In November of last year, the city of St. Paul Minnesota passed an ambitious rent control measure that placed limits on rent increases in the city to no more than 3% per year. However, unlike typical rent control measures, this measure has no exemption for new housing construction, a feature many experts argue is needed for protecting investment. Now, several months into the experiment, St. Paul’s new law has produced all too familiar results and reaffirmed why rent control measures are a terrible policy prescription for dealing with high rent.
According to recent data compiled by the U.S. Department of Housing and Urban Development and U.S. Census Bureau, St. Paul building permits are down 80% compared to the same time last year. This is despite an increase in building permits for neighboring Minneapolis and a housing boom that experts predict will result in the largest increase in apartment construction for any time in the past 40 years.
While likely shocking news to St. Paul residents, these finding are in line with the results of previous rent control experiments in other states. This is perhaps one reason why today 25 states preempt rent control for local jurisdictions, with several more preempting mandatory inclusionary zoning laws and rent control.
Economists have known for decades that any attempt to control housing prices adversely affects supply. When a state, city, or local jurisdiction establishes a cap on how much a landlord may charge renters, they deny them the ability to make price adjustments according to market signals and reduce their incentive to provide housing. As a consequence, there is usually a decline in the housing supply, or the rate of new home construction slows. This can quickly lead demand to outstrip supply and create unnecessary scarcity. Similarly, the relaxing of rent control policies can have the opposite effect and increase supply.
For instance, in a 2020 study commissioned by the National Association of Home Builders (NAHB), researchers found that following California’s passage of a rent control easing measure known as the Costa-Hawkins Rental Housing Act of 1995, six California Bay Area jurisdictions with rent control ordinances, saw a statistically significant increase in the total number multifamily permits granted for new construction. The analysis also found similar results for the total number of housing permits granted within these same jurisdictions and concluded that more than 11,400 additional homes were constructed as a result of rent control easing.
Similar cases have been observed in other states. For example, following Massachusetts’ move to end rent control in 1994, new housing and construction increased by 50%. In contrast, San Francisco’s 1994 rent control initiative led to 15% decline in tenants among rent controlled buildings, as property owners with declining profits sought to sell their rental apartments to owner occupants or convert them to condominiums. Overall, San Francisco’s rental housing market shrank by 6%, resulting in a 5.1% increase in rental costs across the city.
Examples such as these show that rent control measures, even well-intentioned measures, can have disastrous consequences. However, there are several steps policymakers can take to help make housing more affordable.
First, policymakers should focus on increasing the supply of housing by removing barriers to construction that discourage investment. For example, states, cities, and localities should repeal antiquated zoning laws that restrict development to single-family homes. Most of these laws were enacted decades ago when land was less scarce, and Americans sought a suburban way of life. While perhaps reasonable at the time, these laws are no longer well suited to address the complex range of problems currently confronting society, such as a high demand for public housing. Oregon’s recent move to end single-family zoning requirements offers a useful model for other places to follow.
Policymakers should also roll back policies and regulations that indirectly stifle supply, such as urban growth boundaries, restrictive building codes with height restrictions, historical designations, and NIMBY opposition to any new type of construction that does not adequately meet the demands of community activists. Demands such as requirements that a new apartment complex reserve a certain number of units for low-income tenants, limit parking, provide space for bike racks, or only have electric appliances.
What makes these types of barriers so problematic is that many of them, at least on the surface, have an important purpose. However, collectively they can be a huge impediment to increasing supply and therefore frequently reduce access to affordable housing for many Americans.
Second, policymakers should repeal any existing rent control ordinances and resist the temptation to implement new ones. While only Oregon currently has a statewide rent control measure, several cities and counties in other states also have rent control measures, and more are currently considering their own. While it’s doubtful any of these measures will be as regressive as St. Paul’s, it should be concerning to everyone that something that was once considered a failed experiment, is back in vogue.
Rather than wasting valuable time resurrecting old top-down solutions to high rent prices, policymakers should instead focus on new market-based solutions.