Minnesota’s Economic News — W/E 9/22/23
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Rent control is a bad policy; economists agree. In 1992, when economists were polled on whether rent control reduces the supply of housing, 93 percent of them agreed. Similarly, in a 2012 University of Chicago survey, 81 percent of economists disagreed with the statement that rent control measures “have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”
Certainly, there is a difference between the moderate rent control policies being discussed in the Twin Cities today –– also known as Rent Stabilization –– and the more widely known strict first-generation rent control policies that froze rents and allowed for no increase. But evidence indicates that even such moderate policies wreak their own havoc.
As evidence from our new report shows, in places like San Francisco, Cambridge, Ontario, Berlin, and numerous other cities, moderate rent control policies have reduced the supply of rental housing; raised housing costs; reduced property values, and eroded the property tax base; led to housing misallocation; and discouraged housing maintenance.
Additionally, evidence indicates that since rent control is not means-tested, middle and high-income renters also highly from huge rent savings, sometimes almost exclusively. In cities like Cambridge, San Jose, Los Angeles, San Francisco and Oakland, low-income individuals made up a tiny proportion of renters in regulated apartments. The rest were middle- and high-income renters.
Currently, the Minneapolis ballot question has no specific proposal, and voters will only be giving power to the city council to enact rent control measures in the future. St. Paul residents on the other hand will be voting on a proposal that will cap rent hikes at 3 percent over a 12-month period.
The proposal, while it can be considered moderate in the sense that it allows landlords to raise rents, it contains no other provisions that would put it on par with most other current rent control ordinances. In fact, if enacted, it will be one of the strictest rent control ordinances for the following reasons:
To be clear, rent control is on its own a disastrous policy. But there is a good reason that cities include provisions that exempt new construction, allow vacancy decontrol –– whereby landlords can reset rents to market levels once a tenant moves out ––, and index rent hike caps to inflation. All these provisions help weaken the negative impacts of rent control on the housing supply. The St. Paul Proposal has none of these provisions.
According to the Bureau of Labor Statistics, in the year ending September 2021, inflation was up by 5.4 percent. Moreover, there is a high likelihood that high inflation will likely persist for the foreseeable future. A 3 percent cap on rent hikes during times of high inflation, like now, would significantly increase the cost of undertaking investment in housing and reduce landlord profits.
Indeed, there is evidence indicating that vacancy control keeps rents significantly lower, but it also magnifies the negative effects of rent control on housing supply. Take the California cities of Santa Monica, Berkeley, East Palo Alto, and West Hollywood –– all of which had vacancy control. Between 1980 and 1990 these four cities saw their housing stock decline much more significantly compared to their border cities, two of which had rent control with a vacancy decontrol provision.
This was due to a combination of two factors: landlords were converting to owner-occupied units at higher rates, and new units were being created at lower rates compared to other cities that allowed vacancy decontrol. Not to mention that the housing supply grew faster in Berkeley, Oakland, San Francisco, and San Jose after the repeal of vacancy control in 1995.
Notwithstanding, rent control is a proven disastrous policy and no number of modifications would change that. But the current St. Paul proposal would only amplify the negative consequences that other cities with rent control have faced.
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