Does Rent Control Make Sense for Minneapolis? What Theory and Evidence Tell Us

Minneapolis like many American cities is facing a housing affordability crisis.  Rents  are going up rapidly,  placing middle class and low income households into units beyond what they can afford, if in fact they can even find suitable unit at all.  Among solutions  being considered in Minneapolis and elsewhere is rent control or stabilization.  Is that a viable solution?

            The case for rent control is simple:  Freeze rents or limit increases  to reasonable costs plus indexed inflation.  The hope is that this will squeeze unfair profiteering out of the housing market and  eventually make units more affordable.  Evidence does suggest that rent control  helps existing tenants, including  encouraging them  to remain in their current units for years.  This may stabilize  neighborhoods in healthy ways, perhaps increasing a sense of community and the building of social capital.  Rent control done right, will possibly stem the migration of middle class out of a city, also an important goal.

            But the textbook  economist’s  answer to whether rent control works is no.  For an economist, housing is like any other commodity that responds to market forces of supply and demand.  The only way to decrease the cost of housing is to increase the supply.  However,  this solution does not always work.  Developers, left to their own devices and market incentives, will build units that yield the highest profit  margin, and that is not necessarily middle class or low income housing.  Housing markets are segregated by income or class, and simply building more units will not translate into serving the overall housing market or populations.  The best way to provide affordable middle class or low income units is to build them to serve that market.

            But economists will argue that rent control does not work because of the market externalities it produces.    One, place caps on the rent that landlords can charge, and they will delay maintenance.  Two, rent control creates disincentives to build new units since the profits will not be there.  Three, owners will convert existing rental units to condos or coops in avoid rent control, thereby exacerbating the rental shortage.  Four, developers will move housing construction outside of the rent control jurisdiction, again  aggravating shortages.  Five, rent control make encourage tenants to stay in units for too long or in units that no longer serve their needs, creating a mismatch between apartments and occupants.  Empirical studies of what happened in San Francisco, California  and Cambridge, Massachusetts lend evidence to these claims.

            Overall, economists and critics assert that while rent control might benefit current tenants or occupants, longer term its impact is more destructive.  A parallel to this is what happened in 1978 with California’s Proposition 13 that froze property taxes on existing housing.  Its impact was to shift property taxes to new construction, driving up its cost and leading to some of the rental shortage and cost problems one sees lingering to this day.

            Moreover, in the case of Minneapolis, rent control cannot be examined in isolation, but in conjunction with other policies, such as the 2040 Comprehensive Plan.  It calls for significantly new construction through the elimination of single gamily zoning. The hope is that increased densification of housing will, among other things, reduce or stabilize rents.  Simply rezoning will not necessarily produce the type of housing units that help middle class or low  income households or ensure that  historically segregated neighborhoods will equitably integrate.  Here, rent control may counteract and benefits  that come from Minneapolis 2040 by again decreasing incentives to build more units of any kind.  It may push development into higher end condos or shift development outside the city.

            Finally, rent control may work well when there is a surplus of units to prevent speculation.  But as in the case of Minneapolis where there is already a shortage of units, squeezing rents will not solve a pre-existing problem, only make it worse.

            How can one address the lack of affordable housing?  Specifically building those types of units combined with rent stabilization policies is one way to do it.   Rental subsidies are another solution.  Three, Minneapolis is part of a larger metro-wide housing market and it needs to operate in concert with other jurisdictions or the Met Council to fix the problem.  Four, consider alternative housing strategies, such as  encouraging the construction of  micro-housing.  Five, more creative development solutions, such as waivers on height or unit  numbers in return for dedicated construction of middle class or low income units, should be considered.  Six, allow for pre-fab units, which are cheaper to build, to be sited in Minneapolis.

            Rent control alone is a crude solution to a serious problem.  The real problem is that  housing is a basic human need commodified, meaning its delivery is mostly subject to the laws of marketplace.  Rent control is a band aid on a larger problem  and if implemented wrongly it produces secondary effects that distort housing markets for decades.  Used more carefully and in conjunction with  other strategies, it may serve as a partial tool to addressing the problem that a free market delivery of housing produces.