Another housing development in St. Paul, Minnesota, is on hold after losing its financing partner this week.
On Monday, the St. Paul Pioneer Press reported that developer Alatus had a previously-committed equity partner renege on its commitment to invest $23 million in a proposed 304-unit project in the city's Frogtown neighborhood. Two other investors who had proposed preliminary financing terms for the project—in which half the units would be rented out at below-market rates—have also walked away.
The reason? St. Paul's newly-passed rent control ordinance, which Alatus' principals say is making their once-eager investors skittish about doing business in the city.
Rent control, which typically caps how high landlords are allowed to raise rents in a given year, is making something of a comeback in the United States.
Once imposed only as a wartime measure, the policy has developed a rock bottom reputation among economists over the past few decades.
They almost uniformly argued that capping rents deterred developers from building new homes, and discouraged landlords from taking care of the ones that already exist. The inevitable result is less, and less well-maintained, housing.
"Rent ceilings do nothing to alleviate this [housing] shortage," wrote economists Milton Friedman and George Stigler in a now-famous pamphlet for the Foundation for Economic Education in 1946 in response to San Francisco politicians considering extending wartime rent caps. "Indeed, they are more likely to perpetuate it: the implications of rent ceilings for new construction are ominous."
Friedman and Stigler's warning is coming true in St. Paul, where the Alatus project is only the latest development put on ice since city voters approved a rent control ordinance capping rent increases at 3 percent a year with almost no exceptions.
St. Paul is hardly the only jurisdiction to embrace rent control in recent years.
Faced with ever-rising rents, and all the attendant problems of unaffordability and displacement that come with them, more and jurisdictions are returning to the idea that they can outlaw, or at least reform, the law of supply and demand.
In 2019, Oregon passed the nation's first-ever statewide rent control law, limiting annual rent increases to 7 percent per year plus inflation. California followed suit a few months later with a 5-percent-plus-inflation rent control cap.
It was also that year that New York state legislators expanded the scope of existing rent control policies covering the New York City area, and allowed other cities in the state to adopt their own rent control laws for the first time.
What explains this rising tide of rent control?
It's a near-universal consensus—held in common by progressive policy wonks, radical free marketeers, and the three most recent presidential administrations—that America's highest-cost cities are so unaffordable because government zoning regulations prevent enough new housing from being built.
So why are a growing number of politicians, wonks, and pundits suddenly embracing a policy that's been long maligned for further reducing the supply of housing?
The argument from rent control proponents boils down to the need to create short-term stability for renters. That will then, hopefully, give cities some breathing room to get to work on fixing their pressing supply issues.
Vox policy reporter Jerusalem Demsas made a thorough, representative argument along these lines in an article published last week.
Demsas is quick to identify high housing costs as a product of cities' and states' "bevy of rules and regulations regarding what kind and size of new homes can be built that overwhelmingly make it illegal or unprofitable to build small single-family homes, multi-family homes, and dense neighborhoods."
Rent control won't fix that supply crunch or the high rents and home prices it causes, she concedes. But that's because it's not supposed to.
Rather, "rent control should be understood as a remedy for displacement," Demsas writes. "It's best as a measure that can help keep current tenants from being displaced from their neighborhoods, and as part of the long-term project of solving America's housing shortage."
In particular, she argues that rent control is necessary to protect low-income renters of color who are a rent increase or two away from being forced to move to another neighborhood, another city, or in the most drastic cases, the streets.
Limiting the amount that rent can go up in a single year shields people from sudden, unaffordable increases in the cost of living, thus preventing them from being displaced.
As evidence of rent control's power to stop displacement, Demsas cites a landmark 2019 study by Stanford economists Rebecca Diamond, Tim McQuade, and Franklin Qian.
That study looked at a 1994 San Francisco ballot initiative that expanded preexisting rent controls to cover four-unit apartment buildings constructed prior to 1980, but which exempts four-unit apartments built after 1980.
That created something of a natural experiment on the effects of rent control.
The Stanford study concluded that tenants living in the older, rent-controlled buildings were 10–20 percent more likely to stay at their same address than people living in newer, unregulated buildings. The study also concluded that the expansion of rent control caused a 15 percent decline in the availability of rental housing among affected units.
In short, there's a clear tradeoff in rent control policies between creating stability for existing tenants and preserving and expanding rental housing supply for new tenants. The goal of politicians, according to some, should be to strike the right balance between the two.
"The question becomes the policy design," writes Demsas. "There, the devil is in the details."
In particular, she advocates for rent control that exempts new construction, allows "modest" increases tied to inflation, and allows landlords to charge higher rents on vacant units (a policy called vacancy decontrol).
We actually have a good, real example of what this balance striking in the real world looks like: San Francisco.
The rent stabilization ordinance that's been in place in San Francisco since 1979, and which the Stanford study examined, has all the features Demsas would want in a well-designed rent control policy: post-1979 construction is exempt from price controls, landlords can raise rents by the lesser of 60 percent of yearly inflation or 7 percent, and there's vacancy decontrol.
Some 40 percent of San Francisco's housing stock is covered by these rules. Another 9 percent is deed-restricted affordable housing, meaning that rents can't generally consume more than 30 percent of tenants' pretax earnings.
That leaves only 16 percent of housing stock in the city where rents follow the ebb and flow of market forces. (That was at least the case prior to January 2020, when California's statewide rent control law went into effect.)
The result is, again, San Francisco; a synonym for housing dysfunction and unaffordability. That obviously makes it a place that's antagonistically expensive to newcomers. Copious amounts of rent control also haven't stopped it from ranking first among American cities in some measurements for gentrification and displacement, either.
To be sure, Demsas is a zoning reform supply-sider who argues that the reason cities like San Francisco are unaffordable is that they have yet to seriously reform their zoning codes or labyrinthine process for approving new housing.
That's true, but it's also somewhat conceptually confused. Rent control is always going to disincentivize housing construction, regardless of how tight or loose the zoning code is. Repealing zoning restrictions will allow for more housing. It will also make the supply-killing effects of rent control all the more apparent and relevant.
Imagine a marathon runner who is at the starting line of the race with a sprained ankle that also happens to be chained to a heavy boulder. It wouldn't be incorrect to say that the boulder is preventing her from running the race. But with that boulder removed, her sprained ankle is still going to prove a real handicap.
Similarly, it's true that single-family-only zoning flatly prohibits a developer from turning a large existing home into a small four-unit apartment building. Legalizing four-unit homes on that plot, but subjecting the new units to rent control, could still end up seeing nothing getting built. All that zoning reform was for naught.
Rent control also could disincentivize renters—who should be natural proponents of new housing construction—from supporting zoning reforms.
If government price controls are keeping your rent stable, you have much less of an incentive to support new market-rate construction. At best, it would just be doing more of the same. At worst, it would be adding more construction noise, more traffic, and, God forbid, more shadows.
Indeed, rent-controlled tenants have an incentive to oppose any rezoning on the grounds that it might make their own rental unit a candidate for redevelopment. They're at risk of losing the below-market rents they're currently being charged.
San Francisco again is an illustrative example. Widespread rent control there hasn't stopped the city from boasting some pretty anti-development politics, including a tenants rights movement that is vociferously opposed to new market-rate apartment buildings, even if the only thing they'd be replacing is a parking lot or a laundromat.
Outside the U.S., we can see more cases still of rent control leading not to zoning reforms, but to more statist control of housing policy.
In Germany, the federal government has a modest form of rent control that forbids landlords from charging rents above 10 percent of market rents. That didn't stop Berlin from adopting rent controls that actually required landlords to lower nominal rents in some cases. When the city's rent control law was struck down by a federal court, voters responded by passing a non-binding referendum calling for the expropriation of 15 percent of the city's rental housing stock.
Former Swedish Prime Minister Stefan Lofven's recent attempts to modestly reform rent control in the country—which is causing a massive housing shortage—by exempting new private construction nearly toppled his government.
Demsas says that tenants in rent-controlled buildings might actually be more amenable to zoning reform because their immediate fears of displacement have been addressed. Yet the study she cites as evidence of that point only surveyed around 60 tenants of rent-controlled buildings on their views on "not in my backyard" (NIMBY) policies. Its authors said that the results were too statistically "noisy" to conclude much of anything about their views compared to tenants in non-rent-controlled buildings.
So then, if rent control isn't the answer to short-term housing affordability issues and displacement, what is? I'd argue it's zoning reform, and, failing that, federalism.
New housing units, even if they're really expensive housing units, act almost immediately to lower the costs of rent for everyone. That addresses both affordability and displacement in the short-term thanks to the magic of the "moving chain."
When a new "luxury" apartment comes online (and basically all new construction is high-cost "luxury" housing), it's often filled by a high-income person who moves from his previous, older apartment building in the city. His now-vacant home is then snapped up by a middle-income person who leaves behind an even older unit that a third, lower-income person can now move into.
Follow this "moving chain" back far enough, and soon enough you see that each new unit of luxury housing is freeing up lots of housing in the lowest-cost, lowest-income neighborhoods in the city. That presumably puts downward pressure on prices and displacement.
All this might sound kind of wonky and theoretical. But there's a growing body of empirical research finding that these "moving chains" deliver benefits for low-income people relatively quickly.
An August 2021 paper from Finnish researchers looking at moving chains in Helsinki found that for every 100 new market-rate apartments built in the city center, "29 units get created through vacancy in bottom-quintile income zip codes and 60 units in bottom-half income zip codes" within two years.
"When new market-rate units get occupied by high-income households, they also benefit middle- and low-income households through a moving chain mechanism," the researchers conclude.
Research by economist Evan Mast on the effects of luxury apartment construction in 12 American cities has also found that new, pricey units open up more housing options for middle- and lower-income neighborhoods.
So new housing supply can be a short-term solution for both affordability and displacement. Policy makers need only get their zoning rules out of the way of new market-rate construction to reap these benefits.
Will policy makers do that? The answer is probably not in a lot of high-cost cities.
Places like California are starting to make real progress on peeling back restrictions on new housing supply. The positive reforms the state is passing are nevertheless relatively marginal ones—a duplex legalization bill here, a streamlining of environmental review there.
Much bolder reform is required to realize the widespread, short-term benefits of new supply. That, sadly enough, is politically impractical in the places that need supply the most.
Fortunately, we're not wholly dependent on policy makers in San Francisco or New York City to adopt the policies that will create housing affordability in the short term.
One of the blessings of living in a country like the U.S., with its federalism and regional policy cultures, is that there are lots of places where supply is relatively unconstrained and housing is broadly affordable for even low-income people.
Renters being priced out of their homes by restrictive zoning codes in New York City, Los Angeles, and San Francisco do have the option to move to growing, cheap cities like Houston, Phoenix, and Las Vegas—where both jobs and new housing are plentiful. More and more people are taking this option every day.
Is it fair that zoning laws effectively require a renter in San Francisco to move to Texas to find affordable housing? No, not really.
But relying on rent control to keep that renter in the same home comes at the expense of new housing supply, which in turn raises rents for everyone else in the city and prevents others from moving there entirely. That doesn't strike me as particularly fair, either.
Worse still, rent control creates a whole new privileged class of tenants who have every incentive to fight the kinds of supply-increasing zoning reforms that would make cities broadly affordable in both the short and long run.
The immediate affordability pressures in America's highest-cost cities are causing a lot of people to stop worrying and love rent control. I'm still pretty concerned.