What's behind skyrocketing rental prices in Spain?

What's behind skyrocketing rental prices in Spain?

What's behind skyrocketing rental prices in Spain?

Last month, Spain’s prime minister Pedro Sánchez was forced to call a snap election after Congress rejected his budget proposal. The call for elections and subsequent dissolution of parliament has not, however, prevented Sánchez’s caretaker government from continuing legislating via executive orders.

Even though these executive orders need to be approved by the so-called Permanent Deputation (a decision-making body that replaces the legislative chambers during vacation and pre-election periods), it seems likely that Sánchez will gain the support of a sufficient majority to have at least some of them passed before the elections.

One of these pieces of legislation introduces new rental rules for the Spanish housing market. Among other things, this new law imposes a cap on annual rental increases and extends the length of contracts from three to five years. With these measures, the government tries to tackle the considerable increase in rental prices that has taken place over the last years, especially in large cities like Madrid or Barcelona.

Unfortunately for tenants, these interventionist policies could end up making things worse. The impossibility to increase rental prices over the term of the contract could push lessors to ask for a higher initial rent, putting even more pressure on the rental housing market. Similarly, lessors could simply postpone annual rent increases and implement them all at once when the contract ends.  This would benefit current residents at the expense of future tenants.             

The good news is that the executive order doesn’t include a cap on rental prices, a measure proposed by Podemos (Sánchez’s left-wing populist allies) that would result in a severe shortage of homes for rent. Given the vast empirical evidence about the harmful effects of rent controls and other interventionist measures in the housing market, why do politicians continue to insist on such policies?

One reason is ideological bias. After all, politicians aren’t different from the average citizen, that is, they are affected by the same cognitive biases that affect us all. A second reason is populist electioneering. The main goal of politicians is to be reelected, which means that they tend to carry out those policies that are seen favorably by the majority of voters regardless of whether these make economic sense or not.

Be that as it may, one thing is clear: Sánchez’s government and its parliamentary allies have misdiagnosed the problem and, thus, put forward the wrong recipes to solve it. Who is then to blame for the explosion in rental prices of the last years?

The preferred scapegoats are real estate investment funds and other similar financial firms, whose business consists of purchasing and renting out houses with speculative purposes. The problem with this explanation is that it doesn’t fit the numbers. The largest real estate investors own only 3 percent of all rental houses in Spain. It is thus impossible that they exert such a large influence on the rental housing market.

Those in favor of further regulating the housing market also blame platforms like Airbnb for the price increases. However, recent evidence suggests that the influence of such platforms on rents is minimal. Between 2009 and 2016, Airbnb contributed to a meager 4 percent increase in rental prices in Barcelona, one of the cities where rents have skyrocketed over the last years.

What explains, then, this economic phenomenon? Simple: supply and demand. The economic recovery together with the attractiveness of large cities for job seekers have pushed up demand for rental houses in urban areas. In contrast, supply of new houses has lagged behind, which has resulted in a substantial increase in rental prices. In the period 2013-2017, rents went up by 45 and 55 percent in Madrid and Barcelona, respectively.  

Therefore, the solution shouldn’t be more regulations, but to end with zoning restrictions and allow for the construction of new dwellings. This would no doubt put downward pressure on prices, thereby helping people access an affordable house without going bankrupt in the attempt.





Luis Pablo de la Horra

Luis Pablo de la Horra
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