Despite evidence that the Socialists – the senior coalition partner in Spain’s left wing government – don’t believe in rent controls, and despite the lack of evidence that rent controls have ever worked, anywhere, the government has announced it will press ahead with rent control measures, if only to keep their hard-left coalition partner Podemos happy.

José Luis Ábalos, the Minister for Transport, Mobility, and the Urban Agenda, which includes housing policy administration, told a parliamentary commission this week that he will present an initiative to control rental prices in ‘hot markets’ to the lower house before the summer.

The government plans to create powers for local and regional authorities to cap rental prices in areas where they have gone up “excessively”. Officials claim the measures will be short-term and temporary, which is how many permanent regulations and taxes start out.

The suspicion is that the Government is only doing this to keep its hard-left coalition partner Podemos happy. The Socialists were never in favour of rent controls before they did a deal with some-time Communist Pablo Iglesias, and the left wing party he runs with his wife from their luxury villa on the outskirts of Madrid. Indeed, the Socialist VP and Minister for Economic Affairs, Nadia Calviño, said only the other day “there are different cities experimenting with that [rent control], establishing limits, but without much success.” Her saying that rent controls have a poor record wherever they’ve been tried reportedly caused some friction in the coalition.

“The publication of a price index will be a great step forward, because it will give reliability and robustness to the data, as it will be based on census data not surveys,” says Ábalos. The index will use technology and the collaboration of all levels of Spain’s notoriously disjointed government to produce an accurate rental price index that will also make the market more transparent, he asks us to believe.

Ábalos pointed out that, thanks to high housing costs, “tens of thousands of young people can’t leave home and set up their own families.” Therefore, rent controls are the answer, he says. “An extraordinary social problem needs a bold government that takes equally exceptional steps.”

He is right that access to affordable housing is a big problem in parts of Spain where people want to live or visit, mainly the big cities – Barcelona in particular. Of course the Spanish Government should do everything in its power to help solve the problem, but rent controls could make the situation worse.

Why do residential rental prices go up?

Why do rental prices go up? Some say prices go up when demand is higher than supply, just like in other markets. If you are a landlord with a flat to rent, and you find you have a queue of potential tenants, and some are prepared to pay more than others, you obviously go for the best price you can get, all other things being equal, because as a landlord you also have lots of costs to meet like taxes, community fees, and maintenance costs. That’s the way rental prices creep up in markets where demand is higher than supply. It works the other way when supply is high and demand low. In that case landlords compete with each other for tenants by dropping their prices. But according to Podemos, rental prices are going up in Barcelona and Madrid just because of greedy speculators and vulture funds, and capping rents will solve the problem, end of.

Most experts seem to agree that rent controls don’t work. Although some people get to pay a lower rent than they otherwise might have (the winners), on the downside rent controls discourage housing investment, reduce the supply of housing for rent, create shortgages, depreciate the housing stock, and encourage a black market.

Even Paul Krugman, the left leaning Nobel economist, says rent controls don’t work. “Rent controls restricts the construction of new homes,” he told Europa Press on a recent visit to Madrid. “I’m not in favour of rent controls.” You can read a critique of rent controls by Krugman in the New York Times here: Reckonings; A Rent Affair

I half suspect the Socialists will introduce a rental price index with no teeth to hoodwink Podemos into thinking the coalition agreement has been honoured. If not, then it will be interesting to see how rent controls work in Spain. Right-wing Madrid has already said it will not introduce rent controls if given the option, whist Ada Colau, the leftie Mayoress of Barcelona, won’t stop publicly demanding the power to control rents as soon as possible. If Barcelona goes down the road of rent controls, and Madrid doesn’t, it’ll be interesting to see how access to affordable housing results compare in the two cities over time.