Rent control: The life-size American experiment that the government should have meditated on before resorting to it

Rent control: The life-size American experiment that the government should have meditated on before resorting to it

©JOEL SAGET / AFP

Perverse effects

A life-size experiment with rent control took place in the cities of Saint-Paul and Minneapolis, two large American cities in the same metropolitan area. After passing a law to control rent, building permits fell by 84% in St. Louis. Paul, in favor of Minneapolis.

Atlantico: In Minnesota, Saint Paul and Minneapolis are two major cities in the same metropolitan area. Saint Paul passed a law to control rent, not Minneapolis. What were the consequences of this decision? What do we observe between the two cities?

Marc de Basquiat: Without getting lost in the details of the technical provisions, one can only be struck by the graph published by MinnPost, commented by journalist Bill Lindeke. The city of Saint Paul, which implemented rent control, saw a tripling in the number of housing starts, while its neighbor, who opted for a more flexible policy, observed a doubling of new housing construction.

Figure 1 – 6-month rolling average of the number of building permits for multi-storey properties – Source: US Department of Housing and Urban Development

All economists dream of encountering such blatant real cases that prove that the idea of ​​rent control goes against the desired effects and all good economic sense.

Incidentally, what were Saint Paul’s motives for embarking on such a seemingly disastrous policy? Let’s be clear: this was not a project led by Mayor Melvin Carter, but the result of militant action led by the HENS collective (Housing Equity Now Saint Paul), which achieved a majority on a very simple.

Basically, their motives – very commendable – were as follows: “the current shortage of rental housing units and the prevailing rental levels have a detrimental effect on the health, safety and welfare of a significant number of Saint Paul residents, especially those in low-income households. moderate income. ” The essence of the measure adopted in November 2021 can be summed up in a few words: “No landlord can demand a rent increase of more than 3% per year of the existing monthly rent”. No exceptions have been made for renovations and new constructions, nor for homes rented after being left empty.

With U.S. inflation happily exceeding 3% in the past year, homeowners have seen the value of their real estate plunge, which has removed any incentive to build new rental homes. How do you get surprised?

To what extent do the observed results in the two cities show the perverse effects of rent control more generally?

The idea of ​​freezing rents is one of the sea snakes of economic policies, which opposes advocates of an authoritarian state to those who propose to regulate markets more gently so as not to deprive themselves of their virtue of self-adjustment between the diversity of offers and wishes. As the measure implemented in Saint Paul is simplified, it unequivocally illustrates its harmfulness. Can we qualify the analysis by acknowledging the virtues of other, more subtle formulations?

This is especially the case for the city of Paris, where in 2019 Anne Hidalgo introduced a framework system that articulated three amounts (in euros per square meter) according to a grid of the city in 80 districts. In addition, updating rents between leases must follow the tenant reference index (IRL). Can we share a positive reading of this set of rules?

Showing a “reference rent” is certainly virtuous, informing both the owner and the tenant of a reportedly reliable standard (the median rent observed in the district), and assisting them in their negotiation. Similarly, the presentation of a “reduced rent” (by 30%) provides a justification when the parties choose – for reasons relating to them – to set a price lower than the recommended standard. The law also defines an “increased reference rent” (by 20%), which the owner is prohibited from exceeding under sanctions.

The economist views positively a device that is not too restrictive (less than 10 fines are imposed per year), which helps to reduce the asymmetry in the information between tenant and owner. The danger would be to make it develop into a tool to control rent levels by establishing political control over the “increased reference rent” for each of the 80 neighborhoods and by strengthening sanctions. This would make the economic viability of real estate investments so uncertain that many players would turn away from the sector, which in the medium term would be left without financial backers.

Bruno Le Maire declared “We are introducing a rent shield (…) Rents will not increase, for a year, by more than 3.5%”. To what extent will this decision, taken to respond to inflation, have different effects than expected if we are to believe the example of Minnesota (and so many others)?

Strictly speaking, it seems difficult to claim to fight inflation in this way, a statistical index calculated by INSEE from a basket of goods and services, where rents weigh only 6%. Although it is difficult to control the chain effects of rising energy prices, the government is looking for ways to mitigate the consequences for the most vulnerable. The approximately 40% of households renting their main home are clearly more affected than the owners who saw their assets grow over the two years with Covid-19. The Minister of Finance’s proposal is therefore first and foremost a means of targeting public support for low-income households.

So what would be the specific terms of this limit of 3.5% increase in rent? Is it a matter of establishing political control over the rental income index (IRL)? IRL has so far been determined simply “on the basis of the average over the last 12 months of the development of consumer prices excluding tobacco and exclusive rents”. Would the IRL now be manufactured in an office in Bercy, in conjunction with the Matignon and Elysée?

As with the control of rents in Paris, Bruno Le Maire’s statement illustrates the temptation that political leaders may have to decree desirable economic indices in order to impose economic actors on them instead of letting them make rational decisions on the verge of macroeconomic trends. .

Professor Yoland Bresson often said this when we mentioned the desirable amount of redistribution in a country like France: When we deviate from the basics, “the economy avenges itself!”. We see it in Saint Paul, Minnesota. Let us avoid triggering the same kind of correction the size of Paris or the country.

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