Rent Control's Effects on Housing Supply: Saint Paul

St. Paul's rent control at least verified theories about rent controlling new housing construction on day one but the overall the proposal was good.

First, let’s define three categories of rent control based on the rent ceiling. This will be important for the subsequent articles this week:

• Weak: Anti-rent gouging. Sets allowances for rental increases well above inflation. (Examples: California’s AB 1482 prohibits rents higher than Consumer Price Index + 5%).

• Moderate: Rental increases cannot or barely exceed inflation. (Examples: Mountain View, Calif. and Richmond, Calif.)

• Strict: Rental increases are far below inflation. (Examples: San Francisco, Calif., Oakland, Calif. more recently).

Additionally, auxiliary policies dictate the implementation of rent control programs: 

• Vacancy Control: Landlords cannot reset rents from one tenant to another. “Vacancy Decontrol” allows landlords to reset rents to market rates once a tenant leaves but prohibits rental increases when a new tenant arrives. Vacancy Control is banned in California and the state’s rent-controlled cities are all de-facto Decontrolled.

• Phase-In Dates: Whether and when rent controls apply to new rental construction. Vast majorities of cities simply exempt rental housing built after a certain year. For example, Germany prohibits rent control on new homes built after 2014. A small number of places have rolling dates after a constant number of years. Virtually none, except St. Paul, enforce rent controls on housing the day its finished construction.

• Registration: This requires landlords to register their units and report information into a database. The economic impact is nonexistent but generates feuds with landlords’ sense of privacy and can result in landlords protesting by leaving the rental market.

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Part 1: Saint Paul’s Rent Control

St. Paul’s is undergoing rent hikes from the region’s high population growth and inflation, resulting in rent burdens affecting nearly half the Twin Cities metro area’s renters. Voters and tenant activists answered by passing rent control to prevent displacement. St. Paul’s rent control was remarkable because it was abnormally strict. In addition to vacancy controls and below inflation rent caps, proponents imposed rent control to new housing the day it was built. This is largely unheard of in most of the rent-controlled world. Cities avoid immediately rent controlling new housing construction as investors are less likely to fund developers if they lack rent-setting flexibility after a building’s been built. But St. Paul advocates insisted on it because they opposed new development being too expensive.

After St. Paul’s ordinance passed, housing construction in the city shrunk dramatically with new permits declining by 30% while the rest of the metro area saw permits increase by 30%, confirming economists’ claims that rent control can impose housing shortages. Preliminary data indicates that in the last two months St. Paul permitted zero multifamily rentals while Minneapolis permitted 322 in the same time span. Data like this provided ammunition to the city council to gut St. Paul’s rent control law by removing vacancy control, allowing landlords to set rents above inflation in certain circumstances and installing a rolling date of 20 years after homes have finished construction.

I waited a while after St. Paul passed rent control to give my take to see the effects while others chose to endlessly dog the proposal after it had been voted on. However the results are clear on the new supply-aspect: below-inflation rent control should not have been imposed on new housing without a rolling date between 10–20 years. Proponents were motivated by their belief that landlords raise rents on old housing thanks to new market-rate developments, and discussed how developers switching to condos instead would help with homeowner opportunities anyway. So investors ultimately did what proponents wanted them to do which is to stop building market-rate rentals. However proponents charge these were scare tactics, or a “capital strike” to force the council to change the policy.

If they wanted new rental construction then rent control should have been phased into new housing after 15 years, plus or minus, on a rolling date. An interview of developers on rent regulations by Urban Displacement Project found that investors only considered their financial forecasts up until 15 years, with the expectation a developer has sold their properties by then. Even progressive enclaves like Berkeley, California when voters anticipated the repeal of the statewide ban on strict rent control, would have phased in new buildings after 20 years of age. Additionally, Urban Displacement Project’s research found that at or above inflation rent control did not interfere significantly with market forecasts. Thus weak or moderate rent control could have been written for day 1 of new rentals to protect market-rate tenants from rent gouging, and that would be more progressive than most rent control the world over.

Tenant advocates online pushed back against criticism and said new market-rate tenants deserve protection too. Okay, but what is the realized benefit of a day 1 implementation of below-inflation controls on high-end units? The number of tenants in new rental complexes protected by strict rent control is the exact same with day 1 controls or without: zero. If there’s no below-inflation cap on market-rate units, new tenants don’t have strict rent control. If there is a below inflation cap and developers quit then those new tenants don’t exist in those buildings. So the result is the same. And brand new market-rate tenants are relatively wealthier, so anti-rent gouging levels would suffice.

Moreover there’s valid concern from tenant activists about developers demolishing rental housing for market-rate replacements once the rolling date is up — hence why anti-rent control demolition ordinances should be passed. And I’ve seen rent control detractors complain of the evictions that occured in the interim period between the law’s passage and implementation. This is a predictable criticism and a poor one. I don’t blame activists for not being able to do everything all in one initiative. But anti-demolition ordinances eventually need to happen for any rent control initiative because landlords will quickly convert rentals to condos or demolish rentals once their units get regulated. This is demonstrated everywhere strict rent control has been passed. If you want to blame someone, blame St. Paul’s city council’s for not passing a protection law rather than unnecessarily gutting large provisions of the rent control ordinance.

The gutting of St. Paul’s rent control ordinance beyond the phase-in date by the city council was inevitable and always happens when leftists pass initatives for liberal legislatures to oversee. It is silly for rent control detractors on social media to act like a city council willing to kill vacancy control and the strict rent cap would be more amenable had it not been for the day-one phase in on new construction. The council ultimately decided to deconstruct the rent control law much further than what the mayor’s commission on rent control had recommended at the behest of real estate groups.

I’m glad St. Paul did a strict rent control law because the city makes a good example of the impacts of strict rent control beyond just the academic theories and very old WWII-era policies. I also don’t think it lasted quite long enough. Real estate groups and the city council quickly tried to gut the rent control law from the start. They were helped by national and local media coverage highlighting the severe decline in new construction and Mom n’ Pop landlords selling their properties to corporate landlords. Media insufficiently spoke about the impacts on renters. Many tenants were saved from displacement thanks to the rent caps and if a landlord isn’t making substantial improvements to property, it’s completely warranted to defacto cap the rents they’re able to charge, with exceptions granted, rather than capture lots of sudden, unearned value. More on this moral question for Friday’s substack, though.

We need strong rent control like St. Paul’s to protect tenants at a time of a national housing shortage and declining funding in subsidies for rental housing. But St. Paul has clearly demonstrated that strict rent control implementation should not be the day a new rental is constructed.

Part 2 on how economists and researchers get rent control wrong coming up. . .