Home » Catalonia’s experiment with rent controls a success or failure?

Catalonia’s experiment with rent controls a success or failure?

Catalonia introduced rent controls back in September 2020 that were struck down by the Spanish Constitutional Court in March 2022. Now that rents are rising again both fans and critics of rent controls are arguing about what that means. 

Back in September 2020 the Generalitat (regional government of Catalonia) introduced rent controls in all Catalan municipalities declared to have ‘tense’ housing markets, which then applied to 61 municipalities in the region, including Barcelona. From the 22nd of September 2020 new rental contracts were tied closely to an index that held rents down, and in September 2021 Barcelona reaffirmed its status as a ‘tense’ housing market to ensure five more years of rent controls. However, the rent control clauses of the Catalan law were struck down by the Spanish Constitutional Court in March 2022, since when landlords have been free to charge market rates for new contracts.

The Generalitat has just released figures showing what happened to the number and price of new rental contracts during and after the rent control experiment, as illustrated in this chart looking just at Barcelona.

The orange columns (left axis) represent the number of new rental contracts signed and registered with the Incasol urban affairs office of the Generalitat. The red line (right axis) shows the average price (€/month) of new rental contracts signed each quarter in Barcelona city.

Rental prices in Barcelona

That rental prices of new contracts fell in the two quarters after the controls were introduced was to be expected – that was the whole point of them, as the index sets rents below market rates.  Rents rising in Q2 of this year once free from index control was also to be expected. What was less expected was rents rising in the 3rd and 4th quarter of 2021, and 1st quarter of 2022, when the controls were still in place. Nevertheless, the overall picture was that prices were held down under rent controls, and rose faster when the controls were removed. The latest data shows rents in Barcelona rising 10.3% to 997 €/m2 at the end of Q2 (YoY).

Rental transactions in Barcelona

What happened to the number of new rental contracts over the same period? They rose sharply after the introduction of controls, but also started falling sharply before controls were removed. Why? Perhaps because of the pandemic, which suppressed the market in the first half of 2020, leading to an explosion of pent up demand after lockdown. The covid pandemic – one of the biggest events in our lifetime – completely distorts the data and makes it impossible to isolate the impact of rent controls on the number of new contracts signed last year.

Why are rental contracts falling so fast this year, now that the pandemic appears largely behind us? The data shows new contracts in the first half of this year down 17% to 23,670 compared to last year, and 6.4% down compared to 2019, pre-covid. Either because demand is falling (despite rent controls still in place in Q1 – half the period) or because the supply is falling as owners abandon the long-term rental market for other avenues. If the latter, then rent controls will be at least partly to blame.

Barcelona Housing Observatory study

A study of the impact of Catalonia’s rent controls carried out by Barcelona’s Metropolitan Housing Observatory (L’Observatori Metropolità de l’Habitatge de Barcelona) was published in June concluding that rent controls did reduce prices to some extent, especially when first introduced, and that the supply of homes for rent was not diminished as evidenced by the surge in new contracts signed after lockdown ended, ignoring the impact of the lockdown. The study also concluded that the overall number of outstanding rental contracts did not decline whilst rent controls were in force. You can download the report in Catalan here.

Barcelona’s Metropolitan Housing Observatory is beholden to bodies in favour of rent controls like Barcelona City Hall, and the Generalitat, so it might not be free of bias. Nevertheless, the pro-rent control crowd are pointing to its report as definitive evidence that rent controls were working and must be reintroduced ASAP or Barcelona will become ‘gentrified’ and unaffordable (see this example tweet).

The pro rent-control crowd reject outright the idea that rent controls reduce the incentive to invest in rental housinging and thus the supply of homes for rent, and lay the blame for higher prices exclusively at the door of speculators and greedy landlords imposing ‘abusive’ increases on new tenants. For them it’s just a morality story, and the laws of supply and demand never come into it. They point to the chart above and say rent controls work and must be brought back urgently.

The anti rent-control crowd say rent controls are to blame for higher prices because they reduced the supply and quality of homes for rent creating housing shortages that lead to higher prices in the end. This side points to the chart above and says ‘see what happens when you introduce rent controls – access to rental housing deteriorates, and prices end up rising even more’. 

Who’s right?

Well, obviously rent controls do keep down rents, at least for some lucky people and for some time (one old lady in my building has been living in a rent-controlled flat since 1932 and now pays 100€/m for a flat that would fetch 2,500€/m on today’s market). But there is also evidence that rent controls reduce housing access and quality over time. 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 concluded in a 2018 report titled ‘What Does Economic Evidence Tell Us About The Effects of Rent Control?’ 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 neighbourhood.”

Catalonia’s experiment with rent-controls was too short-lived and distorted by the impact of covid / lockdown to draw any firm conclusions, but it probably won’t be the last opportunity to observe the rent control experiment in action in Spain. Even when there is reasonable evidence that rent controls are counterproductive, and need to be approached cautiously for fear of doing more harm than good, the Spanish Left can’t resist them. 

The Spanish government is working on a new housing law expected to pass later this year that is reportedly going to allow Spanish regions to introduce rent controls under some circumstances, and in the meantime has capped all existing rental contract increases at 2% per annum, regardless of inflation above 10%. Another Spanish experiment with rent controls is likely next year.

Berlin rent controls a success or failure?

Catalonia isn’t the only region, and Barcelona the only city, to experiment with rent controls recently. Berlin also had a go back in 2020 with its ‘Mietendeckel‘, which was also subsequently struck down as unconstitutional by Germany’s highest court. Was it a success or failure? It depends on your politics. According to the Guardian, Berlin’s rent cap, though defeated in court, shows how to cool overheated markets, whilst according to the Economist, After a year, Berlin’s experiment with rent control is a failure – Rents may be down, but so is the supply of homes. What’s for sure is that rent controls that turn out to be unconstitutional do nothing but introduce legal uncertainty into the rental housing market, which is no good for anyone.