It is undeniable that rental housing in Spain has a price problem. It is true that it does not affect the entire territory but it does affect the most thriving populations. A recent study indicates, for example, that in all the districts of Madrid city the effort to rent a 60 m2 house exceeds 30% of the average salary of the district. That 30% is the limit of what you usually consider reasonable for a rental.
Should we be concerned about this? Well yes, and a lot. Not only because it has an impact on the finances of the most vulnerable people, but because it has an impact on the emancipation rate, on the fertility rate and even how innovative cities are. Politicians know this but they differ in how to deal with it, there are even divisions within the Government.
Price control, yes or no?
The star measure in terms of housing of this Government was set a rent price control in areas where prices exceed a certain threshold. The proposal came from United We Can and was signed by the PSOE, although as we will see later, it does not seem that it will be implemented.
The problem with price control is that it doesn’t work. It has been seen in multiple countriesIf the state artificially fixes a maximum price, the rental market disappears. In fact in Spain we have had a recent experience: the Reform of the Urban Leasing Law of 1964. There it was established that the rental contracts were indefinite, until the death of the tenant, and from then on, his spouse or descendants could be subrogated. In practice, leases were frozen and the rental market evaporated until the next two reforms of the law, in 1985 and 1994.
A market regulates scarcity via prices and if they cannot be set freely, then there will be long waits to achieve the desired good. Regulating the prices of the rental market, if it is with strong decreases with respect to the market price, the only thing that will achieve is that homes disappear, that it is very difficult to access these few rental homes and that Let’s go back to buying and selling as the exclusive method of having a place to live.
The measure is an announced failure and perhaps because of that (and for other political reasons, such as occupying the gap that Ciudadanos is leaving when sinking) now the PSOE is unchecking it and makes another proposal.
What could work
The housing market is complicated, since it is not only the product that is important but also The ubication. Given the shortage of any good, the supply usually increases more or less quickly (new factories, for example) but in the case of housing, the space to build in areas with high demand is usually limited (sometimes artificially by a tangle of local, regional and state regulations). Therefore, given this shortage, it is difficult for the supply to increase quickly with new available homes.
Therefore the measures should go in two directions: in the short term try to have new homes offered for rent, of those already built. In the long term, with new homes built and put on the market.
The second part is clear, just as in recent decades administrations have tried to make the housing market accessible by building and selling, now it is time to do the same but building and renting. It is more complicated, yes, but it has to be done. Spain does it recently. And no, it is not valid with the FROB homes because normally they are not in high demand areas, you have to do a plan by neighborhoods.
The first point is more complicated. It consists of making the homes that are not being used go to the rental market. To do this, incentives must be given (for example, to rehabilitate) but it might also work to be more coercive (for example, further taxing vacant homes without justification). The idea is to ensure that homes that pretend to be an investment are also in the rental market and also those that are not because they need a reform.
In Spain there are around 13% of empty houses, but in big cities around 10%. It doesn’t seem like much, but if they entered the rental market the offer would increase by 50% in some cities such as Madrid (where about 20% of homes are for rent).
Intervention in markets is always controversial, but when the impact is great (and we have already seen that rental housing prices can have many negative effects on society) it is justified. In fact, this type of intervention is common in developed countries (even the EU and the US).
What the PSOE proposes
The PSOE has ruled out the United We Can plan to control prices and proposes two actions. The first is to make the tax relief for renting a home progressive, which is currently at 60%, and take it from 50% to 90% (for example, for rehabilitating the home, renting to young people or lowering the price). These measures are the carrot. And maybe not very effective, since the real impact is scarce and is not seen immediately (only in personal income tax declared the following year). In addition, these deductions currently cost the public coffers more than € 1 billion a year and perhaps these funds could be better spent on the long-term plan (creating a public rental park).
The second part of the plan is increase the IBI by 50% for empty houses. This is the stick part, and as we’ve discussed before, it could work. However, there are a series of “leaks”: it would only apply from the second year of being empty and there would be a series of assumptions that would prevent it, such as work reasons, dependency, etc.
And the problem with taxing these empty homes is that there are many cases in which it can be justified and that it does not make sense to have a penalty, but checking it is complicated.
Still i think the proposals of the PSOE make more sense than those of United We Can. They are on the right track although the part of the long-term plan is missing, which should be agreed upon by all administrations, which is always more complicated. Let’s hope it ends up being approved because of course it is better than the status quo.