[image_credit]MinnPost photo by Corey Anderson[/image_credit][image_caption]This November, for the first time, both Minneapolis and St. Paul have rent stabilization measures on the ballot.[/image_caption]
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.
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.
[image_credit]Source: CURA Minneapolis Rent Stabilization Report [/image_credit][image_caption]The line in the chart shows the average increase in rent for Minneapolis apartments. The shaded area is the range of changes in rents.[/image_caption]
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).
“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.”
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%.
Wow. Rent Control is a terrible idea in general but this would be disastrous.
What a fantastic piece!
Putting aside the problems with rent control generally, the St. Paul ordinance is an absolute disaster. I have heard advocates claim that the differences in the St. Paul ordinance were to fix flaws in other rent control schemes. The reality is that they have made the flaws much worse.
The good news is that if this ordinance passes, it will almost certainly be struck down by the courts. The biggest problem is the vacancy decontrol. Its one thing to limit rent increases to a current tenant, which the courts have allowed. The government can regulate a standing landlord/tenant relationship. Its another matter entirely to tell a landlord what they can charge for a vacant apartment – its blatantly unconstitutional.
And even if the whole ordinance isn’t tossed, the absence of inflation-based exceptions, and big property tax bumps and other assessments, etc. are going to cause a flood of litigation over the 3 percent limit.
This is very similar to the tenant protection ordinance that was ridiculously broad and was struck down by the court. The people behind these measures don’t seem to understand (or don’t care about) the law, and they certainly don’t understand how housing affordability works.
Bill thank you for this overview. I would say though that there is more risk to Minneapolis matching this extreme proposal than you suggest depending on who wins in November.
Shelia Nazad has already signed on to this type of policy – from her website:
“Support the Rent Control charter amendment so we can create a strong Rent Stabilization policy that keeps rent increases at 3%, and ties rent stabilization to the unit, not the tenant”
Kate Knuth has also signed on for Rent Control as part of her platform without quite so many specifics
However the activist community driving this agenda in Minneapolis (and historically as we see with Yes4Minneapolis on public safety there is a large progressive constituency in Mpls governance who defer to the activist community on policy) https://mpls4rentcontrol.org/ have a 6 point platform that looks as extreme as what St. Paul proposes. So I would expect if the ballot proposal to allow rent control were to pass, there would be serious lobbying and movement towards a policy as extreme – if not more – than what St. Paul is teeing up, unencumbered by any of the experience and data showing the dangers and problems with rent control in general let alone such radical assaults on the housing market.
Good info. I have not been following the mayoral candidate positions.
Extremely well written story. My only comment would be that from the CURA study, the average rent increase over the studied period from 2001-2018 was 1.8%, not 2.5% as referenced on page 56. The longer the period you look at, the more you capture the ups and downs.
Ah. Well it’s a very complex report. Thanks for the correction,.
I agree and it was an extremely well done study that should cause people to know, a form of rent stabilization that prevents rent gouging should be put in place, just not like this.
Thanks for overview Mr. Lindeke, this is much more useful than a simple condemnation based on supply side ideology. I appreciate the recognition that all rent control regimes are not alike, and I hope that readers will recognize the fact that RC is in practice successfully in some countries. This is the first article I’ve seen in a very long time that doesn’t simply claim that all rent control always fails no matter what; anywhere it’s implemented.
New construction is problematic within a rent control regime, but it’s also a primary driver of housing inflation. This is why we may need to work even further upstream to create alternative building and construction models based on non-profit models of some kind. RC in-and-of itself may not a magic bullet.
Decontrol upon vacancy has been a major blow to affordable housing in many cities where it’s allowed. The re-set to market rates has essentially nullified rent-control for anyone other than those who stay in their apartments more or less indefinitely. It can create a scenario where different renters in the same building are paying way way different rents, and landlords will jack up the rents as much as possible for new renters in order to make up for those who are still paying old controlled rents. It’s important to note however that this isn’t a scenario wherein landlords are losing money with RC, they just aren’t making as much money as they possibly could without RC. This comes back to the basic conflict in capitalist economies between recognizing a difference between providing basic needs and pursuing profit. Basic morality compels us to provide essential needs regardless of profit, but profit is the essential feature of capitalism. Morality tells us that safe and secure housing is an essential human need, and a feature of successful human societies, but capitalism pursues profit regardless of that morality. In the end we have to work that out, history has shown us that it doesn’t work itself out.
The corruption that RC can invite is also an interesting consideration, but housing discrimination has never been completely eradicated. Let’s not pretend there is currently no discrimination based on any of the bias you mention. It’s not clear that discrimination becomes more prolific or more difficult to attack within an rent controlled milieu, rather it may just remain a ubiquitous feature of housing that requires some other kind of regulation or solution.
I would also remind everyone that statistically relying on “averages” for analysis can be extremely problematic in some scenarios. You can see in the chart here that this average here levels huge fluctuations in rent increases to such an extent that virtually no renters have actually seen the “average” rent increase. Averages tend to push curves down, and can underestimate trends. This is why we have other measurements such as modes (most frequently occurring number) and medians (points as which 50% are above and below). If rents were only increasing by 1.8% we probably wouldn’t be talking about an decades long affordable housing crises in the first place.
Comparisons to the official inflation rate are likewise dodgy because that rate is indexed to specific consumer purchases that may not reflect actual buying power or wealth inequity. You have to look at wages and salary increases over the years. So for instance even a 1.8% can be a crushing increase if it’s an annual increase at a time when over-all wages have only increased at total of 2% over the course of 3 or 4 decades.
We’ll have to see what actually happens in St. Paul if this proposal survives. And remember, one advantage of representational democracy is that ordinances like this can be changed and modified. Repeal isn’t the only option available if something doesn’t work as intended.
You’ve got it completely backwards. Adding housing is the antidote to inflation.
Dude, no one said subtracting housing is any kind of antidote. The question is how to add necessary housing that is affordable; and or make existing housing affordable. You can sing the song of supply and demand all you want, but it’s obviously a failed mechanism. And no, S&D is NOT the basis of economies, commerce is the basis of all economies and in a Capitalist economy profit is object of commerce. Making supply and demand the basis of the economy is like pretending turn signals are function of automobiles.
Supply and demand is again literally the fundamental concept of supply and demand. Commerce only exists because of supply and demand. Its the engine, if not the entire car.
And of course adding supply makes prices drop. Minneapolis and cities all over have adjusted their housing policies to increase supply because it does work.
I do agree, of course, that subtracting housing is not an antidote. And that’s the problem with rent control. It subtracts housing. Specifically, it subtracts affordable housing. If you are in a rent-controlled unit you will benefit, but the net result will be less available affordable housing for those not already housed.
“Supply and demand is again literally the fundamental concept of supply and demand. Commerce only exists because of supply and demand. Its the engine, if not the entire car.”
Wrong, exactly backwards. Supply and Demand is one mechanism that can effect prices in a monetarily based economy, but it’s not the only mechanism that can influence or determine prices. Commerce can exist without S&D but S&D cannot exist without commerce. And profit motive tends to have a much stronger influence on prices than S&D.
You’re analysis of rent control is out dated. We’re discussing contemporary rent control regimes.
Supply and demand doesn’t work well as mechanism to affect prices of essential necessities. For it to apply to affordable housing, not being housed would need to be an equal or more attractive option than whatever price a landlord is asking for rent. As it isn’t, there is never an incentive for a landlord to provide affordable housing, no matter the supply, because they aren’t truly in competition with other housing, but rather with homelessness. There will always be someone willing to pay whatever they’re asking, within reason, to stave off that scenario, making it a competition they will always win. It’s of a similar vein to health insurance, where the competion isn’t between the varying companies offering similarly lackluster options, but with not having health care at all.
I agree that it doesn’t work well with healthcare. Healthcare in this country is about the furthest thing from a free market, but the varying needs of healthcare for different people make it a poor fit. You can incentivize healthy behavior (gym memberships, non smoking discounts) but so much depends on genetics and things outside of anyone’s control.
I disagree completely about housing. Because the price of housing is determined by supply and demand. You can have identical apartment buildings in Minneapolis and a small town in Minnesota, and the Minneapolis apartment will cost 2-3 times as much. Housing scarcity drives up prices. The costs have soared because the housing supply has not kept up with growing population.
In a market where there is a housing shortage, you are correct that landlords do not have an incentive to provide affordable housing. Because the choice is homelessness, people will pay whatever they can.
But in a market with more housing than people, the incentive is to get their units rented. Because if they charge too much, tenants can look elsewhere. Landlords are competing against each other.
Minneapolis adopted the 2040 plan (and many cities have done the same kind of thing) because they have realized that increasing supply is the only way to bring housing prices under control. Its basic economics, but it took a true housing crisis for cities to realize what needs to be done.
Yeah yeah yeah… you’ve been claiming this for how many decades now while the problem just gets worse? No matter how much we build you only want to double down on the magic and build build build more. And you can never tell us despite all your pretentions of economic expertise exactly or even approximately how may units we need to build, and how much that new building will reduce prices.
The problem with neoliberal supply side economics like this is that it’s own logic denies the crises. The only “problem” markets are required to “solve” or even recognize is the generation of profit, so as long as someone is making money, the marking is “working”. The belief that all else works itself out as long as someone is making money is the magical fantasy part. We never really have to solve the problem of affordable housing because we actually can’t recognize it as a problem. At the risk of being dramatic we can easily note that while a teenager dies of an asthma attack in a tent next to Hiawatha Ave., the only problem worth considering for neoliberals is the amount of profit developers are making. We stand back admire the crushing impact of unaffordable housing for decades, but there’s no reason panic right?
The myopic inability to see this reality in housing the way some see it in health care is usually a product of personal investment. What we see here is the ability to recognize the limits of S&D in one scenario (health care for instance) while refusing to recognize those same limits in the housing sector. It’s probably not a coincidence that the those who cling to their faith in this market are those who are invested (or represent those who are invested) in that market. When the kid having the asthma attack in the tent comes up against those who earn their living building housing for someone else to live in, you can see how things shake out in the self regulating market. Some of us see life and death as legitimate economic issues, others see it as mere market “corrections”.
Paul,
Rent control unintentionally redlines the whole city. Hard working families that purchased starter homes in Saint Paul have had their generational wealth ripped from them because property values are now stagnant, and the data supports this. Good work on once again only thinking in terms of one layer socio- economics. Many home owners and investors don’t use banks for improvements, they use cash. And there is no reason to put money into a house that will not appreciate. Welcome to Camden, NJ, or Newark or Detroit. All of which are great examples of generational loss of investment.
If both Bill Lindeke and will be voting against this, it probably won’t pass. I hope.
Certainly many of the commenters above have more experience/insight regarding housing affordability than me. But as a basic layperson’s question, I wonder about this: If we regard affordable housing as a basic right, and as a signifier of a moral society, why do we believe that non-profits or for-profit developers should solve the problem either as they see fit or as we oblige them to do? Why isn’t this regarded as another of those functions of government, in which everyone puts their money where their mouths seem to be, and pays via taxes for an adequate supply of decent, affordable public housing? Why expect somebody else to pay to provide humane housing solutions and, not so incidentally, to make the rest of us feel like we’ve solved the problem without it costing us much of anything?
I would love if the Federal government tackled the housing crisis, but I see little sign of that happening. They haven’t even ended the Mortgage Interest Tax Deduction, which is a huge giveaway to wealthy single-family homeowners that dwarfs our investments in public housing and other Federal affordable programs.
Bill Lindeke has written an excellent opening article on this very complex subject. Like most articles on the subject it is focused on the renter and implies an evil rental property owner. Based on my perspective of knowing some people involved in rental property, I would ask Bill to consider a follow-up article on the rental property owner and the cost drivers on rental property since the CPI has no meaning in rental property. Cost drivers that are increasing far greater than the CPI include: purchase prices, property taxes, energy costs, maintenance costs, etc. are rising 2-3X faster than CPI for rental property. Additionally, rental property mortgages must be refinanced every 10 years for anything larger than a 4-plex. We all know that interest rates will be rising over the next 10+ years adding a further burden on rental property owners if one sided rent control is passed. The net result may be more condo conversions and less rental units in St. Paul & Minneapolis…
Great points. That’s a bit too in-the-weeds even for me. I just have to assume that folks who maintain buildings have this information, and I don’t know where else to find it. For example, I have heard that insurance costs are increasing rapidly over the last few years…
Anyway, the CPI becomes the most useful proxy for all of these costs. But it’s probably not ideal, which is why some cities turn to boards that, I can only assume, use the kinds of detailed costs you mention as a guide.