The Spanish government has just approved extensive rent control as part of its first national “right to housing” law.
He Law for the Right to Housing (“Right to Housing Law”) will allow regional governments to impose limits on the rental of landlord-owned apartments (with 10 properties or more) in areas considered “stressed markets.” It also includes tax penalties for landlords who leave multiple units unrented for extended periods, and includes provisions to reserve 30% of units under new housing construction for low-income public housing.
The measure, first approved as a draft last October, passed the legislature on February 1. It is part of an ongoing effort by Spain’s left-wing government to address an urgent housing affordability crisis, in which renters have faced 50% price increases in a period of five years.
With this new law, the Spanish government is trying to create long-term results (that all citizens enjoy a safe and decent home), but it is using policies that have short-term benefits. For example, the rent caps included in the new law are likely to benefit current apartment tenants, but they are unlikely to help, and may even hurt, the growth of the affordable housing supply overall.
Rent control at the expense of others
In Spain, in addition to others countries throughout Europe, rent regulation policies have historically been a favorite government tool to combat rent inflation and unaffordable housing. But since the mid-20th century, economists have largely agreed that rent control fails to achieve its intended goal of making housing more affordable and plentiful for a city as a whole.
The late Swedish economist Assar Lindbeck has been cited like saying that rent control is the “most efficient technique currently known to destroy a city, except bombing.” This is because price ceilings distort supply and demand in real estate markets.
When some rents are kept artificially low, economic theory suggests that existing owners may sell to occupants to exit the rental market entirely, and fewer developers will be incentivized to build more units, keeping housing supply low and will increase their prices. which is not yet regulated. Lucky tenants already in rent-controlled units can lock in lower prices, but new tenants (and future generations) may be priced out of the market or pay higher rents.
Economists have modeling this theory for years, and a 2019 study He backed it up with empirical evidence. Researchers studying the effects of rent control policies in San Francisco and Cambridge, Massachusetts, found that tenants in rent-controlled apartments were more likely to stay, leading landlords to reduce the supply of rental housing (converting them into condominiums, for example) and increasing rents. prices of new units by 5%. The main beneficiaries of rent control were, of course, existing tenants. This makes rent control an effective tool for preventing displacement, but not for improving overall affordability.
“The benefits are visible to people who have rent-controlled apartments, but the harms are very diffuse and spread among many people, including people who do not yet live in a city but would want to live there,” says Professor Lance Freeman. of urban and regional planning from the University of Pennsylvania.
For city leaders facing complex housing challenges, rent control is often seen as a politically expedient tool to ease the burden of rising rents, even when multiple factors, including zoning policies and Land use, land availability and increasing construction costs all contribute to the problem. “It would be better to directly help people who can’t afford housing, in addition to building more affordable housing,” Freeman says, “but in the absence of that option, rent control benefits some people.”
The tense rental market in Spain
Spain’s housing affordability crisis is driven by a low supply of rental housing that has failed to meet demand.
Historically, the Spanish government has encouraged homeownership and has been successful at it; Today, approximately 75% of Spanish households own their home. Consequently, Spain has one of the smallest rental markets in Western Europe. But demand for rental housing is increasing and supply has not kept pace.
In Barcelona and Madrid, locals have had to compete with tourists to rent apartments, as an increasing number of apartments have been converted into short-term rentals for platforms such as Airbnb. Meanwhile, the construction of new rentals has slowed since the housing bubble burst in 2008. All of this adds up to a tight rental market that some young people can’t get into; more than a half of people between 25 and 29 years old still live at home with their parents.
When the law goes into effect, rent caps will help stabilize tenants already in units owned by large landlords, but they won’t necessarily help prospective tenants who can’t enter the market. Still, along with other measures included in the bill, it could address more fundamental issues in the housing market. Provisions that incentivize landlords to put empty units on the market and require that a percentage of new construction be reserved for public housing are intended to increase the supply of available housing overall.
If this law is successful in Spain, it could serve as a model for the number of American cities that are increasingly resorting to rent control as a possible solution to rising housing costs. In the 2021 elections, voters in Minneapolis, Boston and elsewhere supported policies or politicians supporting new rent control laws.
But Spain’s experience could also become a case study in what not to do. The new regulations on the right to housing have already sparked criticism from Construction sector (link in Spanish) and international investors (in Spanish) in the largest real estate companies in Spain, to whom the new law would apply. They warn that it will discourage new investments in the Spanish real estate sector and prevent the creation of more new homes.