The nation's strictest rent control law hasn't even gone into effect, yet it's already tanking property values and showering most of its benefits on already well-off tenants, according to a new study.
In November 2021, St. Paul, Minnesota voters passed an ordinance that limits annual rent increases citywide to 3 percent and includes none of the typical allowances or exemptions for inflation, vacancies, and new construction.
While the law doesn't kick in until May, rent control's surprise passage in the city saw developers pull permit applications, financiers walk away from projects, and city officials rush to amend the terms of the law. State lawmakers have tried to repeal it entirely.
The activists who wrote the ordinance and campaigned for its passage have argued that weakening the policy will undermine the stability and affordability it's supposed to provide for St. Paul's hard-pressed renters.
But a new paper published in March on SSRN by University of Southern California Marshall School of Business professors Kenneth Ahern and Marco Giacoletti contends that the poorest tenants will see relatively few benefits from the new law. Instead, the two argue that the pattern of falling property values in St. Paul after the passage of rent control shows that better-off renters will reap the biggest gains from the law.
The authors chart home sale prices between January 2018 and January 2022 in St. Paul and the surrounding five counties. They find that the introduction of rent control caused a 6-7 percent decline in real estate values in St Paul, and up to a 13 percent decline in property values for rental properties specifically, compared to neighboring jurisdictions.
Because the pandemic spurred a movement from city centers to the suburbs, Ahern and Giacoletti also compare changes in property values in St. Paul and comparable metro areas like St. Louis, Kansas City, Indianapolis, Denver, and Nashville. They still find a rent control-induced fall in property values of 6-8 percent in St. Paul.
Rent control proponents might look at those results and say it's evidence of their policy working. The purpose of the policy, after all, is to preserve affordable housing. And rent control wouldn't be causing property values to fall unless it was also constraining future rent increases.
The standard anti-rent control counterargument is that those reduced property values also discourage developers from building new housing and encourage landlords to sell off existing units to owner-occupiers. Incumbent tenants get lower rents but newcomers to the city have a harder time finding housing, period. And even those lower rents come at the expense of less well-maintained units.
Ahern and Giacoletti don't spend much time on these issues of housing supply and quality. Their paper finds a small but statistically insignificant drop-off in new housing permits after the passage of rent control in St. Paul.
Instead, they focus on which tenants actually reap the most benefits from constrained rent increases. To do this, they separate census blocks in St. Paul into four categories based on whether the median incomes of owners and renters were higher or lower than the city's median income.
They found that the largest declines in rent control-induced home values happened in census blocks where owners had lower incomes than the median homeowner, and renters had higher incomes than the median renter. In those blocks, home values declined 8.5 percent on average.
The next steepest declines happened in census blocks where both renter and homeowner incomes were higher than median renter and homeowner incomes. There, home values declined 4.3 percent.
Conversely, areas with wealthier owners and poorer renters saw property values decline by less than a percent.
Ahern and Giacoletti say this is evidence that rents are constrained most in neighborhoods where incomes are high across the board, or where renters' incomes outstrip owners' incomes.
"This implies that the impact of rent control is poorly targeted," they write. "The largest transfer of wealth is from relatively low income owners to relatively high income renters."
This is an early study of a policy whose details are still being hammered out, so the paper's findings are hardly definite. But the results do match the results of other rent control policies around the country.
A comprehensive 2019 analysis of rent stabilization in New York City by The Wall Street Journal similarly found that well-off tenants were receiving the biggest discounts on rent. That same year, the New York legislature amended rent stabilization to make it harder for landlords to raise rents. The result, just like in St. Paul, was a steep fall in the value of rent-regulated properties.
A February survey conducted by the National Multifamily Housing Coalition similarly found that real estate investors were less likely to invest in markets with rent control.
The poorly targeted benefits of rent control are one reason why the policy has developed such a bad reputation. Policy wonks are more liable to advocate for rent vouchers or cash assistance for the poor instead.
Many libertarians might not support that kind of tax-and-spend redistribution. Unlike rent control, at least that redistribution is more likely to flow from rich to poor.