Mark Stücklin
Barcelona has just declared the whole city a ‘tense housing market’ enabling harsh rent controls for at least the next five years under regional laws that the national government in Madrid is challenging as unconstitutional. Both the rent controls and legal uncertainty are already discouraging investment, and the problem will only get worse if basic economic sense and the evidence from other cities is anything to go by.
Rent controls have never worked anywhere, but Barcelona is going to try them anyway. In a city where the supply of housing is acutely limited by geography (land scarcity), planning laws, and bureaucracy, the authorities are trying to force down housing costs by fiat, which critics say will just make housing more scarce and unaffordable.
Housing costs in Barcelona were rising before the pandemic, which the left-wing city council used to justify intervening in the market to suppress rental prices by law. Rental prices have fallen since the pandemic, by 8% in Barcelona, and even more in Madrid (-9%) where there are no rent controls, but this has not deterred Barcelona’s city council from imposing even more intensive rent controls on the Catalan capital.
Now that Barcelona has been officially declared a ‘tense housing market’, along with 60 other municipalities in Catalonia, new rental contracts must be priced a the lowest of either the former rental contract (so long as it is at least five years old), or 95% of the rental index published by the Catalan housing office, which takes very little account of the unique characteristics of any property.
I looked at buying and doing up a property for sale in Barcelona that I would have to let at 2,000€/month to get 4% gross yield. Taking into account the investment and costs like taxes, community fees and depreciation, and risks like the planning department, squatters, and non-paying tenants, it barely made financial sense. The new law allows a rent of 1,140€/month, so it’s out of the question. So that’s one less investment in rental property in Barcelona. I assume anyone else with basic numeracy skills is coming to the same conclusion.
A friend of mine with a small flat to rent was going to invest 20,000€ in sprucing it up with a repaint, new kitchen and bathroom before putting it back on the rental market after the previous tenants left. Now it goes back on the market ‘as is’ because the new rent will not justify the investment. Who benefits? The new tenants will pay less rent but live in a shabbier flat. Decisions like this will be happening city-wide, and lead to a steady decline in the city’s housing stock.
Along with tough new rent controls, Barcelona has also basically banished new development from the city by imposing a social housing quota of 30% on all new projects over 600m2, set to increase to 40% in future. This makes it impossible to build for a profit in Barcelona. The Catalan Association of Developers and Builders has confirmed that new development in Barcelona has collapsed as a result.
Barcelona city hall under the control of Mayoress Ada Colau and her hard-left Barcelona en Comú party also side with squatters against owners, which has turned Barcelona into a squatters’ paradise. This also increases the risk of investing in housing in the city.
What this all means is a decline in housing investment in Barcelona. It will take time for the results to become apparent, but it will inevitably lead to a decline in the quantity and quality of homes for rent in the city. Rent controls will lead to shortages and low quality, just like a soviet shop. But whilst they are in power, Mayoress Colau and her team will blame the results of their policies on greedy landlords, speculators, and vulture funds.
Some tenants in Barcelona will benefit from lower rents, but many more will find nothing to rent, or nothing in decent shape. The only people who will be unaffected are those rich enough to afford to buy.
Record of failure
It’s not like rent controls have a record of success, or have not been tried before. There is plenty of evidence from other cities that rent controls do more harm than good.
The Brookings Institution, a left-leaning think-tank based in Washington DC with a mission to “conduct in-depth research that leads to new ideas for solving problems facing society at the local, national and global level,” has studied rent controls and demonstrated they are counter-productive.
In a report from 2018 titled What does economic evidence tell us about the effects of rent control? they argue that “while rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.”
You have to be ideologically-blinkered or ignorant to ignore the evidence, which is exactly what they are doing in Barcelona. We are all now guinea pigs in another experiment with rent controls that have never worked anywhere. Will Barcelona be any different?.
