Rent control ordinance cut property values, transferred wealth in the ‘opposite’ direction

Rent control ordinance cut property values, transferred wealth in the ‘opposite’ direction

The City of St. Paul, Minnesota “passed a rent control policy in 2021 and it hadn’t even taken effect before it managed to reduce new building permits by 80%,” observes Hannah Cox of the Foundation for Economic Education. The rent control ordinance almost immediately cut property values by $1.6 billion, according to an economic study that was just released. That will reduce city revenue, meaning either cuts in services, or tax increases. The ordinance, which went into effect this year, also resulted transferred wealth from people of modest incomes to higher-income renters.

As the study by Kenneth Ahern and Marco Giacoletti explained,

the passage of rent control in St. Paul in 2021…caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals….the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were most likely to be minorities…to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intentions.

As Cox observes, low-income tenants are likely to be harmed, rather than helped, by the rent-control ordinance:

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landlords tend to respond to rent control by ridding themselves of properties they no longer find valuable enough, or by evading the law (something higher-income earners will have greater ease in doing).

Secondly, the decrease in property values caused by rent control also leads to a decrease in the property taxes the city may collect—and property taxes are what fund schools and most city services (often used at far higher rates by poorer people).

Not only that, but the study also found that rent control’s benefits tend to help higher-income renters far more than lower-income renters and that rent control imposes a larger burden on lower-income renters…..

When rents are capped at a certain percentage, landlords will likely be incentivized to focus on properties with a higher value and lower risk….In contrast, lower-income renters will be left with scraps in the market and, additionally, find their landlords unwilling to help with repairs or upkeep because they lack any incentive to do so.

When there are lots of lower-income renters chasing a small number of properties, and when the landlord has no ability to recoup additional investments into a property, they have virtually no reason to provide good customer service.

What can be done to make housing affordable? Eliminate complicated building regulations and restrictive zoning rules that make it more expensive and difficult to build housing:

housing prices—and therefore rent prices—are increasing drastically for one reason and one reason alone: bad government policies.

Things like zoning, historical overlays, strenuous building regulations, unions (backed by the government) lobbying for artificially high labor prices, environmental policies, and yes, things like rent control.. have all led to a massive housing shortage….they make it very expensive and less profitable to build housing.

In fact, we’re about 5 million properties shy of where we needed to be as a country to keep up with replacement and population growth rates. And when people do build, they increasingly focus on higher-income homes where they can at least make a decent profit in exchange for all the hoops they have to jump through to build. This means the poor and lower middle class are the most burdened by this shortage.

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.” Census Bureau figures showed 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 Senator Bernie Sanders. Sanders said that America needs “national rent control.”

LU Staff

LU Staff

Promoting and defending liberty, as defined by the nation’s founders, requires both facts and philosophical thought, transcending all elements of our culture, from partisan politics to social issues, the workings of government, and entertainment and off-duty interests. Liberty Unyielding is committed to bringing together voices that will fuel the flame of liberty, with a dialogue that is lively and informative.

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