Economic analysis consistently reveals that rent control policies often curtail housing availability by diminishing developers' motivation to construct new units. These regulations also discourage owners of multi-unit properties from investing in improvements, limiting their potential profit and ultimately degrading the housing market for renters.
St. Paul, Minnesota's experience is a prime example of this effect. In November 2021, the city's electorate passed a stringent Rent Stabilization Ordinance, which was one of the most severe rent control policies in the United States. Designed to tackle the shortage of affordable rentals, this ordinance restricted rent hikes to a maximum of 3% annually, applying universally without exceptions for lease renewals, new leases, or new constructions.
The aftermath in St. Paul's multi-unit housing market was rapid and stark. Construction of new units, which had been robust before the policy's implementation, plummeted by 28% within six months. This contradicted the ordinance's goal, as restricting new housing developments unintentionally exacerbated the scarcity of affordable rentals.
This scenario was not unique to St. Paul. Before the pandemic, Oregon and California had also implemented state-wide rent control measures. In 2019, Oregon capped rent increases at 7% plus inflation, and California set a limit of 5% plus inflation starting in 2020. Unlike St. Paul's ordinance, both states exempted rentals in buildings less than 15 years old and allowed uncapped rents for new tenants.
In May 2022, St. Paul revised its ordinance significantly. New exemptions included buildings less than 20 years old and all affordable housing from the 3% rent hike cap. Moreover, landlords could increase rent by up to 8% plus inflation when a tenant vacated a unit. These modifications led to a resurgence in rental housing construction in St. Paul, with a record 2,100 units currently being built.
Source: CoStar Insight, Redacted by MMCG
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