Spain’s government just passed sweeping rent control as part of its first-ever national “right to housing” law.
The Ley por el Derecho a Vivienda (“Right to Housing Law”) will allow regional governments to impose rent caps for apartments owned by landlords (with 10 properties or more) in areas deemed to be “stressed markets.” It also includes tax penalties for owners who leave multiple units unrented for long periods, and includes provisions to reserve 30% of units in new housing construction for low-income public housing.
The measure, first approved in draft form last October, passed in the legislature on Feb. 1. It’s part of a continued effort by Spain’s left-wing government to address an urgent housing affordability crisis, in which renters have faced price hikes of 50% within a span of five years.
With this new law, Spain’s government is attempting to create long-term outcomes—that every citizen enjoys a safe, dignified home—but it’s using policies that have short-term benefits. For example, the rent caps included in the new law are likely to benefit current apartment renters but are unlikely to help, and may even hurt, growth in the supply of affordable housing overall.
Rent control at the expense of others
In Spain, as well as other countries across Europe, rent regulation policies have historically been a favored tool of government to combat rent inflation and unaffordable housing. But since the mid 20th century, economists have largely agreed that rent control doesn’t achieve its intended goal of making housing more affordable and abundant for a city overall.
The late Swedish economist Assar Lindbeck has been quoted as saying that rent control is the “most efficient technique presently known to destroy a city—except for bombing.” This is because price ceilings distort supply and demand in housing markets.
When some rents are kept artificially low, economic theory suggests existing property owners may sell to occupants to get out of the rental market altogether, and fewer developers will be incentivized to build more units, keeping the supply of housing low and driving up prices on housing that isn’t already regulated. Lucky tenants already in the rent-controlled units may lock in lower prices, but new renters (and future generations) may be shut out of the market or pay higher rents.
Economists have modeled this theory for years, and a 2019 study backed it up with empirical evidence. Researchers studying the effects of rent control policies in San Francisco and in Cambridge, Massachusetts, found tenants in rent-controlled apartments were more likely to stay, prompting landlords to reduce the supply of rental housing (converting to condos, for instance) and raise rental prices for new units by 5%. The primary beneficiaries of rent control were, of course, existing tenants. This makes rent control an effective tool for preventing displacement, but not for improving affordability overall.
“The benefits are visible to the people who have rent-controlled apartments, but the harms are very diffuse and spread among many people, including people who don’t yet live in a city but would want to,” says Lance Freeman, a professor of city and regional planning at the University of Pennsylvania.
For city leaders facing complex housing challenges, rent control is often seen as a politically expedient tool to ease the burden of rising rents—even when multiple factors including zoning and land use policy, land availability, and rising construction costs contribute to the problem. “It would be better to directly help people who can’t afford their housing, in addition to building more affordable housing,” says Freeman, “but absent that option, rent control benefits some people.”
Spain’s stressed rental market
Spain’s housing affordability crisis is driven by a low supply of rental housing that hasn’t kept up with demand.
The Spanish government has historically incentivized homeownership, and it’s been successful in that; today, roughly 75% of Spanish households own their homes. Consequently, Spain has one of the smallest rental markets in western Europe. But demand for rental housing is rising, and the supply hasn’t kept up.
In Barcelona and Madrid, locals have had to compete with tourists to rent flats, as an increasing number of apartments have been converted to short-term rentals for platforms like Airbnb. Meanwhile, construction of new rentals has slowed since a housing bubble burst in 2008. All of this adds up to a tight rental market that some young people can’t break into; more than half of people between 25 and 29 still live at home with their parents.
When the law takes effect, the rent caps will help stabilize renters that are already in units owned by large landlords but won’t necessarily help would-be renters who can’t break into the market. Still, together with other measures included in the bill, it could address more fundamental issues in the housing market. The provisions incentivizing owners to put empty units on the market and requiring a percentage of new construction to be reserved for public housing are both intended to increase the supply of available housing overall.
If this law is successful in Spain, it could serve as a model to the number of US cities that are increasingly turning to rent control as a potential solution to rising housing costs. In elections in 2021, voters in Minneapolis, Boston, and elsewhere supported policies or politicians that back new rent control laws.
But Spain’s experience could also turn out to be a case study in what not to do. Already, the new right to housing rules have drawn criticism from the construction sector (link in Spanish) and from international investors (in Spanish) in Spain’s largest real estate companies, to whom the new law would apply. They warn that it will discourage further investment in the Spanish real estate industry and prevent more new housing from being created.