The Disastrous Impact of St. Paul's Rent Control Policy

It's the same old, same old. Last fall St. Paul was patting itself on the back for a new rent control policy, the most onerous (to landlords) in the U.S. When it went into effect in May, the Law of Unintended Consequences kicked in and already, just months later, the mayor is trying to distance himself from it. 

St. Paul. Photo by Josh Hild on Unsplash

The policy St. Paul set in place was a rule that landlords can't raise rent by more than 3% a year. This is great for tenants, obviously, but what happens when the cost of owning property goes up 10%, 20% or more per year. Currently, we are in the middle of a rather wild inflation bump, fast approaching 10%. 

Here in St. Louis County property taxes seem to be climbing exponentially as property values get re-assessed. In an article titled The Results of St. Paul’s Rent Control Experiment Are In—and They’re Disastrous, John Miltimore points out one of the major flaws in this new legislation. It has no exemption for new construction. Therefore St. Paul's new housing construction is suddenly on hold with new building permits down by 80%. This will not alleviate the housing crisis they are experiencing. 

The mayor is fighting to insert an exemption clause, but housing advocates will have nothing to do with it. Building contractors are now struggling with another aspect of the problem which is financing. Banks want to support projects that will be successful. The new ordinance adds another layer of risk  and as most of us learn (too often the hard way), risk aversion is the name of the game. My personal guideline in these kinds of situations is, "When in doubt, chicken out."

Miltimore writes, "As anyone who has ever taken Economics 101 can you tell you, the solution to the high cost of housing isn’t price controls. The answer is to increase the supply of housing."

A little further on the author cites an anecdote from economist Thomas Sowell's Basic Economics regarding the destructive results of rent control policies around the world by citing a Swedish economist who once quipped that rent control “appears to be the most efficient technique presently known to destroy a city—except for bombing.”

In July the Wall Street Journal carried an opinion piece on St. Paul's housing woes titled St. Paul's Rent Control Backfire. The subhead reads, "Building permits fall, and so will the supply of affordable housing."

Here's what I don't get. Economics is a science, too. There are laws or basic principles that form a foundation for all economic theory. Like the law of gravity, you disregard these rules at your own risk. Unfortunately, K-12 education these days seems incapable of recognizing the importance or value of a good sense of how economics works, why mounting debt is grinding and why failing to think long term about one's life and choices can be devastating.

Here in Duluth, it's been said that "Duluth's housing restrictions are Hermantown's best friend." (Hermantown is the community up over the hill.) This appears to be a similar tale. Bloomington, Minneapolis and other sibling communities will be beneficiaries of St. Paul's mistake. No matter how good your intentions are, reality will bite you if you're not grounded on a foundation that is firm.