Policymakers and advocates are watching St. Paul most closely, because it’s ballot initiative actually instituted a strict rent control law that goes into effect May 1. Minnesota’s capital city is set to become a proving ground for this controversial housing policy as it gains popularity again in the midst of a national housing shortage.
“We had an affordability problem before COVID, now it’s 20 percent worse,” says Stijn Van Nieuwerburgh, professor of real estate at Columbia University’s business school. “In big markets, but also secondary markets, the solution has to be building more. But that’s an intractable problem in many locations. That’s why people have resorted to rent control.”
For the last 70 years rent stabilization regulations have been largely confined to a handful of hot markets, largely in the Northeast and the West Coast. But the 2021 ballot measures in the Twin Cities are part of a larger reconsideration of these policies as a diverse array of cities face affordability challenges and long-term residents are threatened with displacement.
In Minneapolis, the ballot measure simply required the City Council to consider legislation, a process that is expected to soon unfold. But the St. Paul measure sets a hard cap of 3 percent on allowable annual rent increases. There is no “de-control period” during vacancies either, meaning rents cannot be more sharply increased between tenants. The St. Paul law also covers new construction, which is unusual.
The measure faces intense backlash from rental property owners and real-estate developers, interest groups that are not always aligned. But because rent stabilization covers new construction too, home builders have paused construction on thousands of housing units.
Although the ordinance takes effect next week, it can be altered starting one year after its passage, and policymakers are very clear that changes are coming. To that end, Mayor Melvin Carter organized a rent stabilization working group, with experts, advocates and industry representatives to hash out reforms that will incentivize continued construction.
Rent control’s foes have long said that the concept is inherently contradictory and worsens affordability challenges by restraining new construction and pushing rental units into the condo market. Can policymakers in St. Paul, and elsewhere, square the circle between ensuring these regulations don’t add to the housing shortage while still protecting tenants from displacement?
“A lot of times, there’s this false dichotomy between tenant stability protections and supply,” says Paul Williams, researcher with the Jain Family Institute. “Both moderate policymakers and progressive groups need to both do a better job of advocating for an all-of-the-above approach.”
Should Rent Control Apply to New Construction?
Rent control has long been the bête noire of economists, with overwhelming majorities of the profession agreeing that it’s a counterproductive idea. Developers won’t build if they aren’t able to charge higher rents to pay for new construction, the argument goes. Existing landlords will neglect their property, or put it up for homeownership, if they cannot make a living.
But the extremely strict policies taught in Economics 101 courses have long been in decline. Until the St. Paul ballot initiative, traditional rent control measures have been shrinking, and exist in vanishingly few places. In New York City, one of the last bastions of the original early 20th century policies, only 22,000 truly rent-controlled apartments remain.
By contrast, roughly half the city’s rental units are “stabilized,” meaning that their owners can only increase rents by a percentage set by the city’s Rent Guidelines Board. Rent hikes are allowed if a tenant moves out, although extreme cost spikes were limited in 2019. New construction isn’t covered, because it’s usually occupied by those with higher incomes unless it’s specifically built with lower income tenants in mind.
Outside St. Paul, most jurisdictions considering rent regulations are looking at similarly flexible policies. But how to get the balance right between stabilizing conditions for renters without strangling the rental housing market?
Some cities exempt small landlords, like those who own under four units. Single-family rentals or owner occupants who rent out a basement apartment are exempted in other areas. One of the most common exemptions is on new construction.
That’s why even many advocates of rent regulation fear the current St. Paul law goes too far. If investors think rent growth will be too restricted to provide returns from new buildings, they will pull out. Mayor Carter says that thousands of units are “paused” right now in St. Paul for this reason.
“If you have a housing market where we’re restricting growth on initial rents it’s going to have a serious negative impact on housing supply,” says Williams, who is a proponent of rent stabilization.
Many older rent regulations in cities from San Francisco to Washington, D.C., solve this problem by only setting rent regulations on housing built before a certain date. In New York, all units built after 1974 are exempt from rent stabilization or control. In some jurisdictions, like Jersey City, N.J., new construction is only exempted in certain districts within the municipality.
A different approach is setting a rolling window where buildings enter the stabilization program after they’ve been around for a set number of years.
“A rolling window is probably your best option,” says Williams. “That gets you new supply, it lets projects pencil, and then after the initial investors and the developer have exited the deal you can fold that property into your policy.”
That’s exactly what Mayor Carter and much of the St. Paul City Council have already embraced. City leaders have told the rent stabilization stakeholder group that some kind of new housing exemption is a must, although some advocates are fighting against any reform. Carter says he’s open to a rolling window starting anywhere from 10 to 30 years.
“The question is how, not if,” says Mayor Carter. “We’re all in agreement. Every city in America that we can find that has rent stabilization has a new housing construction exemption. St. Paul ought to as well.”
Can Landlords Increase Rents Between Leases?
Another major sticking point for housing industry groups is the lack of “vacancy decontrol,” which allows rents to be raised more dramatically when a tenant moves out. Landlord groups say that this practice is meant to help pay for repairs between tenants, and to allow for the possibility of catching up to inflation before a cap is imposed again with the next renter.
Advocates are leery of the idea, in part because in the absence of just cause laws — where landlords need a reason beyond profit to kick someone out — this incentivizes eviction. Vacancy decontrol is the principal way that rent stabilization laws have been eroded from New York to California. In New York, landlords could keep raising the rent until the unit no longer qualified for protection. Before left-wing Democrats took control of the state Legislature in 2019, thousands of stabilized apartments were being lost in New York City every year as a result of the practice.
Some experts say that a balance is needed between a strict ceiling and the incentive for rent spikes that New York used to provide.
“Allow landlords to increase rents to compensate for repair, maintenance, appliances and a little more than that, but not much,” says Van Nieuwerburgh. “Otherwise, landlords just jack up the rent every time the apartment turns over and it doesn’t stay affordable.”
Some city councilmembers in St. Paul have expressed interest in amendments to allow for some form of vacancy decontrol, but it’s not clear what it would look like. The St. Paul Pioneer Press reported that the mayor was “looking into” the idea.
St. Paul’s 3 percent annual increase limit is a throwback to an earlier era, where hard ceilings were set on rent increases during another national housing shortage. In New York, the rent control board determines allowable price increases which have lately been consistently lower than 3 percent. But it has the flexibility to grant higher allowable rents in the face of, say, a spike in inflation. That’s the weakness of St. Paul’s hard 3 percent cap: if inflation remains elevated it could incentivize divestment.
Similarly, in Berkeley and Santa Monica landlords are allowed to increase their rent in line with the Consumer Price Index (CPI), plus a couple percentage points. At the state level, California and Oregon have recently enacted laws that allow for 7 percent increases plus CPI, which only prevents really dramatic rent gouging.
“If you’re starting from scratch, a better way is to take something like the anti-gouging approach that California and Oregon have,” says Sophie House, Law and Policy director at New York University’s Furman Center. “Then pair that with subsidies that are actually targeted to lower income tenants. It’s much easier to target housing assistance, whether vouchers or cash payments, than to design rent regulation systems.”
There is no indication that Carter or St. Paul’s other politicians are considering any reforms that deviate that far from what voters approved in 2021. Many cities, like Philadelphia, offered innovative pandemic-era rental assistance programs during the pandemic, but municipal budgets simply don’t have that kind of budget capacity in the absence of federal assistance. As no rental aid looks likely from Congress, rent regulations are a path cities can pursue without swamping budgets.
The trick is to protect existing residents while building for new ones. The original rent regulations of the early 20th century were necessary because of a housing shortage, and in many localities they were dismantled, in part, because the country built its way to affordability, at least for medium income Americans. (Rent stabilization probably survived in New York because it’s one of the few localities where middle class voters were still invested in the practice.) As the affordability crisis of today spreads beyond the red-hot markets on the coasts, construction needs to catch up again. But today’s renters can’t wait for that. Building takes time, especially in the midst of a supply chain crunch, while rents are spiking now.
That’s why Mayor Carter is not abandoning rent stabilization despite the backlash from the housing industry. But he also speaks very clearly of his desire to make building easier by liberalizing the city’s zoning code, making inspections easier to access, and by exempting new construction from the rental regulations. For those who worry that rent protections could strangle supply, there are other culprits — like exclusionary zoning — that are arguably a bigger challenge to builders.
“We don’t have to choose between abundant housing and tenant protections,” says Williams. “There are countries all over the world where both exist. We can have both too.”
Related Articles
