Building permits in St. Paul are down over 80% since the city passed rent control

By John Phelan. John Phelan is an Economist at the Center of the American Experiment.

"The rent control ordinance passed in St. Paul last November is having exactly the consequences that were predicted before it was passed. If you set a price below a market price, you increase demand relative to supply, worsening the very shortages the price control was meant to fix.

St. Paul’s rent control ordinance was especially bad policy. As Minn Post reports:

…it contained a unique provision for national rent control policies: there was no exception for new housing construction. Typically, in order to make sure that new homes still get financed and built, rent control policies only apply to older apartments, either exempting buildings for a certain period of time or only including buildings built before a certain date. The policy laid out in the St. Paul referendum had no such exception.

“With the passage of the rent control ordinance, there’s now a useful real-world experiment taking place,” the article continues:

Was the conventional wisdom true that rent control would reduce housing construction, and if so, to what degree? Or is it possible to apply rent control to new housing without impacting the new apartments that cities like St. Paul need?

Now, the results are coming in:

With three months of data on the books since the passage of the rent control measure in November, results are rather grim for anyone hoping for new apartment buildings in St. Paul. Compared to the same period during the previous year, multifamily building permits are down over 80 percent. Meanwhile, in Minneapolis overall construction is up as the economy has rebounded.

Developers looking to build in St. Paul cannot get financing to do so:

Because people making financing decisions view rent inflexibility as increasing risk, they have been simply leaving St. Paul construction projects by the wayside. As one St. Paul developer described during a recent round table discussion, “it’s a concern.”

“We have two projects with 260 units where the capital stack was all put together and ready to go, but when the ordinance passed those investors went away,” explained Kou Vang, president of JB Vang Real Estate. “A lot of our investors were family funds, stuff of that nature, and they still went away.”

Econ 101 strikes again.

The city government is now scrambling desperately to undo the damage wrought by this utterly predictable disaster. Mayor Melvin Carter – who backed the ordinance – is now trying to get new housing exempted. This is better than nothing, but the whole ordinance needs to go."