Early evidence suggests the passage of St. Paul's new rent control law caused the growth rate of residential property values to lag behind other cities, according to an analysis of real estate transactions conducted by University of Southern California researchers.
While the city's housing market remains competitive, with a shortage of listings driving prices up in recent months, economists Kenneth Ahern and Marco Giacoletti studied geographic and seasonal trends, building age, square footage and other variables to compare the change in St. Paul real estate prices following voters' November approval of rent control to what other markets experienced during the same period.
They estimate that if voters had not passed a 3% annual cap on rent increases, residential property values would be 6-7% higher — a collective $1.6 billion.
"Prices tend to reflect what's happening in the future," Ahern said. "We know that in the future, rents are going to change. If I as an investor anticipate that, I'm not going to pay as much today for something that's going to have less cash flows in the future."
Ahern and Giacoletti used data from Redfin, an online real estate brokerage company, to look at nearly 150,000 Twin Cities-area transactions that took place between January 2018 and January 2022. The analysis focuses on one-to-four-unit properties and does not include large apartment buildings.
A handful of economists from other institutions noted that while the paper — which has not yet been peer reviewed — appeared methodologically sound, the findings represent a relatively small time frame.
St. Paul Mayor Melvin Carter has already asked a 41-person stakeholder group to recommend ways to improve or enhance the city's rent control ordinance, and future changes to the policy would likely have effects on housing prices.
"This study provides some reasonable evidence ... though we need more time and more research before reaching definitive conclusions," said Evan Mast, a University of Notre Dame economist.
St. Paul's policy, which takes effect May 1, has drawn attention from outside Minnesota as the first rent control measure in the Midwest and a particularly stringent law. It is not tied to inflation, does not allow landlords to raise rents more than 3% once a tenant moves out and — perhaps most unusually — does not exempt new housing construction.
That's what caught the eye of the USC researchers, who said academic studies often don't examine the impacts of policy decisions until years after they are made. With inflation spiking and rents skyrocketing in many U.S. cities, rent control has been gaining what experts are calling a third wave of popularity.
In Minneapolis, where voters last fall signaled they'd like city leaders to craft a rent control law, elected officials have said they are keeping a close eye on the rollout of St. Paul's ordinance. Advocates in both cities launched campaigns for the policy last year after University of Minnesota research showed that low-income residents and people of color in Minneapolis were more far more likely to experience drastic rent increases.
"We've got intense affordability problems in most American cities," said Ed Goetz, director of the university's Center for Urban and Regional Affairs, which is facilitating St. Paul's rent control group. "While it's true that some of this is caused by lack of supply, it's unrealistic to think that tenants are going to sit around and pay 6-8% more each year, trusting that in 15 years we'll have added enough stock so that their rent will finally be reasonable."
Long-term questions linger
In their study, Ahern and Giacoletti observed a bigger decline in the value of rental properties, which they identified using data from nonprofit HousingLink and the city's fire certificates of occupancy.
Compared to the Twin Cities suburbs and five other markets — Denver, Indianapolis, Kansas City, Mo., Nashville and St. Louis — St. Paul saw a statistically significant increase in volume of sales following the November vote, the authors wrote. They did not include data from Minneapolis to avoid potentially confounding effects of the city's simultaneous ballot measures.
The paper suggests the drop in prices was driven by landlords selling off properties to avoid future rent caps. That's not surprising, economists said, given past studies on the effects of certain rent control programs.
"I think the results are very eye-catching because they were so immediate," said Salim Furth, a George Mason University economist. "This is a red flag, a flashing light, telling the government, 'Hey, you did something that people who own property here expect to make the city worse.' "
Real estate agents said while the average St. Paul home buyer or seller doesn't seem to be taking rent control into consideration, there have been some small-property landlords citing the new law when they decide to sell. The tight market might sway some who are on the fence, especially landlords with single-family rentals appealing to would-be homeowners, said Robbie Grossman, a board member for the St. Paul Area Association of Realtors.
"I don't have good enough sense to say whether there's any sort of trend, but I do know that it's happening," he said.
Tram Hoang, who led St. Paul's campaign for rent control and serves as director of policy and research for the Housing Justice Center, called the study "a bit premature" since it relies on a single quarter of data before the ordinance went into effect. She added that she does not think the authors provide a convincing argument that the difference between St. Paul's market and other cities is solely attributable to rent control.
Appraiser Josh Folland, senior managing director for St. Paul-based Valbridge Property Advisors, said he also thinks it's too soon to draw conclusions.
The last few months have been marked by confusion about the ordinance, and changes to the policy seem likely — the mayor has repeatedly said he wants to change the law to exempt new housing construction, and the City Council recently tasked the stakeholder group with a list of issues to consider as it prepares recommendations for how to enhance the ordinance.
"St. Paul's rent control and its effect on the market is a living, breathing thing, changing every day," Folland said. "Trying to measure the initial shock of the most stringent rent control policy in the country just four months after its approval could overstate its long-term impact."