Here I argue that the political risk of owning Spanish property has gone up as the hard left faction in government make housing intervention one of their priorities. When risks rise, so to does the importance of getting the price right if you buy.
Housing is always a political issue, but sometimes more than others. It gets more political when times get tough, and housing affordability becomes an issue, like it is now. It’s a rich seam for populists looking for grievances to stoke, and scapegoats to blame.
Spain is currently run by a left-wing coalition between a bigger Socialist party, led by Pedro Sánchez, and a smaller neo-Marxist party called Podemos, led by Pablo Iglesias. Though partners in government, the two sides have been crossing swords over housing policy, with Podemos pushing for greater control over private property rights and market intervention, and the Socialists pushing back. But, in the latest tussle over this year’s budget, it looks like Iglesias and his comrades have got their way.
In order to get a budget proposal agreed with Podemos, the Socialists have agreed to pass a new housing law within four months, co-authored with Iglesias. That means the hard left will have a big say over Spain’s next housing law, due early next year.
In the meantime, Iglesias has regular and well-publicised meetings with housing activists lobbying hard for rent controls, and other restrictions on private property. The co-author of Spain’s next housing law only listens to hard-left activist groups like the Plataforma de Afectados por la Hipoteca (PAH), and the Sindicato de Llogateres, who are also pushing for a permanent ban on evictions that would effectively hollow out property rights in Spain. They have the full backing of Ada Colau, Mayoress of Barcelona, a former squatter activist and leader of the PAH.
But some high-ranking members of the government on the Socialist side like Nadia Calviño, Minister for the Economy, are putting up a fight. In response to Podemos pressure for rent controls she said this week that “the evolution of the property market and the cost of housing and rents is a complex matter, and people want to be told when things are complicated, not to be told there is a magic wand for easy solutions.”
Their first priority is to impose a rent control umbrella all over the country, allowing local authorities to decide what rents should be in each area, based on a blunt index that takes no account of the differences between properties. This law has already been introduced in Catalonia, where it is being contested in the constitutional courts, and might be struck down. A national law would protect it from that, and roll it out countrywide to be deployed in any area deemed to have a ‘tense’ rental market.
Do rent controls increase the supply of homes for rent, which is the only sustainable way to make housing more affordable? No, but they do hurt small-time landlords, who make up 90% of the market in Spain.
But according to Podemos, the reason rents have been rising in some areas (though now falling everywhere) is entirely due to vulture funds, speculators, and greedy landlords, which is why rents must be suppressed by decree. The laws of supply and demand have nothing to do with it.
Podemos also want to:
- Stop all evictions
- Increase taxes on property
- Clamp down on tourist rentals
- Remove tax breaks for real estate investment trusts, known in Spain as SOCIMIs, which use tax breaks to encourage investment in rental housing
- Penalise owners of empty properties
- Fight “vulture funds and housing speculators”, which is how they see most investors
None of these proposals will solve the challenge of increasing the supply of affordable housing where it’s needed. But, as far as Podemos are concerned, restricting property rights, and intervening in the housing market are the right thing to do, and I assume they think it will win them votes. It fits in nicely with their Marxist ideology, and they appear to be making it one of their flagship issues.
It’s not just Podemos who want more restrictions on property rights. Pretty much all parties on the left support increasing restrictions, including Catalan nationalists, formerly of the centre-right.
Traditional defenders of property ownership on the right, like the Popular Party, are so tainted by corruption they are taking a well-deserved break from power at a national level, though they still control some regional and municipal governments like Madrid, where local officials have rejected rental controls as “populism based on simplistic arguments”, which they will not implement “under any circumstances.”
Weaker property rights, and political intervention in the housing market, increase the political risk of property investments whilst reducing market liquidity, which is another a risk factor for investors to bear in mind. So you get a negative feedback loop of increasing risks, creating another headwind for the market to deal with at an already difficult time.
Private property rights might be the bedrock of prosperity, but as Nadia Calviño points out, defending them is a complex case to make. A recent report on the erosion of property rights in Spain warns, “when countries reach a certain level of development, they run the risk of forgetting that the protection of property rights is a necessary condition for economic prosperity.”
As private property rights are fundamentally protected by the EU, and the Socialists are the senior partner in government, Podemos do not have the power to do what they want. But they are in government, and will do what they can to interfere in the housing market, and undermine property rights, so investors and owners should prepare for greater restrictions, higher costs, lower rental incomes, falling capital values, and depleted market liquidity.
None of this is to say you shouldn’t invest in Spanish property. It just means the higher risk should be factored into your decision and budget. Professional investors might want to place a higher value for political risk in the discount rate.