How Spain Ending Its Rent Control Experiment Demonstrates A Disastrous Potential UK Policy

Hello Readers,

This is one that’s pretty much feared by most landlords and peddled by several politicians as being part of a solution to the UK’s housing crisis and that is the subject of rent controls.

The latest call for private rent controls has been by London Mayor Sadiq Khan earlier this year who has called for London rents to be frozen for two years to help with the cost of living crisis. Ok, so I get this is different to the rent controls in Spain, but what was in place and how did it fail?

How did Spain’s rent controls function?

Spain’s rent control policy was in place to allow regional governments to impose their own rent caps on apartments owned by landlords who have 10 or more properties in areas deemed to be “stressed markets”.

In addition to this cap, the policy included a tax penalty for owners leaving multiple units unrented for long periods along with provisions to reserve 30% (increasing to 40% in the future) of all units in new housing developments over 600m2 for low-income public housing.

This policy was self-imposed by Catalonia’s Government in September 2020 and was due to last for a total of five years to assist with the spiralling cost of living. Catalonia covers four main areas: Barcelona, Girona, Tarragona and Lleida.

Whilst the local Government fully expected a drop in investment as the policy was introduced, it was expected to pick back up again as the change bedded in.

What happened and how did it fail?

Early warning signs showed as soon as six months into Catalonia’s experiment, as in March 2021 there were clear indications that the market was shrinking.

The headline figure from the 2021 report was how the number of available homes dropped by 12% from September 2020 – March 2021 as the law took hold and affected an estimated 90% of housing stock.

The opposite intended effect of this was simply that renters were finding it increasingly difficult to find properties to rent and, the short-term effect meaning prices are similar to before the law was imposed.

The other potential risk of the policy is that developers would simply leave the area and invest elsewhere meaning a huge undersupply of properties available to rent. We saw this impact from a report in September 2021; one year after the policy was introduced. A significant reason for this was that yields dramatically dropped amidst rising house prices.

Reports highlight how the number of properties for rent (apx 10,900 in September 2021) were 42% down on the previous year in September 2020 and when compared to September 2019, stock is only 13% up. Comparing to other areas, Palma in Mallorca has 64% more than in 2019 and Seville 59% more than 2019. This is a dramatic statistic when you look at the chart below!

The final nail in the coffin is how such a dramatic reduction in stock has led to demand skyrocketing. We’ve seen this in the Medway sales market recently with is not becoming uncommon for agents to book over 30 viewings for a property in one day. Not only is this something of concern to the Catalonian Government, it’s also a huge problem as in Barcelona for example, it has led to the highest level of demand ever seen!

The government has now ended the scheme as it’s declared the rental law as unconstitutional. I expect investment will rise; however, it will be interesting to see if there are now big jumps in rental prices as the market starts to recover and readjust.

What can we learn?

I think it’s relatively straightforward here and the biggest learning we can take from this situation is a confirmation of how rent controls work in the sense that they control rents, but they have a dramatic and negative impact on the market where controls are in operation.

Property investors are already selling up amidst a raft of anti-landlord legislation and I’ve already mentioned how London Mayor Sadiq Khan has proposed rent controls in London, but if you search further you will see how Scotland are looking into their own version and Jersey proposing similar.

I do sometimes wonder whether our politicians think through the practicalities of the changes they propose as we so often see the opposite effects to proposed policies! I am still confident that property is a proven long-term asset class when held for several years, however being a successful property investor has never been as challenging as it is today.

I’d be keen to hear your thoughts on this!

Hasan

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