St. Paul’s new rent control law is off to a bumpy start, six months before it even goes into effect.

In November, Minnesota’s capitol narrowly approved a measure that limits landlords’ ability to increase rental payments on its 65,000+ properties, capping increases at 3 percent annually. The measure will go into effect May 1, 2022.

As FEE’s Brad Polumbo noted when the law was first approved, this makes St. Paul’s rent control policy “one of the strictest in the U.S. — if not the world.” Unlike many rent control laws, the provision was not indexed to inflation (which currently is substantially higher than 3 percent) and it applies to new developments, not just existing properties.

The latter provision has St. Paul Mayor Melvin Carter already seeking an off-ramp — or at least a partial one. Carter, a first-term Democrat, has said he’s exploring ways to alter the rent control provision to exempt new developments, noting the policy could discourage new housing construction in the city.

“Turning off our supply of new housing would be disastrous for us as a community,” Carter said in an interview with a local TV station.

A Predictable Result

Mayor Carter’s warning is no idle threat. Days after voters approved the rent control initiative, the Ryan Cos. development firm informed the city they were putting multiple Highland Bridge development projects on hold after investors balked at moving forward in light of the rent control mandate, The St. Paul Pioneer Press reports.

“We were in for permit review, and we paused that,” Maureen Michalski, vice president of real estate development with the Minneapolis-based Ryan Cos. told the newspaper on Monday. “It’s in response to specific conversations with capital providers, and conversations with our partners. We have partners that are owners and investors in the buildings. There are other places in the metro that people can invest their money.”

This is precisely what economist Walter Block pointed out would happen in an article for FEE exploring rent control policies in the Twin Cities. (Minneapolis voters also passed a rent control measure, which will be implemented by city council leaders.)

Block, a professor of economics at Loyola University in New Orleans, explained that by keeping rent prices below market levels, lawmakers invariably create a housing shortage, since landlords and developers inevitably find more profitable ways to put their property and capital to use.

“Some landlords try to convert their properties from rentals to condominiums. Another response is to knock them down entirely, and build shopping malls, factories, or office towers,” Block explained. “They will do just about anything to escape the piercing eye of the bureaucrats in charge of administering this law.”

Block continued.

As for new residential rental units? Fughedaboudit (Forget about it)! Why should they sink their hard-earned funds into the one sector of the economy subject to these pernicious rules, when other avenues for investment now look relatively more enticing? A 3% limit in an economy with an inflation rate higher than that? All we could expect would be landlords leaving the rental market, or trying to, like rats on a sinking ship. Repairs? Upgrades? Don’t be silly.

The Basic Economics of Rent Control

The solution to high housing prices isn’t a mystery: it’s more housing. Basic economics teaches us that the solution to high demand is more supply, not price controls. An abundance of historical evidence shows rent control achieves the opposite.

Thomas Sowell, in his book Basic Economics, exhaustively documents the consistent failure of rent control throughout the twentieth century.

• In Melbourne, Australia, not a single housing unit was built following World War II for nine years because rent control laws made it unprofitable.
• In the 1970s, Washington, D.C., saw its rental housing stock decline from 199,000 to less than 176,000 because fewer people were willing to rent their homes because of price controls.
• In Santa Monica, California, in 1979, the number of building permits plummeted by 90 percent from just a few years earlier because — again — rent control laws made it unprofitable to construct new housing.

Sadly, the horror stories of rent control are not ancient history. In Sweden, many people currently have to wait a decade (or longer) to get an apartment, while others have to pay double what the property is leased for.

“I really feel like Sweden actually has failed [on housing],” Oscar Stark told the BBC earlier this year in an article exploring Sweden’s housing market.

Sweden’s housing market problems, which ultimately got then-Prime Minister Stefan Lofven bounced from office, are no mystery.

“All the country’s rental units, whether public or private, are subject to rent control [in Sweden],” The Economist reported in June, “making everyone’s rent a matter of government policy.”

Learning the Hard Way

St. Paul appears to be just the latest rent control disaster story. The city is about to learn the hard way that bad economic policies come with serious consequences. Unfortunately, it’s often the poorest among us who pay the price for these mistakes.

Among the 3,800 housing units the city is expected to lose in Highland Bridge development are some 760 units of affordable housing, which are subsidized by market-rate units through on-site property taxes.

“We think that’s pretty compelling for people,” Michalski told The Pioneer Press. “If you lose the market-rate units, you lose the affordable units. That’s the financial mechanism.”

The Pioneer Press reports that some hope the move by Ryan Cos. is a bluff and the development company will “come back to the table in the months ahead.”

This is wishful thinking. A more sober line of thought is this: Who will be next?