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Government to introduce rental control in 2021

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By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
28th of October 2020

Spain’s social-communist government announced yesterday with great formality Spain’s budget for 2021. Marking the solemnity of the occasion, we even saw our Beloved Leader, communist Vice President Mr. Iglesias, wearing a suit for the first time. Spain’s annual budget law is by far the most important law to be passed every year and one needs to pay close attention to it to see where the ruling government’s agenda is heading for next year.

I could write over a dozen articles on the pernicious effects of what was agreed and why, but I only want to focus in today’s short post on the announced rental control law. On the back of the one already approved in Catalonia by the Generalitat earlier on this year, Unidas Podemos (Spain’s Communist party) has pushed its agenda to extend the shadow of this control to all of Spain. Its staunch political ally, PSOE, finally yielded and will be passing a Housing Act in 2021 on this. The final law still needs to be pencilled out, but it is now a certainty, a matter of months at most before it is enacted.

In previous articles I had already foreshadowed this happening, as Spain’s communist party are hell-bent on regulating holiday rentals because they absolutely despise them (and tourism, or so it would seem). I am not going to bang on again how this is a frontal attack to the right of property ownership enshrined by our constitution of 1978 (read unconstitutional) and how these measures to control rental prices have already been tried and tested time and time again in other large cities (Berlin, Paris) and have failed. In short, although I understand where they are coming from and what their declared goal is (reduce rental prices), it’s a very bad measure in my humble opinion and will create several nasty issues with few to no discernible real benefits.

The Agencia Negociadora del Alquiler (private entity) collated seven adverse effects this planned intervention will have on the Spanish rental market:

  • Increase of landlords and tenants signing rental agreements off the books (not declaring them).
  • Sharp increase of rental prices and introduction of market anomalies (because landlords would pull out en masse from renting, drastically reducing the available offer). This is ironic because the whole point of passing this new law in 2021 would be to drive rental prices down, not to increase them!
  • Trashing of properties
  • End of buy-to-let
  • Introduction of legal insecurity (which deters investors)
  • Suppression of tax-friendly SOCIMIs
  • Artificial creation of ‘guettos’ in large cities with long waiting lists

At a time when rentals are on freefall, because of the ongoing Covid-19 financial onslaught and all the associated quarantines, as highlighted in previous articles the introduction of this new measure is really like flogging a dead horse. Central planning of the rental market is bound to create serious market distortions like the paradox of setting a fixed price at today’s value when in fact the rental price may well drop further in real terms in the future. So paradoxically, the government could in effect fix higher prices today than what a property may fetch in the real market in say three months’ time.

I care to throw in a few more adverse effects of my own:

  • Because of Brexit, and the removal of landlord tax relief for UK-based landlords, several companies specialized in home rental care will now fold.
  • Struggling real estate agents, in a stagnated sales market, are heavily relying on rentals to make ends meet because there are almost no property sales. If you mess with rentals, they are *really* going to struggle (read widespread closures).
  • Increase of unemployment in a sector that was buoyant
  • Sharp decrease in offer as landlords, on learning our beloved government is going to dictate at what price they can rent, will cease renting altogether
  • Introduce huge price distortions with new and old rental prices, creating ‘privileged’ rentals
  • What happens to existing signed rentals?
  • What happens to signed contracts under this new law if it is found unconstitutional and is repealed?

I really dislike being forced to write up articles such as this one, but I strongly believe people should be forewarned and that this future ill-thought law should be stopped right on its tracks for the good of us all who work in the property industry. Millions of jobs are at stake.

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – Ronald Reagan

Ronald Wilson Reagan (1911 – 2004). American 40th US President (1981 – 1989). He steadfastly contributed to the Cold War victory which led to the fall of the Berlin Wall and the collapse of the communist U.S.S.R. Through cunning and resolute political plays, assisted unwaveringly by staunch political allies, such as Margaret Thatcher, he ensured western democratic values prevailed and flourished, likely averting World War III. Along with the U.S.S.R.’s greatest president, Mr. Mikhail Gorbachev, he signed the START treaty which would kickstart the denuclearization of the two world’s greatest superpowers avoiding a nuclear Armageddon. A mediocre actor of cheesy westerns turned into a great statesman. Through his steadfast ideals, which almost claimed his life in 1981, his undying legacy would be to ensure us all with freedom, for which we are eternally grateful.

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