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Does rent control make sense for Minneapolis? What theory and evidence tell us

apartments
MinnPost photo by Peter Callaghan
Minneapolis, like many American cities, is facing a housing affordability crisis. Rents are going up rapidly, placing middle-class and low-income households into units beyond what they can afford, if in fact they can even find a suitable unit at all. Among solutions being considered in Minneapolis and elsewhere is rent control or stabilization. Is that a viable solution?

The case for rent control is simple: Freeze rents or limit increases to reasonable costs plus indexed inflation. The hope is that this will squeeze unfair profiteering out of the housing market and eventually make units more affordable. Evidence does suggest that rent control helps existing tenants, including encouraging them to remain in their current units for years. This may stabilize neighborhoods in healthy ways, perhaps increasing a sense of community and the building of social capital. Rent control, done right, will possibly stem the migration of middle class residents out of a city, also an important goal.

Textbook economist’s answer: no

But the textbook economist’s answer to whether rent control works is no. For an economist, housing is like any other commodity that responds to market forces of supply and demand. The only way to decrease the cost of housing is to increase the supply. However, this solution does not always work. Developers, left to their own devices and market incentives, will build units that yield the highest profit margin, and that is not necessarily middle-class or low-income housing. Housing markets are segregated by income or class, and simply building more units will not translate into serving the overall housing market or populations. The best way to provide affordable middle-class or low-income units is to build them to serve that market.

photo of article author
David Schultz
Economists will argue that rent control does not work because of the market externalities it produces. One, place caps on the rent that landlords can charge, and they will delay maintenance. Two, rent control creates disincentives to build new units, since the profits will not be there. Three, owners will convert existing rental units to condos or coops in avoid rent control, thereby exacerbating the rental shortage. Four, developers will move housing construction outside of the rent-control jurisdiction, again aggravating shortages. Five, rent control may encourage tenants to stay in units for too long or in units that no longer serve their needs, creating a mismatch between apartments and occupants. Empirical studies of what happened in San Francisco, California, and Cambridge, Massachusetts, lend evidence to these claims.

Overall, economists and critics assert that while rent control might benefit current tenants or occupants, longer term its impact is more destructive. A parallel to this is what happened in 1978 with California’s Proposition 13 that froze property taxes on existing housing. Its impact was to shift property taxes to new construction, driving up its cost and leading to some of the rental shortage and cost problems one sees lingering to this day.

Can’t be seen in isolation

Moreover, in the case of Minneapolis, rent control cannot be examined in isolation, but in conjunction with other policies, such as the 2040 Comprehensive Plan. It calls for significantly new construction through the elimination of single-family zoning. The hope is that increased densification of housing will, among other things, reduce or stabilize rents. Simply rezoning will not necessarily produce the type of housing units that help middle-class or low-income households or ensure that historically segregated neighborhoods will equitably integrate. Here, rent control may counteract benefits that come from Minneapolis 2040 by again decreasing incentives to build more units of any kind. It may push development into higher-end condos or shift development outside the city.

Finally, rent control may work well when there is a surplus of units to prevent speculation. But as in the case of Minneapolis, where there is already a shortage of units, squeezing rents will not solve a pre-existing problem, only make it worse.

Other potential solutions

How can one address the lack of affordable housing? Specifically building those types of units combined with rent stabilization policies is one way to do it. Rental subsidies are another solution. Three, Minneapolis is part of a larger metrowide housing market and it needs to operate in concert with other jurisdictions or the Met Council to fix the problem. Four, consider alternative housing strategies, such as encouraging the construction of micro-housing. Five, more creative development solutions, such as waivers on height or unit numbers in return for dedicated construction of middle-class or low-income units, should be considered. Six, allow for pre-fab units, which are cheaper to build, to be sited in Minneapolis.

Rent control alone is a crude solution to a serious problem. The real problem is that housing is a basic human need commodified, meaning its delivery is mostly subject to the laws of marketplace. Rent control is a band-aid on a larger problem and if implemented wrongly it produces secondary effects that distort housing markets for decades. Used more carefully and in conjunction with other strategies, it may serve as a partial tool to addressing the problem that a free-market delivery of housing produces.

David Schultz is a Hamline University professor of political science. His latest book is “Presidential Swing States: Why Only Ten Matter.” 

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Comments (14)

  1. Submitted by Pat Terry on 10/24/2019 - 10:33 am.

    Schultz gets rent control right for the most part, but misses on some other points. He is wrong in claiming that simply building more units – even non-“affordable” units – won’t help the problem. It has and it will. Housing costs are determined by supply and demand. Prices are high because demand has grown and the supply has been artificially constrained.

    • Submitted by John Evans on 10/24/2019 - 02:29 pm.

      And single family zoning is one of those artificial constraints. There are others, like minimum parking space requirements.

    • Submitted by lisa miller on 10/24/2019 - 03:23 pm.

      Please site research supporting this–I heard on NPR one expert stating, that in order to reduce rents/housing costs, it would take many years of building high density for any lowering of housing costs and even then it’s not a sure thing.

    • Submitted by Howard Miller on 10/24/2019 - 06:07 pm.

      This seems to be a widely held belief, though I’ve never seen any evidence from a reliable source, that it is actually true. It strikes me as being more an example of face validity – if you build more of anything, its value should ultimately decline – than a truth. If we don’t have any evidence that it is the case, in fact, should we be building endless developments of what will ultimately be, condos in seven years, without a noticeable decline in rent? Pat, can you identify a city, a subdivision, a census tract where there is evidence that developments of apartments ultimately lowered rents? I can show you any number of places where it has, indeed, led to a frightening increase in hard core homelessness.

  2. Submitted by Gordon Howard on 10/24/2019 - 03:20 pm.

    Another factor: rent control’s negative impact on housing supply and quality might be worth it if the countervailing social benefits were high or strong enough. But rent control benefits all renters, rich and poor, whether they need assistance or not. So much of the consequence of rent control is the transfer of wealth from landlords, both wealthy and not, to wealthy tenants.

    Additionally, if rent control results in a shortage of rental housing, and new vacancies invite multiple applications, which application will the landlord accept? Most likely the one exhibiting the highest income, best credit scores, etc. This would end up further reducing housing opportunities for lower income tenants.

  3. Submitted by Jack Cann on 10/24/2019 - 03:57 pm.

    As to Schultz’s position that the 2040 Minneapolis Comprehensive Plan is any kind of answer to the affordable housing problem, see this quote from earlier in the article: “Housing markets are segregated by income or class, and simply building more units will not translate into serving the overall housing market or populations. The best way to provide affordable middle-class or low-income units is to build them to serve that market.” The Comp Plan focuses exclusively on simply building more housing; state law to the contrary, it says absolutely nothing about actual steps to produce low income units.

  4. Submitted by RB Holbrook on 10/24/2019 - 04:20 pm.

    It’s interesting that President Trump had some praise for rent control back in the day. In The Art of the Deal, he (or his ghostwriter) said that he liked the idea of rent control, but felt that it was being used to benefit people who really didn’t need it. He advocated making it a means-tested program.

  5. Submitted by Julie Stroeve on 10/25/2019 - 10:24 am.

    In different economic times, I would agree that supply and demand dictates real estate prices, even rental prices. But today, there’s so much income inequality that r/e prices are affordable only to high income buyers and renters. Low-income people need more options, not fewer. And housing should be a human right, not a commodity that goes to the highest bidder.

    • Submitted by Pat Terry on 10/25/2019 - 12:18 pm.

      Supply and demand works in all economic times. If there there is available housing and people who can’t afford it, the prices will drop. The problem is that there isn’t available housing. The supply has been artificially constrained, and the result hurts the poorest among us.

  6. Submitted by Karen Sandness on 11/01/2019 - 11:15 am.

    Supply and demand is sort of working, in that the owners of over-priced buildings are offering deals such as one to three months of free rent, free garage space, Visa gift cards, or HD TVs in return for a 12-month lease.

    But lower the rent? No, they keep it high in the hope that the young, affluent crowd they advertise to (just look at their advertising) will be large enough to pay for studios that start at $1200 and one-bedrooms that start at $1600. There are plenty of perfectly respectable people of all ages who have less than the $3600 per month it would take to rent one of those studios. I know a couple of seniors who are rent-stressed and desperately trying to get onto the waiting lists for the few subsidized apartments available.

    The problem with the deals is that the people who really need them live month-to-month. Even those three months of free rent might bring unexpected expenses (a broken-down car, a health crisis, the funeral of a close family member out of town, a layoff) that make it impossible to save enough for that fourth month. And what about months five through twelve?

    Just lower the rent already!

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