgage on it and one which does not have a mortgage on it, to increase the rent on the one that has a mortgage on it.
But it begs the question, because of the fact that when the fair net operating income formula was established, I am sure that Congress intended that the income should be sufficient to be able to carry a fair mortgage.
Mr. COLE. If I may interrupt, Mr. Nicholson, that is again the policy of the Price Control Administrators, not only on rent control but on price control. They look almost primarily at peak prices, and their job as they envision it is to eliminate or curtail the peak, statistically speaking. They are not concerned very much, shall I say—and frankly I doubt if they are concerned at all to speak of-with the fairness or justness or equity concerning the people who produce the commodity—the rental property or the commodity which is to be produced. They are interested in showing us statistically that the chart is kept down.
Mr. DuLAURANCE. That is quite right.
Mr. COLE. That is their approach to it, and not whether the producer receives a fair return, or any return, as far as that is concerned. I am speaking a little bit bluntly on that.
Mr. WIDNALL. Do you have any figures at all as to the actual number of units that went out of the rental market into the sales market as a result of rent control?
Mr. DuLAURANCE. What I can give you is that approxi nately 3 million units went from the rental market into private ownership.
Mr. WIDNALL. Thus creating a much tighter squeeze than existed before? Mr. DuLAURANCE. That is right, Congressman.
Mr. WIDNALL. I think one of the things that you have brought out that is most interesting to us is the fact that in the decontrolled cities they have had a tremendous increase in population, and in the rentcontrolled cities there has been a much smaller increase, and in the