2021-09-14

Diving Deep on Rent Control and the Housing Shortage

[A new unsubsidized apartment building in Saint Paul: the kind that won't be built any more.]

I don’t want to be writing this. I’d rather write about how I support rent stabilization (which I do), how the housing crisis is impacting renters (a lot), and how wonderful it is to see renter advocacy take center stage in city politics (I’m all for it). Not only that, I hate arguing with people about housing. I’d rather go door to door on Grand Avenue promoting parking meters to small businesspeople. 

But I have to explain, with detail and source material, why I'm so frustrated with the specific proposal that’s on the ballot in Saint Paul. I think it would make the city worse off and almost certainly backfire.


How I Got Here 

A few months ago I was fairly positive about rent stabilization, at least what I knew about the idea, which was not much. I signed the petition to add it the ballot, and, like everyone else I know, I hadn’t read the specific language. "Renters belong in Saint Paul” sounds nice. 3% seems fine. I’ve been writing about how we need to give more power to renters for 10 years in Saint Paul and this fits with what I believe. 

Then, about a month ago, a friend sent me the ordinance to read, not just the ballot language, but the fine print that will be in the city code. 

[Click here to see it expanded.]

If you don’t know the details of the Housing Equity Now Saint Paul (HENS) rent control policy, you’re not alone. It’s actually hard to find on the HENS website (go ahead and try) and there hasn’t been great reporting on it. For example, here’s what the MPR story on the two cites’ ballot measures had to say about Saint Paul. They had a long article about the non-existent Minneapolis rent stabilization policy, and when it came to Saint Paul, wrote only this:

[That's all the reporter said about the Saint Paul policy.]


So when I read through the ordinance’s fine print, my first thought was “huh.” 

I didn’t have much reaction because I didn’t know much about the details of rent stabilization.  That’s why, an hour later after getting the baby to nap, I grabbed my copy of “The Affordable City: Strategies for Putting Housing Within Reach (and Keeping it There)", the book I trust most on US housing policy. 

More than anything, Phillips’ book is useful. (Read the intro here if you like to get a sense of where he’s coming from.) After an introduction laying out the main problems around US housing affordability, especially his basic “three S” principles (supply, stability, and subsidy), the rest of the book is organized into short chapters on specific policies with lots of examples. 

Phillips works at a housing policy institute in UCLA and, like most people I know, is an “all of the above” pragmatist. Because he lives in California, he understands the varieties of rent stabilization that exist in the US (e.g. his long policy paper on proposals to tweak rent stabilization in Los Angeles). And, by the way, Philips supports rent stabilization and says so explicitly on his podcast and in his book.

Anyway, I had turned to Chapter 29 titled "Place Stronger Restrictions on Rent Increases for Older Housing (Rent Stabilization)" and began reading through it. 

When I got to the following line, I stopped abruptly:

And that’s why rent stabilization doesn’t apply to new housing virtually anywhere in the world.

Hm. 

Wait a minute… What’s the reason? Does that say “in the world”?

[Checks notes] 

I looked back at the HENS proposal to make sure I had seen it correctly, and yes, there it was: their policy applied to new housing.

“Well, that’s odd,” I thought. What’s going on here?

I re-read Phillips’ entire section again on rent stabilization, and here is the beginning (emphasis mine): 

Rent Stabilization helps households afford rent throughout their tenancies, and its negative consequences for housing supply can be minimized.

If anti-gouging rules are the weakest form of rent control, then rent stabilization, sometimes referred to as second-generation rent control, is the middle ground. Rent stabilization, as its often practiced in the US and elsewhere, limits how much a property owner can raise rents on tenants once they’ve moved in. The annual limit on rent increases is lower than for anti-gouging regulations — sometimes even below the rate of inflation — but as with anti-gouging rules, landlords are permitted to reset rents to market rates when tenants turn over.

Supply advocates are rightfully wary of rent stabilization because it can negatively impact new development and existing rental housing supply in ways that anti-gouging regulations do not. A city may end up securing short-term benefits for a portion of existing renters at the expense of an undersupplied, much less affordable housing market in the long run. 

The outcomes are very dependent on how rent stabilization policies are drawn up. For example, if rent hikes are capped at the rate of inflation (or lower) and apply to all housing regardless of age, developers will be heavily disincentivized from taking the risk to build new housing. Projects take a least a few years to advance from concept to lease-up, sometimes even ten years or more in jurisdictions that are less friendly to new housing. Given those time frames, developers working on projects during good economic times may open their doors in the midst of a recession; if they’re forced to lease their units at a loss for the first few years, but rent stabilization rules prevent them from ever raising prices as the economic recovers, they may as well declare bankruptcy on opening day. Developers will understandably avoid cities where this is a possibility, and supply will stagnate. This is why rent stabilization doesn’t apply to new housing virtually anywhere in the world. 

If rent stabilization policies apply only to older units — say, those open for 15 to 20 years or longer — than this is much less of a deterrent to home building.

I was honestly confused at this point. What was actually in the HENS proposal, and why was it different from how seemingly everyone (“in the world”?!) did rent stabilization? 

I began asking around, sending emails to housing people I know and trust (more on that to come). I even looked up Shane Phillips on Twitter and sent him a DM and, what do you know, he kindly agreed to chat with me.

“OK, Mr Phillips," I asked him. "You write here in your book that rent stabilization policies never apply to new housing. I'm a little confused. What’s that all about?” 

Phillips talked to me for a half hour and about the varieties of rent control and their pros and cons, explaining particularly why the housing construction comes to a halt if builders can’t fluctuate rents during times of quick economic change.

Then at the end of the interview, he asked me off-hand about something called “vacancy decontrol.” To be honest, I hadn’t even considered the topic. 

"Um, I don’t know, let me look it up," I said. "Yes, it says here, they have a strict policy."

“Oh,” said Phillips. “Well, let’s just say that there’s a reason nobody does it that way any more.”

I gulped. “What reason is that?” 

Phillips went on for a while and I took some more notes.

Hanging up, I was kind of worried about the HENS plan for Saint Paul. I started researching the issue, to check up on what I'd heard. Was Phillips accurate? Was he being overblown? I had thought this guy’s book was the gold standard for basic information.

Here's what I found.


Rent Control v. Rent Stabilization


For one thing, Phillips is right. There's no rent control policy that applies to new housing and does not account for inflation anywhere in the world that I've found (so far). There used to be before I was born, but not any more.

Digging into this, turns out there’s a whole long history to this stuff. For example, there’s a difference between rent stabilization and rent control and they are not interchangeable. It’s sort of an historical difference where rent control are older pre 1970s programs, and rent stabilization refers to policies that roughly correspond with my lifetime (I’m 42). 

My takeaway here is that the vacancy piece is the key distinction. Rent stabilization programs almost always have vacancy decontrol, where an apartment can be re-set to market rates when it goes vacant. The purpose of these programs, and almost all of the examples in the US and Canada, are to lessen rent hikes and make rent more predictable for individual tenants living in apartments in the city. This is what people mean when they say "Rent Control 2.0" and there are a lot of benefits to that.

Rent control on the other hand, is focused on the apartment, not the renter, which is why it has strict vacancy control. Here the purpose is to make sure that rents across the city, for every home that’s covered by the program, stays at a certain level (tied to CPI or =<3% or whatever). This is what people mean by "Rent Control 1.0", an approach that really does’t exist anywhere these days (other than Montreal). 

I also read a bunch of articles on rent control and rent stabilization, including some that are very supportive of the topic. In all cases, they included the major catch that modern rent stabilization policies do not apply to new housing. For example, this piece in the BBC quotes a leftist British economist (emphasis mine): 

"Today’s rent control strategies are not the hard price ceilings implemented during the second world war. They are a diverse set of strategies that place limits on the amount that landlords can boost rents, but they do so flexibly, usually allowing increases with improvements and in line with inflation… Opponents of rent control frequently invoke the spectre of long-abandoned hard rent ceilings in order to try to lessen the popularity of contemporary rent regulation. But no one is proposing crude rent ceilings today.” 

Or take this article titled “Why Rent Control Works" in Jacobin makes a similar move (emphasis mine):

A number of recent studies have looked at the effects of rent regulations on housing supply, focusing on changes in rent regulations in New Jersey and California and the elimination of rent control in Massachusetts. Contrary to the predictions of the simple supply-and-demand model, none of these studies have found evidence that introducing or strengthening rent regulations reduces new housing construction, or that eliminating rent regulation increases construction. Most of these studies do, however, find that rent control is effective at holding down rents.

The author, coming from a very pro-rent control perspective, doesn’t even mention that none of their examples apply to new housing. Instead, the argument is predicated on keeping new construction exempt— using examples of rent control 2.0 policies that allow for housing development —  as a reason why rent control can work today.


The CURA Report 

After some more cursory reading about rent stabilization, I turned to the CURA Minneapolis rent stabilization study. In 2018, the Minneapolis City Council hired them to do a report on rent stabilization and how it might apply in Minneapolis, if they were to adopt such a plan. The very thorough result is 114 pages long.  

I mostly agree CURA on housing issues, though I think they lean too far toward the “development is bad” side of the spectrum. (See, for example, the article I wrote about around whether market-rate housing helps or hurts local rents in cities. The study tried very hard to prove a particular point that new buildings raise rents, and its conclusion was, it seemed to me, often misquoted in service of that perspective, while the study itself insists repeatedly that market rate housing does lower rents, at least at a city- or regional-scale.)

The point is that I trust CURA to do a good, well-researched job and also have a slightly anti-development perspective, and read most of what they say with that in mind. Here’s what their Minneapolis rent stabilization report has to say in the section, amongst the literature review of rent stabilization research entitled "effects on new housing construction”:

Housing Construction 

Many economists have theorized that rent control or stabilization will significantly dampen housing production. According to this view, developers are discouraged from building new units because rent regulations hinder the profitability of new units (Appelbaum and Gilderbloom, 1989, Sturtevant, 2018). Thus, new housing development may shift to a different, nearby city or simply not occur at all. However, there is little empirical evidence to show that rent control policies negatively impact new construction (Gilderbloom and Ye 2007; Turner 1998; Sims 2007; Arnott 1995; Goetz, 1995; Appelbaum and Gilderbloom, 1989). Construction is more dependent on localized economic cycles and other factors, especially in moderate programs that allow for various exemptions. Additionally, most jurisdictions with rent stabilization specifically exclude new construction from controls, either in perpetuity or for a set period of time. Nevertheless, some economists have argued that even with exemptions, new construction will decrease if there is uncertainty about future market conditions (Sturtevant, 2018). 

Studying the end of rent control in Boston, Brookline, and Cambridge, Sims (2007) found that the end of rent control had no statistically significant impact in the short-term on the construction of new housing. Similarly, Gilderbloom and Ye (2007) compared municipalities in New Jersey that had rent control to those without and found no statistically significant difference in construction activity during the period studied. 

To me, the line in bold is the kicker, as this is precisely what the HENS ordinance does not do. In retrospect, I also feel like the CURA report downplays that particular point. (It’s not just that “most” jurisdictions exclude new construction, but every one in the country does so.) The point is that, of course rent stabilization does not hinder new housing construction when it does not apply to new construction.

The rest of the study is interesting and, if you are truly curious about details, it's worth your time. It displays the wide range of policy approaches that rent stabilization can take and goes on at some length about how rent stabilization might work with the local rental housing market, for example.

Canadian Examples 


Digging deeper, I also read the lengthy study on rent control done for the Manitoba Provincial Government (linked to on the HENS page) which goes into the many varieties of rent stabilization in Canada. 

It turns out that there are many rent stabilization policies in Canada, eh. They’re all done at the provincial level (which actually makes them much more effective IMO) and they vary quite a bit in the subtle details (e.g things like “pass throughs”). Almost all of them have vacancy decontrol and almost all of them do not apply to new housing.

(There’s one major exception: Quebec / Montreal. They were excluded from the Manitoba report because, as it turns out, Montreal has an entirely different kind housing landscape from the rest of the country. The city is composed almost entirely of apartments, with very few single family homes. I read a few articles on Montreal’s rental policies and it’s very interesting but also, if you have an entire city where everyone lives in apartments, it turns out that there’s no NIMBY pressure whatsoever, and it’s very easy, relatively speaking, to build new apartment buildings there. And yet there are some problems emerging. Anyway, c’est la vie. Les Quebecois sont unique.)

[A chart showing the complexity of Canadian rent control policies, all done at the provincial level.]


Chatting with People

The other thing I did over the next few days was to chat with a range of people I know who work in housing development and finance, within both the market-rate and affordable housing circles. Basically, I reached out to as many people as I could dig up. In all cases, I just sent them the HENS ordinance language and asked, without telling them what I thought, “Hey, what do you think about this? What might it do to the housing market in Saint Paul?”  

It got back a range of responses, everything from “It’ll be a total housing apocalypse, I’ve never seen any language worse than this in my life” to “well, I have some reservations, and here they are…” to “it won’t affect affordable housing that much, but I can see why the market-rate folks would be concerned.”

At this point I was pretty sure that Phillips’ claim was correct. This policy was unprecedented, and nothing like it existed in the country. (The only proposal that comes close is Kshama Sawant's plan in Seattle, which is nearly identical to the HENS plan, but is nowhere near being passed and adopted.) After some brief digging about Japan and Europe, I was even kind of sure there weren’t any comparable policies elsewhere either. For example, even Berlin’s famously left-wing rent control law, which passed in 2020 (and was ruled unconstitutional this year), exempted new construction. Not doing so is a big change.


Why the HENS Proposal Will Stop Most New Housing

At this point I was kind of concerned. That HENS website, which I’ve read through many times, has this to say about the effects of rent control on claims on new housing construction:


And this one:


To me, this is not convincing, foremost because they neglect to point out that rent control policies in Boston and the Bay Area did not apply to new development. The rest seems like a lot of wishful thinking about how US housing is actually financed and built. They mention "investor risk assessment" as a reason why banks will finance new homes, when it's precisely the reason why they will not. 

(See below, though I have another post half-done that explains more precisely why this happens under the HENS policy in greater detail.)

I came away from my research convinced by what Phillips says in his book: applying rent control to new construction, which is not done anywhere in the country, seems certain to stop unsubsidized housing construction in Saint Paul. 

The problem here isn’t really the developers, it's the banks that finance them. Very few developers front their own money to build a new apartment building. Instead, they get multi-year, multi-million-dollar loans to purchase land, do planning, do public process, and pay construction costs for a new building. It’s all predicated on a certain return when it’s completed. 

In order to get financing, you have to convince a banker that the investment is low-risk and will meet the threshold for the loan, whatever number it is. Bankers are very conservative about this stuff, which is why, for example, it’s been impossible to build any new housing in Minneapolis’ Seward neighborhood for as long as I’ve been alive. By limiting rent flexibility and not accounting for inflation, the HENS proposal increases that risk dramatically, placing a bunch of huge ????????  into the bankers’ calculations. 

Explaining all this is a bit complex, but here goes: limiting rent increases to 3% rent removes the flexibility about pricing new units that developers need during a recession or some other small-scale demand disruption. (The COVID 2020 housing market is the perfect example, but the 2008 crash is another.) On top of that, the lack of an inflation peg for the rent limits makes any increase inflation into a significant new risk for the lender. If inflation rises past 3%, as it is right now, because the developer is effectively forced to lower rents for all your units, they’ll go bankrupt on the very expensive new building that’s just been completed.

I don't particularly care about the bankers, but I do care about the housing supply in Saint Paul. Bankers look at a policy that applies only within the city, and nowhere else in the metro area or even in the country, one that makes building housing more risky than anywhere else, and they simply won't do it. Getting financing to build housing in Saint Paul will be a non-starter.

This is why I’m convinced that the HENS rent control proposal will eviscerate the number of new homes built in Saint Paul. When it comes to the production of unsubsidized homes, we’re talking about a decrease probably somewhere in the 50 to 90% range. Given that the city has only just begun to make inroads on the housing shortage, in a second I’ll tell you why that’s a big problem.


The Need for Rent Stabilization

[From Housing Link.]

Before that, though, I haven’t mentioned why rent stabilization is good. It might come as as surprise, but I support a rent stabilization policy in Saint Paul, as long as it does not kill the city's housing supply.

The need is certainly large. According to the latest from Housing Link, which does a monthly report on the city’s rental market, 48% of the city’s renters (i.e. around 25% of the population) are paying over 30% of their income for housing. And it’s getting worse as the housing shortage escalates prices. These folks need help as soon as we can get it to them.

If we had rent stabilization in Saint Paul, it would help keep rents predictable for tens of thousands of people. Instead of 5% or 10% rent hikes, that number would be limited to 3%. As Phillips explained to me: 

For rent stabilization specifically, I think the obvious benefit is once move in somewhere your rent is not going to go up too quickly. I think the overlooked benefit is the stability and certainty it provides, that’s something that especially homeowners don’t really appreciate anymore, how precarious it can be to be a renter. Even if you’re doing perfectly well don’t know what the future holds. To have that certainty goes even beyond behind the monetary value. It’s like having health insurance: even if you don’t really use it that often, it gives you a sense of security knowing that you’re going to be OK.

I think that, because it disincentivizes renting out homes, rent stabilization would probably have the added benefit of reducing the financialization of housing (e.g. REITs and hedge funds). I wrote about this recently, and though it’s not yet a big problem in Saint Paul, it's getting worse.

That said, there's a catch here because there’s a key difference between rent stabilization and rent control, where the focus is on the apartment rather than the renter. While rent control policies might work well in a metro area with an adequate housing supply, where prices aren’t skyrocketing all over town, when you have a large housing shortage and homes are going up in value 5-10% each year, rent control creates all kinds of issues.

These are the classic “rent control problems” that everyone wrote about back in the day: disinvestment, condo conversations, not being able to find an apartment, being locked into where you live and unable to leave, super-corrupt relationships between landlords and prospective tenants, no new housing construction, etc. If you have rent control with strict vacancy control, over time, as long as you have a housing shortage and the overall rental market is tight, housing prices and rents keeping going up all around you. As the gap between Saint Paul rents and those everywhere grow wider, rent control gets quite perverse. 

(If I have time, I’ll write about the vacancy decontrol debate.)

This all gets back to what the goal is: do you want to “stabilize” rents and make them more predictable for vulnerable renters? Or do you want to “control” the (entire?) rental housing market and use city ordinance to set prices for apartments? 

[We're only just starting to build housing in Saint Paul at a decent pace.]

This distinction becomes especially important as it applies to the effects on the housing supply. As written, the HENS plan would stop new market-rate housing construction in Saint Paul. Even coming from a pro-rent-control perspective this seems like a bad thing. This is why I hate the fact that the HENS policy pits helping renters against building housing, because I think both of these things are very important. 

Specifically, there are three big reasons why we need to keep building new housing in Saint Paul: the housing shortage, climate change, and the city’s finances. I believe we need to double the amount we’re building today, at least 15,000 new homes in the next five years in Saint Paul, and ideally many more than that.


Problem #1: Housing Supply

The rental problem isn’t just high prices, it’s also a shortage. There simply isn’t much affordable housing available in the city. As of right now, there are fewer than 500 apartments available in the entire city, and you can see how they are priced:

[From here.]

One thing that rent stabilization absolutely does not do is provide more homes for people. In its strictest forms, like the HENS proposal, rent control reduces the housing supply. For vulnerable communities in Saint Paul, not building housing is a problem for two reasons. First, it drives up the costs of single family homes and condos, at faster rates than you see today. That part is pretty straightforward, and you can probably guess the consequences. For homeowners, they’re fine. If you want to buy a house, forget about it. It will surely accelerate the pace of neighborhood change (e.g. flipping).

The second problem is that it will be even harder to find an apartment. The people with the greatest need, those at 0-60% AMI households, already have very few places available to them in Saint Paul. While the rent control plan would keep these existing homes from disappearing through sudden rent increases, it would not make any more of them. If this passes, it will make it even harder to find an apartment in Saint Paul. 

(There’s also the issue of how landlords select tenants, which I briefly glossed in my Minnpost article, and might cover later if I have time.)

As Phillips explained to me:

As important as stability policies are [like rent stabilization], they mostly just keep things from getting worse. It’s a really important goal to prevent people from being evicted unjustly prevent rent from going up at unreasonable rate but that’s different from actually making people’s lives better than they are today. It only keeps them from getting worse. That’s a really important thing to do treat diseases. [But] to try to cure them but we have to actually spend money and build housing to make people’s live better.


#2 — Reducing CO2 Emissions

Not building housing in Saint Paul screws climate action. Transportation emissions are the fastest growing sector of CO2, and probably the #1 thing we can do do reduce carbon emissions, apart from becoming vegetarian or having fewer children, is live in a walkable city near transit. An apartment next to transit has much fewer CO2 emissions than a single-family home in the suburbs, for transportation and for home energy costs. That’s why we need to build thousands more homes in Saint Paul especially along transit lines, and especially in walkable areas. 

[From this conversation.]


Alex gets to the heart of the matter here. Because the HENS proposal will make most new housing impossible to build, the swing between having it on the books and not is huge. Thousands of new homes, most of them along transit lines, being built or not being built each year. If Saint Paul is to come anywhere close to its modest climate goals, we need to build this housing in the city now. Otherwise a lot of those people will end up in Roseville or Lakeville or Ham Lake. When it comes to climate change, we don’t have much time to mess around. 


#3 Saint Paul’s Budget

[Some of the many many vacant lots in Saint Paul.]

The third thing is not my favorite argument to make, but it’s still relevant. The city is not wealthy and many critical programs are underfunded. One of the easiest ways to increase the tax base is to allow a vacant lot to become an apartment building. All of a sudden the property taxes you receive skyrocket.

Here’s a real life example: the five-year-old mixed-use building I used to bike past all the time, at the corner right at the south end of the Wabasha Street Bridge. It’s a building with 178 homes and two businesses, and it provides $735,000 in property taxes per year for the city and county. The vacant lot next to it, that’s been sitting empty for seventy years, pays an annual tax bill of $84. 

Multiply that by five or ten and add it up cumulatively each year, and you begin to get at the difference in the city and county tax base we’re talking about. The new housing that Saint Paul is building adds up to millions of dollars annually that the city and county can spend on things that will help everyone, including BIPOC and working class folk. Taking that revenue off the table hampers what Saint Paul can do in many ways: libraries, rec centers, social services, etc. If you’re talking about a net difference of 1,000-2,000 new homes that would have been built per year, that’s a lot of money missing, millions of dollars per year, every year.

In the meantime, this program is set up to create a large administrative burden. Because of its wide coverage (45,000 homes) and lack of flexibility, anytime property taxes go up, insurance spikes, inflation rises, or the economy does something weird, there’s the potential to generate tens of thousands of variance requests. Nobody knows how this process will go, but if you look at the CURA study of “comp cities” to Minneapolis, they use a lot of staff. The Oakland rent adjustment program (which only applies to homes built before 1995) has 26 Full Time Employees working on outreach, management, and enforcement. That’s about the same size as the department of Human Rights and Equal Economic Opportunity, whose budget is about $4M a year. 

I’m not saying that it’s not worth it, or still not a good idea, but having a city that’s no longer growing its tax base is something to think about. By comparison, the Mayor’s recent proposal to raise the tax levy by 6.9% is worth about $10M in new spending. I’m all for spending money on something that will help people, but I’m less eager to spike the city budget over a program would also cause all kinds of problems. 


So What is Going On? 

I don’t think there are good reasons to craft a rent stabilization ordinance that does not exempt new housing and does not account for inflation. I don’t get it, unless the drafters of this ordinance are intentionally trying to scuttle housing construction or are very naive about how housing is built in the US. 

The only way I can explain it is to dive into a couple of schisms in the lefty housing community. These might seem familiar to anyone who’s followed basically any issue. These are the main three that I see:

Greedy landlords v. The housing shortage — What’s the cause of the high rents in the first place? Is it greedy landlords and greedy developers, Or is it the housing shortage? 

How you answer that question leads you to very different policy solutions. My take is that the greed we're talking about is largely caused by the housing shortage: the worse the shortage gets, the more you incentivize people to try and make lots of money off of housing. I like to picture all the landlords standing on a platform, arranged from most greedy on one end to the most philanthropic on the other. The housing shortage tilts that platform, making it harder and harder for landlords and developers to avoid exploiting people.


Pro-development v. Anti-development — those who think building new market-rate for-profit apartment buildings helps housing affordability overall (either at the macro- or micro-scales, or both) versus those who think building those kinds of apartment buildings drive up rents and make affordability worse. 

This is kind of the key debate, and I’ve written about it before, specifically whether or not building market-rate housing makes rents go up or makes them go down. Based on everything I've read, I'm in camp "more housing helps affordability."  On the other hand, I've met many people who think new buildings are what's causing rents to go up, rather than the other way around.


Pragmatists v. idealists — On the one hand, you have those who want to gradually tweak / work within the existing private-property housing system toward more equitable outcomes versus people who want to end that system, de-commodify real estate, and replace it with something different that doesn’t yet exist. This debate is largely about process rather than results: everyone wants abundant housing, but disagree about how to get there.

When it comes to housing, I’m in the “all of the above” camp, like most people I know. What I think we need to do is pretty much what CM Jalali says in her Minnpost quote: “you need a combination of an abundance of new homes at a whole range of income levels, and then protections for people at the very bottom of the market." I agree with that completely.

I just don't think there are easy answers when it comes to housing, and I'm wary of anyone who offers one. They’re either selling you something or deeply utopian. Actually-existing existing US housing policy is a clusterfuck of messy things, where the vast majority of the white, wealthy, voting public has bought into a powerfully defensive form of living called “homeownership” and are set on a hair-trigger to become conservative reactionaries.

My problem with the idealist / revolutionary approach for housing is that messing up the current system comes with huge present-day costs. I view the current housing system is like a giant puzzle where all the pieces are tied to each other in a weird Rube Goldberg contraption. If you talk to anyone who works in housing for even a second, you are quickly overwhelmed with the microscopic details and Byzantine rules along which our current highly-inadequate housing system works. For example, take this quote from my FB page:



I think I understand that? But its the kind of thing that makes me a pragmatist when it comes to housing policy. For example, I think we need a) zoning reform that gets a lot more housing built, especially in walkable cities by transit, b) renter protections around things like evictions, legal representation, tenant screening, steering, and (yes) rent stabilization etc. (especially ones that will stand up in court), and c) lots more subsidies for building more non-commodifiable / public housing, and basically that money needs to come from the Federal government. 

Diving into any of these topics is too detailed for this post, but here’s just a glance at how we operate today and how much room there is to reform our current system and make things better:

[From a Planning Commission presentation a while back.]

That’s the kind of change we need. How about at the city level? Well, municipally the scope of change is very small. The Saint Paul tax base does not buy you many new affordable homes, but a decent rent stabilization proposal that didn’t scuttle the housing supply, climate action, and city finances would be great.


Conclusion: Predictions and Lamentations

It doesn’t have to be this way.  The drafters of the ordinance could have passed a workable reform and solved a big problem without trying to use a feckless tool to fight the deeply embedded concept of private property, but they didn't. Nearly every opportunity that the authors of the HENS ordinance had to mitigate its effects on the housing shortage, they chose to craft this policy to be anti-housing. All you have to do is use the Oregon law (for example) as a base and tweak it to make it better. Presto! you’ve helped keep tens of thousands of renters in their homes, given them some peace of mind and stability, and made Saint Paul better without flushing the rest of the housing supply down the toilet. After all, stabilization is what we’re all saying we want to do, isn’t it?

I'm highly frustrated with the HENS proposal specifically because it will scuttle the benefits of rent stabilization just to make a point about by inserting an anti-development poison pill into an otherwise defensible policy. It’s completely unnecessary, causing far more problems than it solves, and will -- as Ed Goetz almost but not quite predicts in the recent Sahan Journal article -- offer policy-makers in Minneapolis a great example of what not to do. 

This issue is not just about keeping rents low for existing renters, it’s also fundamentally about ensuring access to housing for everyone in Saint Paul. If rent stabilization and rent control were a panacea for affordable housing, then it would be affordable to buy homes and easy to get apartments in places that have had it for while a while, like [checks notes] Los Angeles, Berkeley, San Francisco, Oakland, New York City, the District of Columbia, and New Jersey. I don’t think making a policy that’s more restrictive than those places on new housing will be the solution to the housing shortage.

In the end, I find myself a rent stabilization supporter, a rent control skeptic, and an anti-housing-rent-control campaigner-againster. I don’t think it makes me a conservative reactionary to not get on board the Socialist Alternative housing platform. I like 21st century American socialists on lots of important issues, but housing policy is not one of them.

I’m frustrated that the details of this proposal make it destined to fail, either in a blaze of ignominy (if it passes) that seems sure to put St. Paul into every housing policy 101 class as a textbook case of what not to do, or in defeat at the ballot box because it comes with so very many strings attached.  

If it passes, the best case scenario is that it gets overturned or amended ASAP, but you have to have a lot of faith in the City Council (which hasn’t been making great housing decisions lately) and/or the City Attorney’s office (which doesn’t have great a track record) if you want to hang your hat on the “amendment and litigation” route. If it doesn’t pass, the best case scenario is that Minneapolis passes their version of rent stabilization, which I guarantee will be far less problematic, and Saint Paul eventually joins them with a pro-housing rent stabilization policy in another referendum down the road.

Either way, the present situation is very disappointing.


[See also my short column in Minnpost about the Saint Paul ordinance and my long-read with all the research about how this rent control proposal affects housing in Saint Paul, an explainer of why a 3% rent cap blocks new housing construction, short posts on how the policy would affect rents and taxesinterviews with housing policy experts on new construction and rent controlguesses about Mayor Carter's plan, and what I recommend we do about the housing crisis instead of the rent control proposal.]


13 comments:

Peter Mason said...

Brilliant. Thank you for writing this.

The Loud St Paulite said...

Bill - thank you for the very write up. I did not think I'd end up reading 6,000 words on rent stabilization today. Thank you for doing all that research and writing it up!

It seems to me the crux of your argument is that setting limiting rent increases to 3% without any peg to inflation means that banks will consider housing developments too risky to give loans to.

Do I have that right?

Did you find any evidence in your research citing the 'banker's risk assessment' reasoning for why so many other cities had some sort of exemption for new housing? Did you find some document or talk to some people who cited this as the most important reason new housing is often exempted?

I've been a St Paul renter since 2010, and have little to no familiarity with how multi-million-dollar development deals work. What you are saying makes sense, I'm just curious if it is the kind of thing that is so obvious, no one actually feels like they have to spell it out, or if you found someone explicitly saying or writing that these bank risk assessments have such an strong role in development, that that the specific changes in the HENS ordinance would make housing development loans non-starters.

I guess what I'm saying is I wish I could ask someone inside the big banks that do development loans around here who could speak directly to how the HENS changes would impact their risk assessment and their likelihood that they would stop doing development loans.

As a hypothetical - do you think the new ordinance would be acceptable if it included new construction but tied increases to inflation, some average of local rents, or some other mechanism that would allow the developers more room but keep the rents at some level most St Paulites could afford? Maybe that premise is impossible from the start, if rent that is affordable means that developers don't make sufficient profit margins. (fwiw, I'm specifically thinking of the rents I saw for the apartments above Whole Foods on Snelling when it opened. Those prices seemed outrageous!)

Lastly, I had not considered the administrative cost of the ordinance at all. Staffing an office to track and enforce the ordinance would be a big undertaking. Thank you for bringing that up.

Anonymous said...

Thanks Bill. This is excellent. I really appreciate the time and effort to put thus together.

Cheers

Bill Lindeke said...

Re: TlSP -- all you have to do is exempt new construction for 15 -20 years. Applying this program to new buildings doesn't even really benefit the people in the new buildings, who would be much better off with many more apartments built across the city than they would with rent control. Would a hypothetical new-building-renter rather have 2,000 STP apartments to choose from with no rent control, or 200 apartments to choose from with rent control? In both cases the developer can set whatever rent they want...

Also, sometimes allowing flexibility around rents benefits new renters because they can be lowered drastically. During recession / COVID / or any other disruption, you can get deals on new construction. I visited a friend in Tampa in 2009 who was living in a brand new building. She explained it to me: "we're just living here for a while; they had to cut the rents in half." If you had a rent control limit in place, a new building landlord might be a LOT more hesitant to do something like, or, say, give you 2 months off your rent when you move in.

Reasons like this is why it makes little sense to apply rent control to new buildings.

Joe H said...

Great article. Thanks Bill.
Curious, you seem to think that a scaled back version might be beneficial (with a carveout for new construction and tied to inflation). Do you have examples of that working somewhere? And somewhere with a comparable rental market (ie we are not San Fran, or NYC or even Seattle). I guess given that average rent increases have only been 1.8% over the last 20 yrs, do we need any kind of restrictions / stabilization? Are class b and c apartment rents higher here than other similar markets? Are you trying to meet in the middle when there isn’t even a compelling data to do so? I am a landlord (older brownstone buildings) and can tell you the more restrictions the more landlords will look to do business where there are less restrictions (ie sell in St. Paul and buy in Roseville) . So carving out new construction and tying increases to inflation is great, but really in our market why are there any restrictions needed? I think collectively something can be done when a long term building owner sells (and tenants have below market rents) and the buyer raises rent to market. Let’s address that issue. But that is a very small portion of the renter pool. Isn’t the real issue here not frequent large rent increases by landlords, but low income levels and income disparities? These are issues that all of society should help with, not just trying to finely tone some rent control policy for landlords to rent apartments at below market rent (when we don’t even have a history of large rent increases). Thanks for your great insight and dialog on this. Frustrating (but not surprisingly) that our city leaders aren’t weighing in more given how important this is.

Joe H said...

Great Article Bill. Thanks for your balanced insight.
You seem to think that a rent stabilization excluding new construction and tied to inflation would be beneficial. Can you think of any examples where that has been effective (and with a similar housing market. STP is not like SF, NYC, Seattle)?

I am trying to understand with 1.8% annual increases over the last 20 years why any rent restrictions are needed. You seem to want to meet in the middle and support some kind of rent stabilization? But why? 

Is there data showing that STP  has large numbers of people moving due to unjust rent increases?

Is there data showing that STP has higher rental rates than other similar sized cities?

You state that 48% of residents spend at least 30% of their income on rent, but isnt that even more revealing of the challenges with income levels and income disparities? Income problems are something that all of society should help with vs trying to solve it by fine tuning some rent stabilization / control policy and having the landlords solve it.  

In full disclosure, I am a landlord of brownstone type class b and c buildings. For the most part I rent apartments for between $800 and $1,200 a month. I know for sure that the more restrictions imposed on landlords the more we will consider alternative markets (ie sell in STP and buy Roseville) and alternative product types (ie sell apartment buildings and buy suburban retail or industrial, etc). Simply allowing new construction and allowing increases tied to inflation may be enough for the new construction developers, but the rest of  landlords still dont want to deal with all the restrictions/ red tape of a rent stabilization policy, especially when we  havent scene evidence that we even need that or that the public would even benefit from that.  This combined with the city council trying to shove SAFE housing down our throats (which they lost in a court battle but not after wasting significant time, money and resources from all parties involved), the increase in crime, and the increase of property taxes has already forced out many GOOD landlords that I know.

There seems to be a lot of talk about how stabilization would keep current residents from receiving large increases forcing them to move. More often than not here is what happens: A person is paying below market rent. The long term building owner sells. The new owner wants to collect market rent. Is the new landlord wrong to want to collect market rent? Isnt this more of an issue of someone not being able to pay market rent? All of society should help with that. 

The vast majority of landlords are good people renting apartments at a fair price. If we aren't fair to people they move somewhere else. If people cant afford to move that likely isn't an issue with rent but an issue with income. Why are landlord's the one that should solve this issue. We ALL should be helping with this. I and all of my landlord friends have plenty of residents that are paying below market. We get to know them personally. We keep their rent lower to help out. That is very common.

Sorry for my rambling thoughts. Thanks again for your dialogue and insight. Unfortunate (but not surprising) that our city leaders aren't doing the same regarding this very important topic.

Josh Davis said...

Great article and post. Sounds like property owners and renters would both be better off with a vacancy reset and new building grace period.

Bill Lindeke said...

Hey Joe. I recommend reading that CURA study. It has a lot of info on rent patterns in Minneapolis and how they are changing. There have been steeper increases for certain neighborhoods especially the last 5 years or so. That's what the policy is aimed at.

Personally, I think a rent stabilization policy could help if it was designed well, e.g. something like the Oregon law. By contrast, the proposal that HENS came up with seems like the worst version of rent control I've ever seen.

Elizabeth Dickinson said...

Thanks, Bill, I can't tell you how much I appreciate your research. Do you know of any data anywhere that tracks how many St. Paul renters are displaced annually from rapidly increased rents? It feels that a lot of the motivation for this ordinance is based on anecdotal evidence from renters who have suffered from high rents, but I haven't heard any hard figures. (And even an organizer admitted publicly that most landlords aren't raising rents astronomically...) The other thing I'd like to point to is the city's 4d program which gives landlords up a big break on taxes (up to 40% yearly) for 10 years if the rents fall within 50-60% of median income with a landlord's promise not to raise rents by more than 3%/year for those 10 years. The city also has a rental rehab program for small rental buildings which will fund up to $40k for major things (roofs, boilers, furnaces, windows) at a 0% interest rate for 10 years, with a commitment not to raise rents by more than 3%/year. I would assume those programs would be grandfathered in if this passes, but I wonder what happens to those programs in the future...

Bill Lindeke said...

Elizabeth - thanks for your note. The CURA study has a lot of detail about trends around renters in Minneapolis, including a demographics breakdown of things like income to rent ratios etc. If I have more time to write about this I will try to look into it and apply those data to Saint Paul. But if you're curious you can check it out.

As for those programs, I don't see how they'd continue if there was a default 3% cap for everyone, do you? The whole question of how and whether property owners will keep investing in rental housing is something that's been a problem with rent control programs for decades. That's one of the reasons why vacancy decontrol is the general rule-of-thumb for modern rent regulations.

Alisa said...

Elizabeth, excellent questions! Curious about the answers. It seems those programs (4d, etc) are a much more positive tools in the toolbox vs negative tools/mandated rules. I for one always appreciate positive community tools. Not "you will do it this way because I know best and tell you so" mentality.

The devil is in the details of this ordinance and there are so many unintended consequences which will do more harm than good to St. Paul. Vote NO to City Question 1.

Elizaveth said...

I'm still not sure I understand how vacancy decontrol works, but I'm going to re-read your article to see if I can 'get' it. My assumption about the 4d program and the rental rehab loan program is that anyone who's already part of it would be grandfathered in, but that any new applications wouldn't be considered if this passes. Which would be a shame, as I think it is a great incentive to improve the quality of rental housing. I'm going to get a new roof and solar panels installed on my duplex to cover the electric heat (and the utility bills are paid for by the tenants, so that's not an immediate direct financial benefit to me...) Will also take a look at the CURA study to see what I can glean. Am going to write an editorial. Would you be willing to talk with me before I submit it? I'll try to dm you through Facebook. Thanks!

Jay W said...

I worked with thousands of renters in 40 years at legal aid. Rent was too damn high for sure but for many people their moves came about for many other reasons. Overall the problem is that housing is not affordable for the lower 25% (or 33% or ____%) of the households. The income side needs to be addressed and those with means should pay higher taxes to make up the difference. Indirect efforts that puts all the costs onto a profit-oriented rental marker will fail, I fear.