St. Paul's new rent control law is off to a bumpy start, 6 months before it even adopts effect.
In November, Minnesota's capitol narrowly approved a stride that limits landlords' ability to increase rental payments on its 65,000+ properties, capping increases at 3 percent annually. The measure goes into effect May 1, 2022.
As FEE's Brad Polumbo noted once the law was initially approved, this will make St. Paul's rent control policy \”one of the strictest within the U.S. – if not the world.\” Unlike many rent control laws, the supply wasn't indexed to inflation (which currently is substantially higher than 3 %) and it applies to new developments, not just existing properties.
The latter provision has St. Paul Mayor Melvin Carter already seeking an off-ramp – or at least an incomplete one. Carter, a first-term Democrat, has said he's exploring ways to affect the rent control provision to exempt new developments, noting the policy could discourage new housing construction in the city.
“Turning off our way to obtain new housing would be disastrous for us as a community,” Carter said within an interview with a local TV station.
A Predictable Result
Mayor Carter's warning is no idle threat. Days after voters approved the rent control initiative, the Ryan Cos. development firm informed the city these were putting multiple Highland Bridge development projects on hold after investors balked at continuing to move forward considering the rent control mandate, The St. Paul Pioneer Press reports.
\”We were set for permit review, and that we paused that,\” Maureen Michalski, v . p . of property development with the Minneapolis-based Ryan Cos. told the newspaper on Monday. \”It's in reaction to a particular conversations with capital providers, and conversations with our partners. We have partners that are owners and investors within the buildings. There are more places in the metro that individuals can invest their money.\”
This is precisely what economist Walter Block pointed out would happen in an article for FEE exploring rent control policies within the Twin Cities. (Minneapolis voters also passed a rent control measure, which will be implemented by city council leaders.)
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Block, a professor of economics at Loyola University in New Orleans, explained that by keeping rent prices below market levels, lawmakers invariably produce a housing shortage, since landlords and developers inevitably find more profitable ways to take their property and capital to make use of.
\”Some landlords attempt to convert their properties from rentals to condominiums. Another fact is to knock them down entirely, and make departmental stores, factories, or office towers,\” Block explained. \”They is going to do almost anything to flee the piercing eye of the bureaucrats in charge of administering this law.\”
As for new residential rental units? Fughedaboudit (Be done with it)! Why should they sink their hard-earned funds in to the one sector of the economy subject to these pernicious rules, when other avenues for investment now look relatively more desirable? A 3% limit within an economy with an inflation rate greater than that? All we're able to expect would be landlords leaving the rental market, or trying to, like rats on the sinking ship. Repairs? Upgrades? Don't be silly.
The Basic Economics of Rent Control
The solution to high housing prices is not a mystery: it's more housing. Basic economics teaches us that the solution to popular is more supply, not price controls. An abundance of historical evidence shows rent control achieves the opposite.
Thomas Sowell, in the book Basic Economics, exhaustively documents the consistent failure of rent control throughout the twentieth century.
- In Melbourne, Australia, not a single housing unit was built following World War II for nine years because rent control laws managed to get unprofitable.
- In the 1970s, Washington, D.C., saw its rental housing stock decline from 199,000 to under 176,000 because fewer people were willing to rent their houses due to price controls.
- In Santa Monica, California, in 1979, the number of building permits plummeted by 90 % from just a couple years earlier because – again – rent control laws managed to get unprofitable to construct new housing.
Sadly, the horror stories of rent control are not ancient history. In Sweden, lots of people actually have to hold back a decade (or longer) to obtain a condo, while some have to pay double exactly what the rentals are leased for.
“I truly seem like Sweden actually has failed [on housing],” Oscar Stark told the BBC captured within an article exploring Sweden's housing market.
Sweden's housing market problems, which ultimately got then-Prime Minister Stefan Lofven bounced from office, are no mystery.
“All the country's rental units, whether private or public, are susceptible to rent control [in Sweden],\” The Economist reported in June, \”making everyone's rent a matter of government policy.\”
Learning hard Way
St. Paul appears to be just the latest rent control disaster story. The city is about to learn the painfully costly way that bad economic policies include serious consequences. Unfortunately, it's often the poorest among us who spend the money for price of these mistakes.
Among the 3,800 housing units the city is anticipated to lose in Highland Bridge development are a few 760 units of affordable housing, that are subsidized by market-rate units through on-site property taxes.
\”We think that's pretty compelling for individuals,\” Michalski told The Pioneer Press. \”If you lose the market-rate units, you lose the affordable units. This is the financial mechanism.\”
Jonathan Miltimore is the Managing Editor of FEE.org. His writing/reporting has been the topic of articles over time magazine, The Wall Street Journal, CNN, Forbes, Fox News, and also the Star Tribune.
Originally published at FEE.org. Republished with permission.