Achieving housing stability starts with improving the housing supply
Few things in life are as important as shelter. So, it is understandable that a lot of effort has been dedicated to ensuring access to affordable housing. But there seems…
Generally, economic theory and evidence have no support for any kind of price control that seeks to limit individuals from engaging in mutually beneficial transactions. But going beyond the basics, there is a lot of complexity regarding the level of damage price controls can wreak and who pays for that damage. One factor that influences the effects of price control is how the market is set up.
Price controls are generally any policy that seeks to keep prices below or above a certain threshold. Controls that keep prices above a certain minimum are called price floors, and controls that wedge a maximum price are called price ceilings.
Rent control is a form of the latter, it pushes down rents by imposing maximum rents that landlords can charge. For a price ceiling to be effective, one thing has to be true: the price ceiling has to be below the market price. If a price ceiling is above market price, it does not impose any effect on buyers’ and sellers’ decisions in the market. In that case, it is said to be non-binding.
Consider the following rental market with a price ceiling.
In the above figure, the market-clearing rental price is $600. At $600, the number of units available to be rented outmatches the number of people looking to rent. The market clears and everyone is satisfied.
If the government sought to keep the rents down by putting a price ceiling of $400, this would reduce the profits that landlords stand to make. Therefore, landlords will react by taking some of their units off the rental market –– in this case, 100 units.
Renters, on the other hand, will react by increasing their demand for housing due to the cheaper price –– in this case also by 100. At a price of $400, there are only 200 apartments available to rent while 400 renters are looking for units –– a shortage of 200 units.
A non-binding price floor in this example would be any price that is above $600. Take, for example, a $1200 price ceiling on rent. Because landlords are willing to rent at $600, a $1200 ceiling has no bearing on their decision. Similarly, because consumers would be unwilling to rent an apartment at above $600, a $1200 ceiling has no effect on their decisions in the market. Therefore a $1200 price ceiling in this market is unnecessary and ineffective.
According to a study by the Center Urban and Regional Affairs (CURA), rents, on average in the Minneapolis –– and St. Paul by extension –– have grown at mild rates. CURA estimates that between 2000 and 2018, rents have grown, on average, 1.8 percent annually.
These averages, however, hide some discrepancies. In Minneapolis, older and lower-rated apartments –– which mostly serve low-income renters –– have faced higher rent increases compared to people in newer, higher-end units, especially in the period after the 2008/9 crash.
This means that a cap on rent hikes will potentially be non-binding for high-end units since rents in that market only rise mildly. However, the cap will be effective and thereby binding for the units that serve low-income renters since the average annual rise in rents will likely exceed the cap.
What does this mean?
If current trends persist, rent control will therefore make it likely that landlords leave the low-income rental market –– where rents will be severely impacted by rent control –– and cater to the high-end of the rental market –– where rent control will have little to no impact on rent increases.
End result? Affordable housing will be even scarcer for low-income renters in the long run.
Certainly, this is not to say that market-rate and high-end units won’t be affected by rent control. Because while rent raises have been lower in those markets, in some years annual increases have surpassed the 3 percent cap currently being considered.
The setup of the Twin Cities rental market just makes it likely the passage of rent control will disproportionately harm low-income renters as they will face a more acute shortage of affordable housing when landlords switch to other more profitable investments like new and luxury units.