Mark Savill considers rent control issues in Span.
In March 2022, Spain’s Constitutional Court struck down the rent control legislation that was throughout Catalonia after nearly two years of operation. However, local politicians in England wish to see the policy renewed in the latest housing bill.
So what was the Spanish rent control policy? How did it affect the rental market and are there any lessons for England and Welsh politicians can learn, with both London and Bristol both being considered for the policy.
What was the rent control policy?
Firstly, it is important to note why this policy was formulated and the reasons behind it.
Catalonia and its cities have many similarities to London and Bristol: there are areas of high demand which led to soaring rental prices, which left a majority of renters unable to afford their rent. There has been a 30% increase in rental prices over the last five years in Catalonia. In London, according to Bricks & Logic, rental prices have increased by 38% over the past 10 years.
In Catalonia, rent control was applied in late September 2020. Rents would be limited to within 10% to 20% of a referenced index drawn up by the Government. If a tenancy had a rent outside the limit, a new contract would have to be written up to reduce the rent.
The only exception to this would be if the owner of the property had made substantial changes to the property in the last year that vastly improved the property’s safety, comfort or energy efficiency.
Rent control would only be applied to ‘tense areas’ which were defined by the local council and were areas of high demand and high prices. The Spanish Government hoped that this would reduce rental price and offer more opportunities for renters.
Impact of the Policy
So with the policy being introduced in September 2020, how did it fare until it was held to be unconstitutional 18 months later?
One of the biggest problems with rent control is that it inevitably leads to a smaller market: as landlords either sell up or fewer houses are built – as investors don’t see the same yield that they had before.
In Barcelona and other places in Catalonia, this was no different. The number of homes available to rent in price regulated districts dropped 12% from September- when the law took effect, to February 2022. Barcelona itself was greatly affected, with Oscar Gorgues of the Urban Property Chamber of Barcelona saying:
The supply of homes for rent is at historic lows, with just 5,000 available in the whole of Barcelona, which is not enough to meet demand and that tightens up prices. Since the end of the pandemic the supply of homes has collapsed as many owners have taken their homes off the market.
Whilst advocates of the policy look at the fact that rental prices have dropped: 1.4% in Catalonia and 4.8% in Barcelona, this in itself may be a red herring. Rental prices fell generally in the pandemic, with Madrid, not operating any rent control policies, dropping 3%.
Whilst the rental drop is encouraging, critics have been arguing that this does not justify the detriment to the overall housing sector which the policy created.
Investment in the Barcelona property market has also dropped. This is not helped by the local Government who appear, as well as being pro rent control to be also adopting a softer approach towards squatters, compared to Madrid. The Government has also pushed forward with a social housing quota on real estate developments, which has led to a 63% drop in a year, of housing developments being built in the city.
All of this showed investors that other areas in Spain produced better yields. However, since the policy was held to be unconstitutional, Barcelona has started to recover as a prospect for investors, according to Lucas Fox International, a real estate agency.
Food for thought
With all this being said, is this failed policy a reflection of rent control as a whole, or merely a good idea poorly executed alongside questionable decisions amidst the background hum of a worldwide pandemic?
As explained in previous articles on this site, rent control, at best, is a temporary solution to a permanent problem. Whilst the policy can lower rental prices in the short term, the damage to investment, property supply and property value in the affected areas are almost inevitable. Capping rent at a certain price will always lead to reduced property values and investment opportunities.
In addition, because rental properties become less valuable, landlords will invariably sell these properties off, cutting their losses sooner rather than seeing their property devalue over time. This creates a smaller pool of rental properties in the market for tenants and in a cruel twist of fate, generally likely increases the rental price as demand far exceeds the supply.
Rent control also fails to adequately deal with or offers a remedy to the ‘losers’ in this whole situation: landlords. While many politicians and pro rent control reformists believe that landlords are wealthy and greedy millionaires, this is simply not the case. Many landlords only operate just a single property, which is likely to be their pension, their investment or their livelihood.
While large companies with multiple properties may be able to stomach rent control policies, landlords with single properties will likely be forced out of the market.
With that being said, if rent control is not the right policy, what is?
A Way Forward?
There is a way for the Government to lower rental price, while also not diminishing property value and supply through regulations. This is simply to build more houses. Or make the economic environment more favourable to promote investment into real estate.
Nearly all London boroughs face a shortage of housing, both private and social. According to an article by the London Councils, in October 2021, there were 250,000 Londoners on waiting lists for council housing. London itself accounts for two thirds of all homelessness in England. This lack in housing supply increases demands and means that rental prices will increase.
This shortage is also exacerbated by the Government’s right to buy scheme.
Since the inception of this policy in the 80s, more than 300,000 houses in London have been brought. This would not be a bad policy if the Government had continued building social houses at the rate that it lost these properties and stayed on top of demand. However, demand grew as supply shrank, pushing more people into the rental market.
Property building and development may be an expensive option, but it is necessary to ensure the longevity of the private rented sector.
However, we would be interested to hear landlord’s opinions about rent control and indeed suggestions on how to improve affordability within the PRS for tenants.
Many landlords point to the over-regulated nature of the PRS, such as HMO licensing and new EPC targets set by the Government as the reasons why rent has increased. Is this true? And if so, how do landlords believe the Government should act in light of this?