Home » A brief look at Spain’s new Housing Act

A brief look at Spain’s new Housing Act

Author: Spanish lawyer Raymundo Larrain Nesbit Raymundo Larraín Nesbitt
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Lawyer Raymundo Larraín does a quick rundown on the major highlights this new bill introduces to the Spanish property market.

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By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of November 2021

Introduction

Spain’s Socialist-led coalition government is in the last legislative stages of enacting a new housing bill that will create ripples across the real estate industry and Spanish housing market. A bill that has not been exempt from controversy, ruffling the feathers of all those involved in the business.

As I can only review a draft bill at this stage, albeit a final draft with few changes to be expected, please be aware alterations may be introduced.

The lofty goal of this law is to stop housing speculation, and reduce rental prices, making housing more affordable for vulnerable collectives, such as despondent young families.

You can read Mark’s take on this here: Spanish government announces plans to control the housing market.

To reach a wider audience, I will shy away from esoterics, and go the good old-fashioned way of listing the major highlights in bullet points in no particular order.

Housing bill’s major highlights

  • Housing earmarked as public is banned from being sold to investment funds to avoid speculation of a good of prime necessity.
  • Landlords who leave housing empty for over two years may be faced with higher municipal tax rates (of up to 150% surcharge on IBI tax). Some left-wing regional governments, such as the Balearics, have already made clear they will levy the maximum penalty as soon as the law allows it. They claim this will discourage speculation and free up the housing to those in need. The question arises with second residencies, many of which are owned by foreigners.
  • Creates new mechanisms to draw-out (sic) non-paying tenant evictions, which means make the whole process longer, particularly when landlords are companies.  We actually need the opposite in Spain to foster a robust rental market, but whatever.
  • The new law will cap rental prices in earmarked areas where demand is high and the market classified as tense or stressed out / under duress with a view to curb speculation.
  • The law forces property developers to reserve 30% of all developed land for social housing.
  • Tenants may apply for forced renewals on periods lasting from one to three years, forcing the hand of landlords.
  • A new concept is created, the ‘great’ landlord. Defined as someone (legal or physical person) who has more than ten properties or who has a built surface of 1.500 m2 on rental.
  • Great landlords are now forced to offer rentals at a price set by Authorities, under huge penalties.
  • Great landlords cannot update the rental price year-to-year (as currently) and must remain frozen for a period of up to 10 years
  • Physical landlords will rent at a fixed price determined by Authorities in areas under ‘rental duress’ (zonas tensionadas, in Spanish).
  • Sliding tax breaks will be introduced for landlords who lease properties to tenants within the age group of 18 to 35 y.o.
  • Reduction or suppression of 85% tax breaks for great landlords.
  • Creation of landlord tax breaks of 60% when improvements over the previous three years exceed a 6-month rental.

Potential negative repercussions of this new law

We already glossed over them in detail in previous articles: Government to introduce rental control in 2021 – 28th October 2020.

  • Sharp rise of off-the-books rental agreements
  • Sharp increase of rental prices (as offer will foreseeably retract following these changes)
  • End of buy-to-let boom as we know it
  • Introduction of legal insecurity on creating several undefined legal concepts
  • Artificial creation of ‘ghettos’ in large cities with long waiting lists
  • Rise of unemployment in a sector that was thriving (we are in a property boom!)
  • Restriction in supply. Sharp decrease in offer as landlords, on learning the government will fix at what price they can rent, will cease renting
  • Introduction of price market distortions. Huge price distortions with new and old rental prices, creating ‘privileged’ rentals
  • New problems: What happens to existing signed rentals?
  • New problems: What happens to signed contracts under this new law if it is found unconstitutional and is repealed (as is likely under a new government)?
  • On reserving 30% for social housing on all developments, how are you going to market (and sell) a luxury development?
  • Landlord tax break on long term tenancies reduced from 60% to 50%
  • Longer tenant-eviction procedures (effect pursued on purpose)
  • Sharp tax rise (IBI) for some landlords

Personal opinion

To sum up, lofty ideals at the expense of someone else’s property.

This law introduces a plethora of undefined legal concepts left for ulterior regulation to develop, listing but a few:

  • Areas under ‘rental duress’
  • Empty homes
  • Fixed sliding rental scale set by Authorities

A golden rule is never to create a legal text with undefined legal concepts that can be construed in any manner of ways. Needless to say, this creates legal insecurity for investors. This is not what investors want to hear. This is exactly the type of regulation they abhor and move away from.

Spain has huge potential to attract foreign investments, creating jobs and wealth on its wake.  We see this actively happening in Madrid and in Andalusia which are in a property boom. But clumsy laws such as this one, which openly favour market interventionism over a free market economy, in a move straight out of the playbook from Maduro’s Venezuela, are counterproductive. Spain is not a planned economy. Spain’s economic potential is held back by laws such as this one. Investors will go elsewhere. The Spanish government should stop demonizing foreign investors who are key to our economy.

This piece of legislation is the latest in a long string that further undermines the rights of property owners. Spain’s coalition government between the Socialists and the hard-left Podemos party, which includes communists, is hell-bent on curtailing ownership rights as much as they can, and then some.

Conclusion

This law (unfortunately) will likely fracture Spain further into regions which are investment-friendly and those which are not. This introduces pernicious market asymmetries which stifle competition.

Regional governments in Spain have devolved competencies in housing matters. It can be reasonably expected that regions under moderate right-wing control will implement this law lightly, or not at all, in sharp contrast to left-wing regions. This is a very important nuance and the reason why I write this law will directly contribute to fracture the country and introduce market asymmetries.

Free-market regions, with ultra-low taxation which enshrine personal and business freedom as core civic values, such as Madrid and Andalusia, not only will ignore it, but vehemently fight it.

Whereas regions under left-wing control, such as the Balearics and Catalonia, can be expected to implement the new housing bill stringently, imposing immediately the 150% surcharge of IBI on empty houses.

Honest to God, the last thing Spain needs right now is to exacerbate social or regional polarization further.

There is also the matter of housing affordability. As I mentioned in the article’s introduction, the aim of this new regulation is to make housing more affordable, particularly rentals, for vulnerable collectives such as young people on low and precarious McJobs. Whilst the government’s goal is certainly commendable, no doubt, the way it is trying to achieve this may backfire, at least to my mind. As I have collated above as possible negative effects, it is foreseeable that landlords (offer) will remove from the market properties given the stringent conditions that are now government-imposed (i.e. Authorities set rental prices in areas under rental duress, no updating of rental price in 10 years, taxes on empty property, temporal expropriation of empty properties to be rented out, 30% of all new developments earmarked for social housing, etc). These effects are far-reaching and greatly affect landlords and developers who will likely pull out their units from the property market. When offer retracts but demand remains steady, following the laws of demand and supply, the price of an asset undergoes a rise. This is why I write that all these new changes enacted through this law – as commendable as they are – will likely impact on the market and translate into a general rise of all rental prices as there will be fewer properties on offer to chase after. This, in a context of a sharp rise in inflation, is very negative as it affects precisely the vulnerable collectives this law attempts to protect and assist.

If there is a change in government in 2023 (highly likely) this new bill will be top on the list to be repealed. Key laws – ideally – should be consensuated, reconciling both political sides, and agreeing to a common text that can be upheld regardless on who wins on poll day. Otherwise, laws are short-lived and last what a 4-year legislature lasts (or even less), which is daft, unproductive and fosters widespread legal insecurity which deters foreign investments in Spain. You can expect this new Housing Bill to last a year. Smart money is risk-averse, the market rules need to be fair, clear and long-lasting.

The government’s unconcealed goal with this housing bill is to win the hearts and minds of a disenfranchised youth, mired by record-high levels of unemployment, the highest in any OECD country, wooing their vote in the upcoming election of early 2023.

God willing, these changes will be for the better.

“I commend thee to Almighty God. He is the source of all good. Do the Will of God, which is the Way of Peace. Beware of bloodshed; de not trust in that, for spilled blood never sleeps. Strive to gain the hearts of thy subjects and watch over all of their interests, for thou art appointed by God and by me to look after their welfare. I have become as great as I am because I have won the hearts of men by gentleness and kindness. Never nourish ill feeling toward any man, for Death spares none. Be prudent in thyself. God will pardon the penitent, for He is gracious.” – Saladin’s parting words to his son, al-Zahir.

Al-Nasir Salah al-Din Yusuf ibn Ayyub (1137 – 1193). From humble Kurdish origins, Saladin displayed from an early youth a series of unique traits which distinguished him from his peers, allowing him to quickly climb through the ranks and elevate him to commander of all Muslim armies (over 70,000 men). He became the first sultan of both Egypt and Syria, founding the Ayyubid dynasty. As a master chess player, he developed an uncanny ability, almost preternatural, to ‘read’ opposing Christian commanders’ minds to the point he could effortlessly anticipate their every move; much in line with Alexander’s prescient ability. He would regularly inflict huge losses to armies who vastly outnumbered him and – in theory – were better equipped (with superior European manufactured gear). As a master tactician, he would cleverly deploy his troops in such a manner to always take advantage of the surrounding terrain paying great care to logistics. His unmatched military prowess and gallantry would garner him great admiration, not only from within his own ranks, but from his enemies alike, most notably from Richard the Lionheart, King of England. Through his strategic campaigns, in a tour de force, he would eventually wrestle the control of Jerusalem from Crusaders, which had held onto it for over 88 years. When Saladin recaptured the city, there was no killing and no desecration of holy places, and Christian pilgrims were allowed free access to their places of worship (unlike the first Crusaders who took the city in 1099, murdering thousands, including women and children). He encouraged the establishment of institutes of higher learning in Cairo, Damascus, and Jerusalem. He also set up courts of law. Unlike other potentates, before and since, Saladin did not set himself above the law. But more importantly, he displayed a rare acumen that singled him out and made him human and relatable to all, even his foes. He showed great compassion and piety and would refrain from any unnecessary bloodshed. In Saladin’s possession at the time of his death were one piece of gold and forty pieces of silver. He had given away his huge wealth to his poor subjects, leaving nothing to pay for his funeral. Ironically, Saladin incarnated like no other man the best of chivalric qualities making him a true knight in all but name. Salah al-Din is the greatest Muslim commander of all time bar none.

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