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If approved by voters, St. Paul’s rent control ordinance would be among the strictest in the world

The proposed ordinance lacks many of the exemptions that are common in other places that have rent stabilization, and that may have bad effects on St. Paul’s future housing supply.

apartments
MinnPost photo by Corey Anderson
This November, for the first time, both Minneapolis and St. Paul have rent stabilization measures on the ballot.
It’s possible the above headline might be exaggerated, because I’m not masochistic enough to have researched every rental regulation on the planet. But I’m pretty certain that the specifics in the proposed rent stabilization ordinance appearing on November’s ballot in St. Paul would place unprecedented restrictions on the construction of new housing. Because of the policy details around new construction, inflation and vacant apartments, there’s nothing like it in the U.S., Canada, Japan or probably Europe. It’s an open question what it would do to the city’s housing market.

Allow me to explain. This November, for the first time, both Minneapolis and St. Paul have rent stabilization measures on the ballot. The ballot measures are necessary because of a 1984 state law requiring city-wide rent control policies to be passed through referenda.

The Minneapolis proposal doesn’t take long to summarize, because there aren’t any details. The ballot measure is simply a legal “permission slip” allowing the City Council to implement rent stabilization in the future, the details of which are to be determined. (A more specific ballot measure was vetoed by Mayor Jacob Frey.)

St. Paul, on the other hand, has the opposite situation. Thanks to the city’s ballot initiative rules, a proposal has already been written by a coalition of advocacy groups called Housing Equity Now Saint Paul (HENS). With almost all the details laid out in writing, if it passes, the only thing left to city leaders would be the implementation of things like enforcement and variance regulation.

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The short version of St. Paul’s proposed ordinance: The law would cap rent increases for all of the city’s 65,000 rented homes at 3% per year, but includes a complicated list of factors that allow landlords to apply for a variances — things like property taxes, maintenance issues, capital improvements (only if needed to bring a building to code), and a few others. The process for applying for the variances is yet to be determined. The ordinance exempts only subsidized housing from the caps.

Supply, stability and subsidy

To understand the likely effects of the St. Paul ordinance, I reached out to Shane Phillips, who wrote “The Affordable City”, the best book on U.S. housing I’ve ever encountered. Phillips boils U.S. housing policy down to what he calls the “three S’s”: supply, stability and subsidy. If a city covers all of those bases, he argues it’s possible to keep housing affordable for just about everyone, even in a country like ours, with high inequality. (At least, that’s the theory; so far, no U.S. city has been able to put Phillips’ ideas fully into practice.)

Within the wide world of housing, rent control is one of Phillips’ “stability” policies, aiming to help keep renters in their homes. (The distinction between “rent control” and “rent stabilization” is more of a matter of degree than kind; rent control tends to be stricter and less flexible, which is why I use this term to describe the HENS proposal.)

“For rent stabilization, the obvious benefit is that once you move in somewhere, your rent is not going to go up too quickly,” Phillips said.  “The overlooked benefit is the stability and certainty. Homeowners don’t really appreciate… how precarious it can be to be a renter. Even if you’re doing perfectly well, you don’t know what the future holds.”

According to the recent 114-page study of rent stabilization in Minneapolis by the University of Minnesota’s Center for Urban and Regional Affairs (CURA), rents there have been going up at around 1.8% per year, with the largest hikes in 2015-2018. Within that number lies a lot of variability, across the city and across the income spectrum.

chart showing historical rent growth rates in minneapolis
The line in the chart shows the average increase in rent for Minneapolis apartments. The shaded area is the range of changes in rents.
Though there isn’t a specific analysis of St. Paul, it’s part of the same housing market, with rents that typically lag its western neighbor. Thus, a theoretical rent control ordinance would have alleviated some of the largest increases in rent over the last few years, particularly for the segments of the housing market that saw the steepest rises.

That’s the good news. But the catch for Phillips, and most housing scholars, is figuring out rent control’s effects on the larger housing market. While rent control certainly stops steep jumps, there’s a lot of messy debate about how it shapes the availability and affordability of housing in general. Because, historically, rent control policies have sometimes made housing crises worse by reducing the size and quality of the housing supply, Phillips explains that almost all modern rent control programs are what he calls “rent control 2.0,” explicitly designed to ensure that the housing supply keeps growing.

No exemption for new housing construction

The bad news is that, thanks to three specific details, the HENS proposal diverges from those practices in ways that seem likely to worsen the city’s housing crisis.

A major issue with the policy is that, unlike nearly everywhere else, the proposed ordinance does not exempt newly built housing. This is quite a change, as almost no rent control programs apply to new buildings. In the U.S., for example, all cities and states apply rent control only after a period of time: 15 years in Oregon, 30 years in New Jersey, or only for buildings built before an arbitrary year (1995 in California; 1974 in New York City).

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“It’s important to clarify that when I say [rent control] shouldn’t apply to new housing, that doesn’t mean that a home built in 2021 will never be rent stabilized,” Phillips explained to me. “It just means not having rent stabilization for 15-20 years, to make sure the developer has opportunity to earn a profit, so that people building now, and even more importantly people who might consider building in the future, will continue to build housing.”

Phillips’ argues that, without an exemption, the proposed St. Paul ordinance would significantly reduce new housing in the city. And because it is such an exception to existing practices, it makes comparisons with other rent stabilization programs nearly impossible.

As Phillips writes in his chapter on rent stabilization: “Developers will understandably avoid cities where [rent limits] are a possibility; this is why rent stabilization doesn’t apply to new housing virtually anywhere in the world.”

No accounting for inflation

Another unusual detail of the proposed HENS ordinance is that it does not account for inflation. After many hours of searching, I was unable to find another rent control policy that failed to consider inflation. Almost every other program is pegged somehow to the consumer price index (CPI) or enlists a committee that sets annual rates based on local conditions. Instead, the HENS proposal limits rent increases to 3%, no matter the economic circumstances. Right now, the annual inflation rate in the U.S. is 5.4%, though that includes data from the pandemic that may distort the figure.

On the one hand, the 3% number seems reasonable given we’ve experienced over a decade of low inflation. On average, growth in rent has stayed below that number. But in the big picture, inflation spikes for all kinds of reasons, not to mention sudden hikes in insurance costs or property taxes.

These details might seem pedantic to your average renter, but housing lenders think closely about inflation and interest rates when financing new homes. If there’s even a small chance that inflation could rise and bankrupt a project, the added risk usually makes building new housing into a non-starter.

As Phillips explained to me, “rent control is definitely a spectrum where if you have [strict] price controls, then you probably kill off development entirely.”

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No vacancy … decontrol

The final divergence of the HENS proposal from nearly every other U.S. program is “vacancy decontrol.” For most cities and states, rents are controlled for individual tenants so that, when someone moves out, rents are re-set to market rates. The HENS proposal, by contrast, controls rents even when a home is vacant.

“I don’t come out firmly 100% against vacancy control, but I think it’s quite the leap to go from zero rent stabilization to hard vacancy control,” Phillips said. “There is a reason a lot of places that used to have [vacancy control] have gotten rid of it.”

As I understand it, the basic problem revolves around the unintended consequences of leasing vacant units. If rents are set below market rates, without government-regulated waiting lists (as in Sweden), the situation is rife for potential corruption.

In his book, Phillips explains this in a specific chapter on the subject:

“If landlords could no longer select tenants on the basis of their willingness to pay, they’d find other ways to pick their renters. In some cases, that would entail outright racial or ethnic bias, explicit or otherwise. More often, it might take the form of higher credit score or income requirements, preferred household composition (e.g childless versus families), or a whole range of subjective assessments…. Laws prohibiting [discrimination] are extraordinarily difficult to enforce. How can you prove that the reason a landlord selected a single man or a childless couple was that he doesn’t want children in his units?”

St. Paul stands alone

There are other sticking points in the fine print of the HENS policy. The whole issue of “cost pass-throughs” for landlords deserves its own column, and implementing the program will also prove tricky. Because it’s so strict, the proposal will generate lots of variance requests for the more than 65,000 homes it would cover. For comparison, according to the CURA report, Oakland’s rent stabilization program, which only covers buildings built before 1995, has 26 full-time staff working on hearings, outreach and enforcement. However St. Paul leaders choose to implement the program, it would mean significant changes to staffing and the city budget.

The last open question revolves around scale. Because housing markets are inherently regional, the most effective rent control policies operate at the state level (or, in Canada, by province). It’s theoretically possible that, if Minneapolis passes a rent stabilization ballot measure, it could match St. Paul’s. But I would bet a large sum that, once a policy is shaped by city staff and passed through the City Council, it would be significantly more flexible than the St. Paul ordinance.

The most likely outcome: if the HENS proposal passes, it would put St. Paul on its own, with stricter limits on new housing than anywhere else in the country and beyond. While the policy would probably put an end to high spikes in rent, because of the details around exceptions, inflation, and vacancy, it will almost certainly cause other problems that would make the housing crisis even worse.

Correction: This piece has been corrected to accurately state the average rent increase in Minneapolis cited in the CURA study. It was 1.8%.