New development collapses due to rent control law in St. Paul

New development collapses due to rent control law in St. Paul
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“A collapse in new development activity followed St. Paul voters’ approval of a strict, vaguely written rent control ordinance,” reports Reason Magazine. “As a controversial new rent control law in St. Paul, Minnesota, nears its implementation date, politicians are scrambling to define the terms of the vague new policy, mitigate its worst effects, or even overturn it entirely.”

On March 23, the city council there will discuss how to implement Question 1, a short, voter-passed ordinance that caps annual rent increases at 3 percent and contains none of the customary exemptions or allowances in rent control laws for new construction, vacant units, or inflation.

The policy doesn’t take effect for over a month. “Nevertheless, its strictness has seen developers flee the city almost immediately after its passage in November 2021. Thousands of planned new housing units have been put on hold or canceled, and the number of new multifamily building permits issued by the city has plunged,” reports Reason.

In theory, St. Paul’s ordinance lets landlords ask for exemptions to that 3 percent cap if they can show it’s needed for “a reasonable return on investment.” But as Reason notes, “what counts as a reasonable return on investment and how they’d go about requesting that exemption go undefined in the text of the initiative. Even some basic terms, like what counts as “rent” subject to that 3 percent cap, aren’t spelled out…. Some state legislators have pointed to the vagueness of the law as a reason for repealing it entirely.”

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“They don’t even have their terms defined. They don’t even have what rent is defined yet,” noted state Sen. Rich Draheim (R–Madison Lake). “Does it include utilities? Does it include parking? Does it include internet? Lot of questions.” At a legislative hearing last week, Draheim and other opponents of rent control cited the harm it was already doing to new development in the city.

Draheim cited Census Bureau figures showing that new multifamily building permits had declined 80% in the months after St. Paul passed rent control. By contrast, in neighboring Minneapolis, multifamily building permits went up by 60%, and apartment construction rose in most of the country. Cecil Smith of the Minnesota Multi Housing Association testified that developers canceled or suspended plans to build 3,100 units in St. Paul after the ordinance passed.

These negative consequences were predictable. In a 1992 poll, 93 percent of economists said rent control reduces the quantity and quality of housing available. Even left-leaning economists usually think rent control is stupid — as Swedish economics professor Assar Lindbeck, a man of the left, illustrated. He said, “rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

In 1989, Vietnam’s socialist leaders reluctantly admitted that their policy of rent control had destroyed the housing stock of Vietnam’s capital city, which had been sturdy enough to survive years of American bombing in the Vietnam War. Vietnam’s foreign minister said, “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.”

But rent control’s past failures haven’t dimmed enthusiasm for it among some left-wing politicians, such as Senators Bernie Sanders and Elizabeth Warren. Sanders said that America needs “national rent control.”

Senator Elizabeth Warren has also endorsed rent control. She has “included incentives for localities to pass rent control in her new housing bill.” She has also called for banning states from repealing rent-control ordinances.

Why they support rent control is a mystery, because even liberal newspapers can usually see that it harms cities and the housing market. As the liberal Washington Post explained, “Rent-control laws can be good for some privileged beneficiaries, who are often not the people who really need help. But they are bad for many others.” For example, after San Francisco imposed rent control, “landlords responded by converting their buildings into condos they could sell or business properties they could lease without rent-control restrictions — or by demolishing their old buildings and replacing them with new ones” not subject to rent control.

Moreover, “landlords have less incentive to maintain their properties in a rent-controlled environment,” reducing housing quality. “And since rent-stabilization policies often tend to discourage people from moving, they harm worker mobility and the economic dynamism associated with it.”

Hans Bader

Hans Bader

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department. Hans writes for CNSNews.com and has appeared on C-SPAN’s “Washington Journal.” Contact him at [email protected]

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