When policymakers debate new regulatory policies, including those relating to housing, invariably someone will identify that such regulations come at a price, oftentimes a high price. This usually triggers the response that complying with the regulations will be the “greedy” developer/builder’s problem and they can simply take it out of their profits. It’s a nice, emotional sound-bite; unfortunately it’s wrong.
In a market-based economy like ours, those who produce goods and services price their product to reflect their costs and a desired profit margin. The marketplace dictates whether the stated price is acceptable or not. But in the end, the consumer, whether a business or individual, always pays because the cost of regulation is, of necessity, built into the price. If the regulatory costs become too expensive to sustain the product, the producer will either shift to a different, less expensive product, if possible or close down their business—both options result in a reduction of supply and tend to inflate the price of the remaining inventory over time. While harsh sounding, the consequences are pretty simple and straightforward.
In the realm of housing, we have seen government address affordability in several ways: imposing controls or mandates, such as rent controls, or requiring that developers/builders include some quantity of “affordable” housing units in any new housing project. A new study completed by MIT documents, once again, that rent controls, while beneficial to those renters living in rent-control-buildings (regardless of ability to pay), actually cause rents to rise overall and tend to reduce the supply of “rent controlled” properties over time. Markets are dynamic and not static. The cost of regulation has to shift to somebody; housing developers will need to charge more rent to their market-based tenants to cover the cost of regulation for the protected class of renters and/or the owners of rent-controlled properties will seek to alter their financial exposure by selling such units at a discount, convert apartments to condominiums or, potentially, demolish the restricted buildings and construct a new market-based property.
Attempts to mandate that housing developers set aside a fixed number of “affordable” housing units in a new building (both rental and ownership) will have the same effect on affordability over time. Several communities have recently adopted ordinances that purport to address housing affordability. The trend of such ordinances requires that approximately 10 percent of such units be preserved as affordable. The cost of complying with these restrictions will be shifted to the remaining “market” units, making them incrementally more expensive for the consumer. It will be interesting to observe how market-based housing developers/builders respond, especially if they can pursue their projects in another, reasonably adjacent community that has not imposed such a restriction.
The City of Minneapolis has taken this approach to new multi-family projects; but it has also attempted to adopt an ordinance which, if fully implemented, will compel owners of multi-family rental housing to accept tenants who rely on public rental subsidies, ie. Section 8 vouchers, for some portion of their rent. Many landlords voluntarily accept tenants who rely on rental subsidies, but many do not. Those that do not point to the added cost and regulatory burdens associated with public subsidy programs, such as Section 8. A judge in Hennepin County invalidated the City’s rental housing ordinance as unconstitutional; rather than work with landlords to increase the supply of affordable rental housing, which will cause rents to moderate, the City has chosen to appeal the ruling, which is pending at this time.
The affordable housing task force convened last year at the direction of former governor Mark Dayton reached several conclusions: one conclusion is to dramatically increase the supply of housing of all types to support the growth that is anticipated (or hoped for) in Minnesota. Another recommendation is to closely scrutinize new state and local regulations for their impact on housing affordability. These recommendations go together. Hopefully, policymakers will take notice and do their part to address this chronic problem.