It’s silly to rob Peter to pay Paul

Kenneth Ahrens recently wrote a paper, Robbing Peter to Pay Paul, The Redistribution of Wealth Caused by Rent Control. He was kind enough to join the Minneapolis Area Association of Realtors in a zoom call to present the material. It’s of particular interest in our market as he uses the effects of a recent ballot measure in the city of St. Paul. The paper is written in clear plain language and starts with a nice historical review of rent control in the US. It’s well worth the read. Here is the abstract.

Abstract

We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals. Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

Ahrens mentioned that his peers were wondering why he was working on demonstrating the problems with a policy that has been shown to have greater negative impacts than positive ones. Experiments with rent control in the 50s and the 70s are long forgotten. A new generation of problem solvers and activists are reviving old ideas despite their flaws. The focus seems to be on preserving a renter’s ability to stay in their apartment by capping rent increases. This in turn transfers wealth from the landlord to the tenant.

Although the intent might be to have a one-for-one transfer from the pocket of the property owner to the renter, Ahrens points out that it is not that straightforward. “Basic economic theory predicts that rent control causes both transfers of wealth and deadweight losses (DWL) for property owners. These losses can be divided into a direct capitalization loss and an indirect negative externality loss.” A deadweight loss might derive from postponement of maintenance and repairs due to lack of income. “The sum of these effects is observable as a decline in the market value of real estate, as the property can no longer generate a market rate flow of income and fewer repairs to the property mean a lesser quality building.”

Furthermore, the transfers benefit the wealthy and hurt the less wealthy. In their findings, the lower income owners realize the greatest decline in home values- 8.52%- than any other transfer.

Excerpt from Table VII

There have already been meetings in St. Paul to adjust the stringent rent control measures passed last November. But there is no talk of reversal. Constituents seem to feel that renters in some way are not getting a fair shake.

Maybe I can take a run at the reasoning. Renters play a role in the community as do property owners. They are not as vested as they are more mobile, yet they too can be good citizens. Perhaps they go to city hall to petition for a road safety concern, a new playground, or more observance of a problem property. Perhaps they are the bus stop mom or the football coach. Perhaps they help maintain a safe light rail system or advocate for better bike lanes. For all that personal time spent on city infrastructure, they enjoy an improved environment. Yet the homeowners enjoy greater home values. And renters face the possibility of being priced out.

Of course, homeowners do not always enjoy greater home values. I remember a period of three years following the great recession where most sellers brought a check to closing to buy out their remaining mortgage balance. Sellers also feel a pinch in their bottom line when cosmetic updates have not been done, or repairs deferred. Renters find it far less costly simply to move to a newer updated unit. Such are the differences between ownership and rentals.

Maybe there is a new framework to consider. One that takes into consideration the economic issues of civic participation yet still tallies the risks of ownership. What’s clear to me is that if economists do not come up with analytical tools that better express the motivations and incentives constituents are expressing in their political decisions, then we will continue to suffer through cascading unintended consequences of bad policy.

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