In Spain, government interventions in the market are having the opposite effect to the one desired–instead of the rent controls lowering the rental price for long-term residential housing, rents have risen.
The bad news about government regulation of the housing market comes from the Catalonia region of Spain, the only region to implement price controls on rental housing, as allowed under a housing law that went into effect last year.
Last summer, the Catalan regional government initiated the process of implementing rent controls in 131 cities in the region. The rental cap is a scale of rents set by the central government based on the personal income of renters in various parts of the city according to the most recent tax filings, varying therefore from neighborhood to neighborhood. The goal is to keep rent at about 30% of personal income. According to the government’s analysis, many rents would have to drop as much as 60%. However, it only applies to landlords with more than ten properties, leaving most landlords in Barcelona, for example, unaffected.
On Monday, the regional government announced the expansion of the measure across another 140 cities, affecting in total 90% of the population in Catalonia.
For the first set of 131 municipalities price controls went into effect in March 2024 and an analysis by the real estate portal Idealista shows that the measure has had no immediate effects on lowering prices, at least not in the city of Barcelona. Instead, according to Idealista, rental prices have increased by 4.3% on average, with a few cities seeing slight drops while in Gerona, near Barcelona, rents went up 6.4%.
Additionally, according to Idealista, since the price caps went into effect, rental stock has fallen by 13% on average in Catalonia, the same phenomenon repeating itself in all of the region’s most populous cities. Some cities saw double-digit drops in a single month. According to real estate experts, it seems many landlords are opting to use their properties as vacation rentals, a market largely unregulated and one where for years residents of big cities have been demanding more government action.
The real estate sector warned of this negative secondary effect of the housing law and has constantly advised that the answer to Spain’s housing problem is not more rules for landlords but rather more housing—increasing the number of rental units on the market. Compared to fellow EU member states, Spain has a very low proportion of public housing.
“This measure will do nothing more, if it goes ahead, than exacerbate the problems we have in the market. We will continue to see how rental homes, both large and small owners, will gradually disappear,” Sergio Gutiérrez, co-founder and managing partner of the Excellence Real Estate Circle told Idealista.
The fact that rent control does not work is, according to American legal expert Ethan Blevins, “one of the most settled issues in economics.” If rent control is applied to public housing, it will increase the taxpayers’ responsibility for funding it. For privately owned housing, it has other effects. Blevins explains:
Rent control’s failure begins and ends with the most basic concept in economics: supply and demand. When politicians slap an artificial squeeze on prices, a shortage results. A lower price means more people want that good while fewer people produce it. With rent control, that means less housing. Many landlords will either sell their property or put it to a different use.
