Is inflation lower in the Twin Cities because fewer people want to live here?
For a few months now, a common theme in the local media is that the inflation rate in the Twin Cities is lower than in comparable metropolitan areas. In October,…
One of the most important things to remember in economics is that prices aren’t problems; they are signals, telling you what is going on with the demand and supply of a particular good, service, or asset. If a particular price troubles you and you want to do something about it, you have to address those underlying factors that drive demand and supply. Trying to solve the issue by fiddling with the price is like trying to put out a fire by taking the batteries out of the fire alarm.
In fact, the results can be even worse than this suggests. By trying to hold down a price that you think is too high by legislative or regulatory action, you restrict the supply of the good, service, or asset in question. This, in turn, works to increase the price, the very thing you were trying to fix in the first place.
Rent controls offer a classic example of this. If they push the price below that which matches supply with demand, you will unmatch supply and demand. Supply will fall and demand will rise. The result will be shortages. If, then, you are enacting rent control measures as a remedy for a shortage of affordable housing, congratulations! You’ve just adopted a solution that makes the problem worse.
In November, St. Paul voted to enact one of the strictest rent control measures in the United States, capping annual rent increases at three percent with no allowance for inflation. Theory and empirical evidence would suggest that this will lead to less supply and more demand. And we are already seeing exactly that.
The Pioneer Press reports:
Days after St. Paul voters approved a new ballot initiative that caps residential rent increases at 3 percent annually, the Ryan Cos. informed the city the development firm would put construction of multiple Highland Bridge buildings on hold.
The four projects are multi-family housing buildings where investors have balked at the prospect of moving forward under a rent control mandate, according to the developer.
“We were in for permit review, and we paused that,” Maureen Michalski, vice president of real estate development with the Minneapolis-based Ryan Cos., said in an interview Monday. “It’s in response to specific conversations with capital providers, and conversations with our partners. We have partners that are owners and investors in the buildings. There are other places in the metro that people can invest their money. Any kind of development, people have options.”
Financing for the Highland Bridge development is structured in such a way that market-rate units subsidize affordable housing on the same streets, using on-site property taxes. Overall, 20 percent of the site’s 3,800 housing units are expected to be affordable.
“We think that’s pretty compelling for people,” she said. “If you lose the market-rate units, you lose the affordable units. That’s the financial mechanism.”
So, in the name of ‘affordable housing,’ there is actually going to be less affordable housing in St. Paul.
Remember, prices are a signal of underlying pressures. In this case, expensive housing in the Twin Cities is a result of restricted supply, restricted by excessive taxes, fees, and regulations imposed by government. The same government that is going to try and fix the problem with rent controls.
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