St. Paul landlords are only responding to incentives
This just in: tenants in St. Paul are complaining that landlords are trying to get around St. Paul’s rent control ordinance by raising prices for utilities. What a shocker! Except it isn’t.
Landlords are business people, and business people are incentivized by profits. Rent control runs counter to the objectives of the landlords; it puts a ceiling on how much landlords can charge for rent, thereby reducing profits.
There are a couple of ways through which landlords can remain profitable under rent control. Landlords could minimize costs by cutting back spending on maintenance and other things. Landlords can also pass costs on to renters in other ways.
The latter is exactly what is going on in St. Paul if this interview between Cathy Wurzer of MPR and Max Nesterak — editor at the Minnesota Reformer — is an indication of what’s happening on the ground.
CATHY WURZER: I know you talked with some renters in St. Paul. What are they saying is going on?
MAX NESTERAK: So the renters I spoke to were surprised to learn that their rent was going up 3% and on top of that, they were going to start being charged for water, trash, and shared heat, charges that used to be included in the rent. The two renters I spoke to both said that means double-digit rent increases over from the year before.
CATHY WURZER: So the landlords appear to be pulling out the charges for utilities and charging them separately, right? Are they allowed to do that under this new rent control ordinance?
MAX NESTERAK: So the city says, no, you can’t do that. And the Housing Justice Center president Margaret Kaplan– who’s a lawyer, who represents tenants, and helped craft the ordinance– also says, no, you can’t do that. Landlords say, yes, we can.
Utilities aren’t mentioned in the actual ordinance that was drafted and approved by voters. So it’ll come down to a court fight likely. And it’s going to be really a first test of the city’s interpretation of an ordinance that its city leaders didn’t help write. And a test of the city’s ability to enforce that interpretation.
Whether what landlords are doing is legal or not is a question entirely separate from economics. But what economics tells us is that tenants should have seen this coming.
Landlords do not suffer from excessive greed. But much like every business person, they provide housing in order to earn a profit. And in the process of providing housing, they also incur costs. They have to make money to pay for those costs and also make enough profit to stay in the business. With little to no profit, there is no point in staying in business.
This is why in so many places where control has been enacted, landlords have ended up converting apartments to condos, selling rental units, scaling back on maintenance, and converting old units into new units — in cases where new construction is exempt. They were merely responding to an environment that made it harder for them to earn profits and stay in business.
St. Paul is no different.