So far, the 2021 general election has marked a high-water mark for rent regulations in the Twin Cities. On that November day, voters in Saint Paul passed sweeping rent regulations in a ballot initiative while voters in Minneapolis approved an initiative that would clear the way for the city’s political leadership to propose a similar policy.
Since then, the tide has ebbed slightly. After a year of implementation struggles with landlords and backlash from developers, political leaders in Saint Paul made significant changes to their city’s policy in 2022. Meanwhile political leaders in Minneapolis hit a deadlock in their negotiations and ultimately could not agree on a policy that would’ve appeared before voters in 2023.
These setbacks do not mean that the issue is going away. In both cities’ upcoming city council elections, just about every serious candidate has a section of their website about rent regulation and every candidate forum is reserving time to discuss it.
Yet for all of this attention, it has occasionally been difficult to get a clear picture of what someone actually supports. A leading reason why is because the language used by the candidates, the advocates, and the media lacks a vital degree of clarity. Too often the focus is on surface level details and misses the critical details that differentiate policies. Above all, there is a serious lack of any distinction between the two key words being used to characterize rent regulations: “stabilization” and “control.”
Often used interchangeably, as in “rent stabilization” and “rent control,” these words do not and should not be made to mean the same thing. Moreover, making a careful distinction between these associated phrases reveals a meaningful difference in the goals and methods of what is being supported. While some parties to the debate benefit from obscuring these details, the public would be much better served with clearer language. Going forward, everyone deserves better signposts to grasp the policy options for rent regulations, weight the incentives of the different players in the rental market, and understand the implications of one policy design versus another.
What Is the Rent Regulation Policy Trying To Do?
When advocating for any given policy, it’s essential to have a clear idea of what the policy is attempting to achieve. When it comes to rent regulation, consider two possible goals:
A city wants to pass a policy that will make it easier for existing tenants to remain in housing if they so choose by restricting the amount that the rent can go up in any given year.
A city wants to pass a policy that will make it easier for all renters to find or remain in housing that they can afford by restricting the amount that the rent can go up in any given year.
In both cases, the mechanism is to restrict rent increases. But the details of what rents are restricted is different, and this stems from a difference in who each policy aims to help. Goal #1 aims to stabilize the rental experience of existing tenants. Goal #2 aims to control rents for all tenants.
Burrowing into the details, this small shift in perspective hinges upon a feature of rental regulations known as “vacancy (de)control.” In both policies, a tenant who renews their lease can expect rents to increase by no more than the policy allows. But when a tenant decides not to renew their lease, vacancy decontrol allows the landlord to rent to a new tenant at whatever rate the market will bear, regardless of what the previous tenant paid. Alternately, vacancy control would restrict the landlord to rent to a new tenant at the same rate that the previous tenant would’ve paid, had they renewed.
To illustrate the point, let’s imagine an apartment unit that is rented by Andrew for $1,000/mo in a city with a rent stabilization policy that caps annual rent increases at 3%. If Andrew renews the apartment for another year, the landlord may charge him no more than $1,030/mo. However, if Andrew decides to move elsewhere, and landlord is free to rent the unit to Ben at a rate of $1,031/mo or more.
Meanwhile, in a city with a rent control policy and the same 3% annual cap, whether or not it is Andrew or Ben who rents the apartment in the second year, the rent cannot be more than $1,030.
The most common argument in favor of rent regulation is that such a policy would limit involuntary displacement of tenants by ensuring that annual rental increases would be predictably small. Tenants living in areas that—for whatever reason—suddenly experience large increases in demand would be protected from having to bear rapidly rising market rates. But both rent stabilization and rent control policies accomplish this goal. Through vacancy control, rent control policies are designed to have a far greater influence by preventing rent growth for all units, regardless of their tenancy. In this sense, rent control policies are more ambitious than their proponents often acknowledge, functioning not just as an anti-displacement measure but also as an attempt to hold down, and thus keep more affordable, rents citywide.
Bad Incentives and their Implications
Rent control advocates might push back against one particular assertion from the summary above, and they can make a persuasive argument. While both sets of policies ostensibly succeed in the same goal of protecting existing tenants, rent stabilization policies may instead provide landlords with an increased incentive to evict tenants.
Consider an area where demand is rising rapidly, putting upward pressure on market rents. In a city with rent control a landlord would be subject to the same cap on rental increases, regardless of the tenant, and thus have no incentive to force a change. But in a city with rent stabilization, in plausible circumstances a landlord could make significantly more money by forcing out a tenant (through eviction, intimidation, or simply negligence), triggering vacancy decontrol, and renting the unit out to a new tenant to realize the higher market rent.
In cities like Minneapolis or St. Paul, where housing demand has grown gradually and rents have not increased significantly (according to broad metrics) in recent years, such an incentive would be initially unlikely. Changes in tenancy are expensive for landlords too, and they are generally loath to make them. But the longer a rent regulation was in place, the more likely that long-term tenants in specific areas might benefit from a growing delta between their actual rent and the market rent, and the greater likelihood that landlords might begin contemplating measures to claw that benefit back.
The incentive to evict that is created by vacancy decontrol is a serious challenge that proponents of rent stabilization must address. When passing a rent stabilization policy, a “just cause” tenant protection policy that circumscribes valid reasons for eviction is an essential element. So too may be a “tenants bill of rights” that protects tenants from landlord behaviors that might be designed to force an involuntary move.
Or, policymakers could simply forget about vacancy decontrol and go straight to a rent control scheme that doesn’t create that incentive (and certainly could pass other tenant protections on their own merits). But the ledger is not one-sided, rent control policies are well known for potentially creating perverse incentives of their own, and opponents of such an approach have a deep well to draw from.
A rent control policy needs to hold rents below their market value for it to be of any benefit to tenants. This necessarily will cut into the earnings of landlords. In some markets, these may be high enough for landlords to still do just fine. In others, they might be lower. But in every market for every unit, there will be a margin at which renting it out is no longer worthwhile. And whatever moral value someone personally assigns to the profit motive or private property ownership, they must understand that in the open society in which we live the government cannot force people in any business or profession to predictably and repeatedly take a loss.
Without the prospect of catching up to market rents in the future, landlords may be incentivized to spend less on maintenance, amenities, or other services (plenty already shirk these responsibilities, but a rent control regime only makes this behavior more likely and more rational). They may find ways to pass additional costs onto tenants. To some extent, these strategies can be addressed through separate ordinances, but only at the expense of further eroding the feasibility of operating rental housing. Landlords may also simply choose to automatically increase the rent by the maximum allowed every year, afraid of ever falling behind. In the Twin Cities, this strategy would’ve led to net rent increases in the past decade when compared with the rents that were actually observed.
Ultimately, all property owners have a final option, which is to exit the rental market altogether. No rent control scheme being proposed anywhere to my knowledge contains a plausible way to prevent the sale of rental properties. An initial glut of for-sale properties might be great for prospective homeowners, but would be bad for renters (especially new residents to the market) who could face a shortage that would force them to look in other municipalities for housing, forgoing the protection of the rent control policy that was intended to help them.
Advocates of rent regulations should obsess over mitigating these incentives, not because they make landlords sad, but because public policy lacks the tools to ensure that landlords actually absorb much of their impact. Instead, landlords have many avenues through which they can and will pass on costs to tenants. Even absent any kind of coordination between property owners, inadequate and sclerotic supply of rental housing in the long run, pegged to reflexive maximum rent hikes, will mean that fewer people will have access to the types of housing that has the best value for their lifestyle and is best suited to their needs, and may end up paying more for it despite all intentions to the contrary.
Risky Business
While rent regulations specifically impact the tenant/landlord relationship, they also impact the development process, whether or not the intention of the builder is to hold or to sell.
The mechanism by which this occurs is often misstated; the key variable is not profit, but risk. The public generally views real estate development as a lucrative business. There’s no denying that many people can become quite rich by developing property. But real estate development can be so lucrative only because it is also so risky. Development projects fail all the time and developers go bankrupt frequently. Less visibly, many investments in real estate fail to hit their projections, barely break even, or lose money without it ever being reported. If buying, selling, and improving property were an easy way to rake in windfall profits, more people would do it. Instead, it’s a notoriously capricious business.
The process of developing rental housing involves a substantial up-front investment for the prospect of a long-term return. A developer puts hundreds of thousands of dollars towards securing site control, developing plans, and preparing permit applications. Financing partners put millions of dollars towards construction. All of this money is expected to pay off over the course of the following decades, based on modeled assumptions about occupancy and rent.
Vanishingly few development models rely on year after year of massive rent increases to pencil out and so rent regulations do not typically discourage development because they limit future projections for profit. Where rent regulations, especially rent control, cause problems is that they massively decrease flexibility to adjust rents to respond to unknown future events. This introduces an unacceptable level of risk for most developers and even more for their financing partners.
The past couple years provide an illustration of exactly the types of unexpected events that might require this kind of flexibility. In the COVID-19 pandemic, many landlords were obligated to offer massive rent discounts to keep tenants. In the inflationary period that followed, many landlords faced significantly higher operations and maintenance costs and felt pressure to raise rents to compensate. None of these specific events were anticipated when apartment buildings were being financed in the preceding years, but this experience is now fresh in the minds of everyone involved in development or financing. Under a rent control regime, the ability of property owners to respond to these disruptions would’ve been drastically limited.
Many will see this as an unambiguously good thing! Flexibility for developers, landlords, and their investors is another way of saying uncertainty and worry for tenants. But a rent regulation that discourages nearly all new construction is a regulation that will benefit fewer tenants over time, as some rental units are sold for ownership while not being replaced. This is why rental regulations have evolved over the past century to gradually include a number of adaptations (or loopholes, depending on your perspective) to reduce the amount of risk involved in the development process. These adaptations typically include an exemption period (typically 30 years to match a common loan duration) for new construction and an upward adjustment to the annual percentage increase cap in times of high inflation. Vacancy decontrol, however, is probably the most important of the bunch from the side of property builders, sellers, and owners, because it has the most bearing upon risk. With vacancy control, rents can be locked into a trajectory from the moment they are set. With vacancy decontrol, the flexibility to adjust in the long run is retained.
LEft Hand, Right Hand
The context in which rent regulations are introduced matters. As mentioned above, the extent to which a given market rent includes a cushion for profit has significant bearing on the incentives for the landlord. Future housing supply may also be affected through attrition and decreased new construction.
In some places, like coastal California, prices may be high enough and supply constrained enough that even relatively strict rent control policies may not negatively impact development (should it be allowed) in the near-term. But Minnesota is not California. And in Minnesota, rents have remained relatively stable and low in the recent past.
A key reason for this generalized price stability has been that the supply of new housing has been allowed to keep up with demand to a greater extent than other peer regions. Minneapolis in particular has garnered many headlines for its zoning liberalization. More quietly, St. Paul has enacted many of the same policies. The Twin Cities metro overall has constructed a comparable number of homes to places like the Bay Area, despite a cooler economy, and this success has contributed to one of the country’s lowest rates of inflation.
Not coincidentally, the political debate surrounding housing growth in Minneapolis-St. Paul has not regressed to the same level of zero-sum thinking and nativist toxicity that can be found elsewhere, and can be easily sampled online. Allowing more housing has become associated with progressive policy goals, like combating climate change and reducing residential segregation. As a consequence, it can be found as a key policy plank of many of the city council candidates running towards the left in both cities.
But a preference for rent control can also be found in these same platforms, with little acknowledgement of the areas in which these goals may conflict. Governments pass a lot of policies and sometimes these policies may end up conflicting with one another. Rarely is this done on purpose, however. Tenant protections and rent regulations may be seen as two great tastes that taste great together. But eliminating permitting restrictions while dramatically escalating financing risk are policies at cross purposes.
Rent regulations also cause a quandary for raising government revenue. Rising property taxes and utility assessments can be among the drivers of increasing rents, but such levies operate according to their own fiscal logic. No city would agree to hold their own budgets to a fixed annual increase, aware that needs change overtime and different priorities or new emergencies may demand more spending. Yet raising these rates faster than the imposed cap of rental regulations risks political backlash, not to mention the kinds of evasive money-saving tactics or market exits discussed above.
Finally, rent regulations can fall afoul of good government principles. To the extent that there is such a thing as free money in governmental policy, it comes from ensuring that private actors spend as little time as necessary filling out forms and that public bodies spend as little time as necessary evaluating them. This does not mean that there should be no regulations. It doesn’t even necessarily mean that there should be fewer regulations. Rather, the most effective regulations are easy to understand, easy to follow, and easy to enforce. Both rent stabilization and rent control policies necessitate the creation of new bureaucracies to interface with tenants and landlords, while adjudicating their disputes. But policies with vacancy control, as well as policies with stricter up-front limits that front a warren of exceptions and work-arounds (as experienced in St. Paul), are harder to maintain because they require more documentation. Rent regulations that could undercut other housing affordability efforts, or could sap bureaucratic energy from other initiatives may render municipal policy less than the sum of its parts.
It’s A Delicate Balance
Shelter is at the foundation of the hierarchy of human needs. Without stable housing, there is little else a person can think about. A city in which large numbers of people do not have homes, others struggle to pay for their homes, and many more feel insecure about their ability to do so in the future is a city that is not fulfilling its basic social contract or meeting its potential. Renters rely on an agreement with another party for their shelter and live with some level of vulnerability by default, no matter how secure their finances.
In this context, it is easy to make the argument that some amount of government regulation of rents is necessary and proper. But to what degree?
In the Twin Cities, the debate has often adhered to several poles. On one side, staunch opposition to any rent regulation policy. On the other, unwavering belief in the kind of rent control policy that briefly was operative in St. Paul. There are certainly leaders operating between these positions as well, as illustrated by the enactment St. Paul’s current watered-down policy, but they have been far more reactive than proactive.
The lack of clear thinking and communication regarding these topics has muddied the waters a great deal. Opponents of all rent regulations tend to refer to any policy as rent control. Proponents of rent control policy often refer to their goals as rent stabilization. And people who say they support rent stabilization (or some kind of “anti-gouging” measure) are rarely forthright about what their preferred approach actually is and rarely seem to be in a rush to enact it.
Throughout this political debate, there has been little effort to educate ordinary voters about the different policy levers and a generally misguided media focus on less important topics, like the percentage annual cap, than on more impactful details like the length of the new construction exemption, the available adjustments for economic conditions, and vacancy (de)control. Most ignored of all have been the issues inherent in enforcement, discussed mostly in passing above, which seem to have fatally undermined the tenant benefit of the St. Paul rent control ordinance (even as the threat that the policy posed chased developers away all the same—a true lose-lose policy design).
Nobody is helped by this state of play. Price regulation is among the thorniest types of policy that any government can enact, because in a capitalist economic system prices represent the final output of a complex system of interactions, all of which can be thrown off balance if prices are tampered with. Rents are prices that tenants pay for a good that they cannot do without. They deserve affordability and stability. But rents are also income that pays for maintenance of existing properties, or future income that pays for the development of new properties. The incentives that landlords, developers, and financers face are real. To dismiss them as purely manifestations of immoral greed is myopic—none of us work for free. To ignore the interplay between risk and reward is to deny human nature. Government is not a philosophy seminar. Current tenants need affordable and stable existing homes. Future tenants (no less real) need affordable and stable future homes.
The best rent regulation policy, then, must strike a balance grounded in reality. It must address the needs of tenants while not incentivizing capital to flee the market. It must work alongside other city policies, not against them. This requires more study and less ideology, better communication and less stridency, and clearer goals about what we’re trying to achieve so that the resulting actions can be calibrated to achieve them and not more or less than bargained for.