In residential apartment and tenement buildings the shortage of housing - which is not, of course, a permanent condition - enabled many owners of such properties to fill all vacancies and thus increase their gross income. In spite of large accompanying advances in the cost of fuel and labor, by close economy in upkeep and services they have been able to maintain that income with moderate increase in rents. But in other instances less considerate owners advanced the rent to extremely high rates. Upon a new level of value, thus created, speculative purchasers or lessees endeavored still further to add to the rate of return by additional increases in rental. The process became so ill regulated and oppressive that a large number of tenants combined to demand restrictive legislation, which has been enacted in several States, whereby the courts are now empowered to decide upon the rate of rental in residential buildings, and the owner is also made personally responsible to the law for the adequate maintenance of such services as heat and elevator operation, for the proper upkeep of the structure, and can be fined or even imprisoned if in default. The speculative process of successive sales and the substitution of the irresponsible lessee for the owner were thus incontinently checked, and the sale of such properties at enhanced speculative values became restricted. New buildings now coming into existence with unexampled rapidity will eventually meet the demand for housing accommodation, and excessive rates of rental must decline, bringing down with them any unsubstantial assumed values of the properties.

Residential property was and is entitled to substantial increase of income required to cover the advanced prices of fuel, labor, and repairs, and sufficient also to earn a net return upon a properly established invested value at a rate not less than that obtainable in the investment market for securities of equal standing. Such an increase is necessary merely to maintain the investment. But any additional income is dependent upon the permanency of high rentals, and the conservative investor will do well to consider the question whether rent raised to a high level during a period of emergency can be regarded as permanent.

Nor can it be assumed, merely because the cost of new building construction has advanced to high levels, that an existing building has thereby advanced in value to a similar extent. Such comparative worth could only come into practical consideration in case of the destruction of an existing building, and meantime it constitutes only a very good reason for increasing the extent of fire insurance to cover the enhanced cost of reproduction in case of disaster. In point of fact these advanced costs of construction rendered new buildings so unattractive to the builder, operator, mortgagee, and investor that the process of new construction was completely halted, and was only recommenced when a reduction in taxation was brought about roughly commensurate with the added cost of construction.

It has always been the case that the tenement class of residential property is required to produce a high rate of return in order to render it attractive and marketable, while the more elaborate class of apartments in which leases are obtainable, and which have heretofore been managed with little risk and personal liability, find a market at a lower rate of interest on their investment.

This scale of rates of return presents the same complexion under conditions of high rents and higher prices of money. But the one-time, well established return providing 5 to 6 1/2% on investment in residential property has now advanced to rates of 7 to 10%. It is probable that this higher level will be permanently required to attract investors to properties to which legal complexities and personal liabilities are now attached. Thus as an illustration the first of the tenement buildings in the table on page 41 would require, in order to cover enhanced expenses and return 10% upon its established book value, a rental of 86 cents per square foot, or an increase of nearly 60%. If 10% should have been added to book value, either by assumption or by a sale, then to maintain that value the rent would have to be raised to 90 cents, or 68%. A second sale or addition to book value of another 10% would require another increase in rentals to $1.00, or 83% increase.

The proportion of the book value of the property represented by the annual gross rent has changed by the general advances in rents and rates, so that in the cold-water class of tenement, at a return of 10%, the gross rent becomes about 15 4/10% of the book value, and the ratio of the rents to the book value is as 1 to 6 4/10.

Where the operating expense is greater, as in the steam-heated class of apartments, a return of 10% involves rentals aggregating 17 2/10% of book value, or a ratio of rents to value of 1 to 5 8/10.

Rentals have also greatly increased during the housing shortage in the more expensive class of apartment buildings. The occupancy of such apartment buildings has been the subject of much acrimonious discussion and a vast extent of litigation in regard to what constitutes a proper rental. The ascertainment of a fair rental presents much difficulty because it necessarily introduces the question of what is the real value of the property, and also what constitutes a reasonable rate of return upon that value.

The assessed valuation has been suggested as a basis for fixing fair value. The proposal is made that 15% be added thereto, constituting a "minimum" value which, being thus determinable by established official figures, could be utilized by the courts as a general basis, leaving it to the owner to prove any higher value. By this plan the assumed basis of assessment would be 85% of market value. This plan offers a workable basis, and if adopted it would become the means of adjusting assessments to some fairly uniform relation to true values, because it would then be to the interest of all parties to see that the assessment accurately indicated that value.