According to new research, the strictest national rent control law still hasn’t been in force. Yet, it is already causing property values to tank and allowing tenants who are already financially secure to reap its benefits.
An ordinance was passed by the St. Paul voters in November 2021 that caps annual rent increases to 3%. It also excludes any allowances or exclusions for inflation, vacant land, new construction, etc.
Although the law does not take effect until May 1, rent control was passed unexpectedly in the city. This saw permit applications being pulled, investors walk away, and officials rush to change the law. The law has been repealed in part by the state legislatures.
The ordinance was written by activists and campaigned to pass it. They argue that weakening this policy would cause renters in St. Paul to lose stability and affordability.
A new paper, however, was published in March SSRNProfessors Marco Giacoletti and Kenneth Ahern, both of the University of Southern California Marshall School of Business, claim that only the most vulnerable tenants will be able to reap the benefits of the law. They argue instead that St. Paul’s falling property values after passage of rent control will show that those who have the most money renters the best.
These authors compare home sales between St. Paul (and the five nearby counties) in January 2018, and those of January 2022. Their findings show that St. Paul’s introduction of rent control led to a decrease in property value by 6-7%, with a possible decline of 13 percent for rentals. This is in comparison to other jurisdictions.
Ahern & Giacoletti also compare the property value changes in St. Paul to comparable areas in St. Louis, Kansas City and Denver. They find that St. Paul still has a 6-8 percent rent-control-related drop in property values.
Some rent control advocates might be tempted to look at these results and claim that it is evidence of the effectiveness of their policy. It is meant to protect affordable housing. Rent control would not cause property values to drop if it wasn’t also restricting future rent rises.
Anti-rent control advocates argue that lower property values discourage developers from creating new housing, and landlords encourage them to dispose of existing units to owners-occupiers. Tenants who have been there for a while are entitled to lower rents. However, it is more difficult for newcomers to find housing. These lower rents can come at the price of poorly maintained units.
These issues of quality and housing supply are not something Ahern or Giacoletti spend much time discussing. The paper shows a statistically significant drop in housing permit approvals after St. Paul’s rent control.
Instead they concentrate on tenants that are most likely to reap the maximum benefits of constrained rent rises. This is done by segregating census blocks of St. Paul in four groups based upon whether renters or owners had a median income that was higher than the city’s.
The largest drops in rent-control-induced home value declines were seen in census blocks with lower incomes for homeowners than those of the median homeowner. Renters, on the other hand, had greater incomes that the median renter. On average, these blocks had a decline of 8.5% in home value.
Next, the steepest drops were in census blocks where renter- and homeowner-incomes were both higher than those of median renter/ homeowner. The home value declined by 4.3 per cent.
However, property values fell by less that 1% in those areas with more wealth and lower renters.
Giacoletti, Ahern, and Giacoletti claim this shows that rents can be restricted in high-income neighborhoods or areas where renters have more income than owners.
This means that rent control has a limited impact, they say. “The greatest transfer of wealth occurs between relatively low-income renters and relatively high-income homeowners.”
The paper is an early analysis of a policy, and the details are still being worked out. However, the results are consistent with other national rent control policies.
An exhaustive 2019 review of New York City’s rent stabilization. The Wall Street JournalIt was also found that tenants who were well off received the largest rent discounts. The New York legislature also amended the rent stabilization law to make landlords less likely to increase rents. Just like St. Paul, the result was a sharp fall in rent-regulated property values.
The National Multifamily Housing Coalition also found in a February survey that investors are less inclined to invest in rent-controlled markets.
One reason the rent control policy is so poorly targeted is because of its poor reputation. More policy wonks will advocate cash assistance or rent vouchers for the poor than for rent control.
Many libertarians may not be in favor of this type tax-and-spend redistribution. This redistribution, unlike rent control or other forms of rent control, is likely to be greater in the wealth vs. poverty.