A lesson from Minneapolis: Building more houses keeps rental prices down

After the Bureau of Labor Statistics (BLS) published its latest inflation numbers, one thing was noticeably picked up by both local and national media. This is the fact that BLS reported that the Twin Cities Metro had the country’s lowest inflation. YIMBYS (short for “Yes in My Back Yard”, which is a pro-housing movement) had an especially important talking point, that the increased production in housing was to account for this trend.

Housing certainly has a high weight in the basket of goods that the BLS uses to account for price changes. But inflation also includes other goods and services, so it’s likely that housing was not 100 percent responsible for the Twin Cities’ favorable inflation numbers.

Still, the YIMBYS are right, the increased production of housing does indeed keep housing prices down. For the Twin Cities Metro, this phenomenon is especially evident when we specifically look at the city of Minneapolis separately from the entire region.

According to data from Apartment List, for example, median rental prices in Minneapolis are down 1 percent from what they were a year ago. On the other hand, median rental prices in the state are up 0.6 percent from a year ago. And in St. Paul — the state’s second-largest city — they are up 1.5 percent from a year ago.

Nationally, median rental prices are down 0.7 percent from what they were a year ago. While Apartment List has no data for Minnesota’s third-biggest city — Duluth —, the median rent prices in Bloomington — the state’s fourth-biggest city are up 3.9 percent since last year. And in the Brooklyn part, rents are up 1.7 percent. In fact, among the state’s 5 biggest cities, Minneapolis is the only one whose median rental prices are down, and have gone down higher than the national average.

So, what does Minneapolis have to thank for this favorable trend? Good old demand and supply. Turns out, Minneapolis has been building a lot of homes, which in turn has kept prices down.

Housing data

According to data from the Metropolitan Council, in 2022, Minneapolis gave a little over 4,000 residential construction permits, of which 95 percent were for multi-family units. This was the second-highest number since at least 2000 when the city gave permits for 1,700 units. The number of permits for Minneapolis Minneapolis peaked in 2019 at nearly 5,000, making 2022 the second biggest year for the city in the last two decades.

Figure 1: Residential permits for Minneapolis, 2004-2022

Source: Metropolitan Council

Certainly, not every housing permit translates to an actual housing unit. But permitting activity is still a pretty good proxy for housing construction. As far as permitting activity goes, Minneapolis was not only historically high, but it beat the Twin Cities region.

Data from the Metropolitan Council shows that in 2022, the seven-county region of the Twin Cities gave out 21,850 residential housing permits. Minneapolis made up 18 percent of those permits, higher than its share of the region’s population. In 2022, Minneapolis had a little over 9 housing unit permits per 1,000 of its residents, the Twin Cities Metro rate was a little under 6.

Compared to the state’s second-biggest city, and its neighbor — St. Paul — Minneapolis comes out even further ahead. In 2022, St. Paul only handed out 1,112 residential permits, over three times lower than Minneapolis’s figure, despite its population being only 40 percent lower than that of Minneapolis. St. Paul had 3.5 housing unit permits per 1,000 of its residents in 2022.

Figure 2: Residental permits for Minneapolis and St. Pau, 2022

Source: Metropolitan Council

Data from other sources, also show the same thing. Data from the United States Department of Housing and Urban Development (HUD), for example, show that the total residential permits in the Twin Cities MSA were 99,300 in 2022. Minneapolis’ share of those permits was 15 percent — which is higher than its share of the region’s population of about 12 percent. St. Paul’s share of permits, on the other hand, was only 5 percent — lower than its share of the region’s population.

Demand and supply work, even for housing

To put it simply, increasing the supply of housing puts downward pressure on prices, as American Experiment research has shown numerous times. Using data from the Metropolitan Council, for example, we illustrated in our 2021 report how movements in rental vacancy rates cause movements in rental prices (in the opposite direction). This phenomenon was clearly illustrated during the pandemic when Median rental prices in Minneapolis went down by as much as 10 percent in 2020.

It’s not a surprise therefore that increased building in Minneapolis has acted the same way, holding prices down. This should be a lesson, to not only other regions in Minnesota but even Minneapolis itself, that increasing housing supply exerts downward pressure on housing prices.

This has been a trend for Minnesotapolis since at least 2017. According to The Pew Charitable Trusts, while median rents have grown by 31 percent in the United States overall between 2017 and 2023, in Minneapolis, they have only grown by 1 percent. And that is due to Minneapolis’ increased housing construction.

Turns out, even in the housing market, the law of demand and supply still rules.