Negative Impacts Of Controlling The Rental Price

The Housing Law agreed by the coalition government has enraged, worried and alerted the real estate sector en bloc. The future rule contemplates raising the IBI of empty homes by up to 150% , requires 30% of new developments to be allocated to protected housing, and, among other things, regulates the price of rents in stressed areas .

This last point is the cornerstone of the regulation, and one of the aspects that most worries the sector, which qualifies it as “error”, “inappropriate” or “counterproductive”. Experts agree that the intervention of rental prices will have very harmful consequences in the real estate market, these are the main ones:

Will reduce the offer
The owners will withdraw their apartments from the rental market to avoid government intervention. It is to be expected that many properties will put their houses up for sale or use them for tourist or seasonal rental. From Asprima they remember that all the experiments that have gone in this direction, and have been tested in several European cities, as well as in Catalonia, have caused the opposite effects to those expected, among them, the reduction in supply .

According to idealista data, the housing stock in Catalonia has decreased by 42% during the first year of the law that regulates prices, while in Madrid the current stock is 22% lower than in the previous twelve months

Andrés Horcajada, CEO of Tectum Global Management, a company dedicated to the construction and operation of rental housing, also believes that price regulation will have an adverse effect on the supply: “It may imply a knock on the water line of the residential rental that has been the model that has grown the most in recent years and will generate a decrease in supply “.

The new Housing Law will stop the construction of flats and make them more expensive
The new Housing Law will stop the construction of flats and make them more expensive

In the same vein, David Vila, CEO of Renta Corporación has pronounced: “We consider that this measure probably will not have the desired effect. The main problem in the residential rental market in Spain is the lack of supply and the regularization of prices will hardly contribute to improve this aspect, as has already been seen in other countries “

From Avalisto, he joins the same message: “Far from helping the rent, it could further roll back the demand, leading frightened owners to sell their properties.”

No impact on prices
The price of rents began its downward adjustment in 2019, and it was accentuated the following year with the coronavirus pandemic. Experts repeat like a mantra that the market has to regulate itself, and that any measure that distorts its natural evolution must be avoided. ” The only thing that this law can achieve is to paralyze the adjustment “, warns José María Raya, director of the Housing and Future Chair at Pompeu Fabra University, in the report Effects of the pandemic in the rental market: is a rule convenient price regulation?

Catalonia also serves as an example of the limited effect that the control of rental prices has had. The idealista data reveal that rents have fallen by 8.2% in Barcelona during the year in which the rent control was implemented, a fall of less than the -9.3% registered in Madrid.

Higher rents in areas bordering those intervened
The government’s measure will also have another adverse effect in terms of prices: it will raise rents in the areas bordering the stressed ones, something that has already been detected in Berlin, a city where rental prices are regulated.

“There has been a housing substitution effect in Postdam, a neighboring city of Berlin, and other surrounding municipalities, where rents have been increasing at an accelerated rate since the rent freeze came into force,” warns a study by the Economic University of Vienna on the Mietendeckel , the law passed in Germany in February 2020.

Legal uncertainty and less investment
One of the main complaints of the sector is that the intervention of the Government in the real estate market generates legal insecurity, and by extension, will scare away investors -both national and international-, and will paralyze future projects. That is the position of the national association of developers and builders APC Spain, which believes that the law harms companies that invest and create jobs . It ensures that the lack of legal certainty will cause a contraction of the activity in the autonomous communities and municipalities that implement the control measures.

For Antonio Carroza, CEO of Alquiler Seguro, legal certainty is essential so that the investor “comes to Spain and the supply of rental housing can be increased”. The Rental Negotiating Agency has also raised its criticism against the measure that it considers to go against free competition and market freedom . “Increasing the taxation of large owners and making them lower their prices will go directly against the viability of their business, and they will end up closing their activity in Spain”, explains José Ramón Zurdo, general director of ANA.

From Tectum they define the future law as “intrusive” and argue that it will not solve the root problem of the real estate market. “The application of price regulation, a clearly intrusive measure, which alters the basic rules in private relationships, is not going to solve the problem of access to housing,” explains Andrés Horcajada.

Difficult access to housing for many tenants
The foreseeable decline in supply will make access to housing even more difficult, especially for the most vulnerable families and the very young.

“It is counterproductive because it will cause homes to be withdrawn from the rental market , so it goes against all those whom it claims to benefit now, who will have problems in accessing housing also in the medium term,” they explain from the Association of Real Estate Agents for Rent.

Inadequate distribution of the home
The future regulation could not only make it difficult to access housing, but it will also lead to an inadequate distribution of the market. José María Raya, director of the Housing and Future Chair at Pompeu Fabra University explains it this way: “Tenants can stay in homes that do not adapt to changes in their preferences and needs simply because of their low price. the point of reducing labor mobility (not accepting offers that put that controlled housing at risk) or promoting discriminatory practices “, says the expert, who adds:” if price is no longer a mechanism for assigning housing, the queue system (the first one to arrive) can be easily exchanged for the one related to me in race, nationality, religion, political beliefs,

Deterioration of houses
Rent control will cause many owners to stop investing in their properties, which will cause gradual deterioration and aging of rental homes in stressed areas .

Less profitability for owners
The future Housing Law distinguishes between small and large owners of apartments for rent , who will suffer a marked decrease in the profitability of their properties, which will lead many to put their houses up for sale. In addition, real estate professionals consider it a “tremendous injustice” to set a price control without taking into account the particularities of each home.

“There are houses that are located on the street and in the same portal and are completely different. Some are renovated and equipped, and others are older or not equipped. The first can be rented for 1,000 euros and the others for 800”, explains José María Alfaro, general coordinator of the National Federation of Real Estate Agencies (FAI).

Black market
Property owners subject to government control will seek ways to avoid the application of the law, or at least to minimize its impact. That is why black markets can be created where landlords demand an extra amount from their tenants to what is stipulated in the rental contract .

“There will be an increase in the underground economy,” anticipates the general coordinator of the National Federation of Real Estate Agencies (FAI). But there is more. Homeowners could also seek legal mechanisms to compensate for the loss of income. How? Including in the rent the payment of certain services that are normally not taken into account such as the IBI, the home insurance, or even the internet service, explains the same expert.

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