Tom Sgouros: Landlords, Inflation, and Market Regulation

"...it’s hard to resist the conclusion that the state must venture into price regulation in the rental market if we really want to address our housing crisis."

I live in North Kingstown, and a friend of mine, a retired police officer, rented the downstairs half of a house down the street from me. At least he did until last year when his landlord told him the rent wasn’t nearly as high as the market would bear, and raised it again. When my friend moved in in 2019, he was paying $1350 a month, and he left in 2024 when the rent went to $2500. This is a guy who never missed his rent and helped make repairs to the house. So he left, but had to leave town to find something he and his wife could afford.

My friend’s story is hardly unique. In Rhode Island and much of the country, rents are up. At the end of 2024, the median asking rent in Providence was up 12.6% over the previous year. Average rents were up 2.5%. According to the Joint Center for Housing Studies at Harvard, the metro area that covers about 3/4 of Rhode Island has 176,000 households that are either “cost burdened” (paying more than 30% of their monthly income for rent) or “severely cost burdened” (more than 50%). This is 45% of all households, for those keeping count.

People routinely blame the rising costs on "supply and demand," and sure, a housing supply that isn’t keeping up with increased demand is a big part of the story, but that lets a lot of people off the hook way too easily, including my friend’s landlord.

The thing about inflation is that it’s a matter of choice. Prices go up when someone decides to raise them. Lots of economists like to imagine the economy as a series of auctions where supply and demand find their magic balancing point, but that’s not the way the world works. In the real world, there are power imbalances between buyers and sellers that are different in different markets. Big buyers have a lot of power in commodity markets, for example, and that’s why our country has agricultural price supports to keep farm prices up. But in today’s rental housing market, the sellers have the high cards. Landlords have pricing power that tenants simply do not.

This is not to say that landlords’ costs do not rise. Property taxes go up, but they are limited to 4% per year. They are usually less than a quarter of a landlord’s expenses, so a 4% increase in taxes is certainly less than a 1% increase in overall costs. Few towns hit the limit every year, and North Kingstown certainly has not. Insurance rates are going up, too, but they are generally around 5-10% of a landlord’s costs. 

Even when costs rise, there is a question of how much is enough. If you’re clearing $400 a month on an apartment you rent and your costs go up $200, are you justified in raising the rent $200 to make up for it? Do you *deserve* all of that $400 per month?

John Maynard Keynes understood that there are a lot of individual decisions behind economic phenomena, and that’s why his “General Theory of Employment, Interest, and Money” was as much a book about mass psychology as economics. In that book, he wrote about how emotions, what he called “animal spirits,” were as important to individual economic decisions as financial costs and benefits. Sometimes, he wrote, people’s expectations and collective beliefs make the economy settle into a state that is stable, but not optimal. In that case, government policy should be designed to change those beliefs and expectations.

Keynes was thinking about the Great Depression and the problem of inadequate demand, but the point works here, too. If we say that at least some of the recent rent increases in Rhode Island are not due to increased costs—that some increases are just landlords increasing prices because they can—what should we do about it?

Perhaps one answer is social. Maybe we should bring back the word “gouging as a commonly used description of rent increases and embarrass our landlord friends who tell us that market forces “made” them raise the rent on their tenants. Those who engage in arbitrary and dramatic rent increases damage the communities that provide their income. Let’s make it a norm that a landlord is responsible to the communities around their property. Not every landlord is obligated to make their housing affordable, but every landlord should feel obligated to make their housing stable.

But increasing social stigma seems hardly enough, and it’s hard to resist the conclusion that the state must venture into price regulation in the rental market if we really want to address our housing crisis.

This is controversial, but honestly, I have no idea why. Your federal government, despite who’s in charge of it now, regulates prices in wheat, soybeans, milk, prescription drugs, and labor (that’s what a minimum wage is). The Federal Reserve Bank regulates the market for money by directly setting some prices, too. In Rhode Island, your state government regulates cigarette prices, insurance, taxicabs, tow trucks, moving companies, ferries, electricity, natural gas, labor (again), and more. Governments also regulate markets in other ways than directly by price, but you get the idea: price controls are all over the place. They are a totally normal part of economic life in America. And lots of them are not controversial.

Pretty much any economist will yell at you for suggesting rent control would be a good idea, but these other markets were not regulated because abstract economic theory demanded it. They became regulated because we tried unregulated markets, but they did not work: insurance companies defaulted, farmers went broke, and workers starved.

The current rental market in Rhode Island allows any landlord to be confident they can get the “market rate,” whatever that is, but it also leaves thousands of people without homes and destabilizes entire communities. It’s a market where every seller can find a buyer, but what we need is a market where every buyer can find a seller, and we don’t have that because lots of buyers can’t afford the going prices. Building more rental housing will certainly help, but even if it works, it will take a long time to really affect the market prices. How long do rent-burdened Rhode Island families deserve to wait?