Spain has brought back rent controls that led to a rental-housing shortage the last time they were tried under the dictatorship of General Franco, which is why the democratically-elected socialist government after Franco got rid of them. Here’s a brief history of rent controls in Spain.

Today’s Socialist-led government under Pedro Sanchéz has reintroduced rent controls under the Housing Law of 2023 that the Socialist government of Felipe González got rid of in 1985 for good reason. It’s worth remembering why Franco introduced rent controls in the first place, what the results were, and why the Socialists who followed him liberalised the market, because the current government appears to have forgotten the lessons of that period.

It should be noted that today’s government has not imposed rent controls country-wide like Franco did, rather given regional and local governments the power to impose rent controls in some areas under certain circumstances. So far only Catalonia has taken advantage of these new powers to impose rent controls on cities like Barcelona since March of this year. It is still far too soon to see the full impact of the policy this time around, though it is already clear that it has devastated the long term rental market as landlords have switched to seasonal / mid-term rentals to avoid rent controls.

Why did the Spanish dictator Franco impose rent controls on Spain?

After winning the Spanish Civil War Francisco Franco imposed rent controls to stabilise Spain’s post-war economy, maintain social order, support key social classes, and align with his broader autarkic and interventionist economic policies. Most importantly, Franco’s regime aimed to prevent social unrest and maintain political control by appeasing urban workers and lower-income groups. Affordable housing was crucial to maintain the loyalty of the population, especially in cities where the regime was less popular. By limiting rent increases, the government attempted to avoid tenant discontent and potential social protests. Franco didn’t hesitate to trample over private property rights to shore up his regime.

Rent controls also chimed with his paternalistic instinct of being the father of his people. Franco pursued an autarkic (self-sufficient) economic model during the early years of his rule, trying to minimise foreign influence and keep Spain insulated from the global economy. Rent controls were part of a broader set of state interventions in the economy, including price controls on basic goods and services, aimed at regulating the domestic market and protecting his people from capitalism.

What was the impact of Franco’s rent controls?

The rent controls imposed by General Franco had mixed and ultimately negative long-term effects on Spain’s housing market. While they may have achieved some short-term goals, such as keeping rents low for existing tenants, and preventing immediate housing crises after the Spanish Civil War, they also created significant long-term economic distortions.

Short-Term Effects

1. Affordable Housing for Existing Tenants: Rent controls helped keep housing affordable for existing tenants, especially in urban areas. Many working-class and middle-class families were able to maintain their homes without facing skyrocketing rents, which was crucial in the immediate aftermath of the war and during periods of economic instability.
2. Social Stability: By limiting rent increases, Franco’s regime reduced the likelihood of widespread tenant discontent and protests in urban areas. This contributed to the political and social stability that Franco was trying to maintain, especially in cities where support for the regime was weaker.

Long-Term Negative Consequences

1. Housing Shortages: The rent controls created a disincentive for property owners to maintain or invest in housing, as they couldn’t raise rents to cover the costs of repairs or improvements. This led to a deterioration of the housing stock, particularly in cities. Furthermore, with limited returns on investment, private developers were discouraged from building new rental properties, worsening housing shortages.
2. Deterioration of Existing Housing Stock: Since landlords couldn’t profitably maintain their properties, many buildings fell into disrepair. Over time, this caused widespread deterioration in housing quality, especially in cities like Madrid and Barcelona. The combination of low rents and high maintenance costs created a neglected and aging housing market.
3. Black Market for Rentals: Rent controls often led to the development of a black market for rental properties. Since official rents were kept artificially low, some landlords resorted to illegal under-the-table payments to supplement rent, or they would demand large deposits from tenants upfront. This undermined the effectiveness of the rent controls and created an informal housing sector that was unregulated and exploitative.
4. Misallocation of Housing: Rent controls resulted in inefficiencies in how housing was used. Long-term tenants, especially those who were well-off, had little incentive to move out of large, rent-controlled apartments, even if they no longer needed the space. This prevented the housing stock from being reallocated to younger or growing families who needed larger or better-located homes, contributing to overcrowding in other parts of the city.
5. Economic Inefficiency: Over time, rent controls distorted the natural functioning of the housing market. They suppressed market prices, which meant that the supply of new housing could not keep up with demand. This mismatch between supply and demand contributed to inefficiencies in the broader economy, stunting urban development and reducing economic growth in the real estate sector.

Rental market liberalisation under the socialists

Although Franco’s regime lifted some controls in the 1960s and 1970s, it wasn’t until the Socialists under Felipe González came to power after the restoration of democracy that Franco’s rent controls were finally discontinued for new contracts in the 1980s with the Decreto Boyer.

The Decreto Boyer, formally known as Royal Decree-Law 2/1985, was a legislative reform introduced by the Spanish government under the leadership of Prime Minister Felipe González and Miguel Boyer, who was the Minister of Economy and Finance at the time. It was enacted on April 30, 1985, and primarily aimed at liberalising the rental market in Spain after the heavy regulation of the Franco era.

Key Provisions of the Decreto Boyer:

1. Elimination of Rent Controls for New Leases:
   • The decree removed rent control for new rental contracts, allowing landlords and tenants to freely negotiate rents. This marked a significant shift from previous laws that had frozen rents and provided extensive tenant protections.
2. Reduction of Tenant Protections:
   • The decree reduced the protections that tenants had in terms of lease renewal and eviction, making it easier for landlords to end rental contracts once they expired.
   • In particular, long-term, indefinite contracts, which had been common prior to the law, were no longer required for new leases. This gave landlords greater flexibility and control over their properties.
3. Promoting Market Dynamics:
   • The Decreto Boyer aimed to create a more flexible, market-oriented rental sector. The previous rent control regime had led to a shortage of available rental properties, as landlords were disincentivized from renting out their properties or maintaining them. The reform sought to increase housing supply by making it more attractive for landlords to offer their properties for rent.
4. Urban Renewal:
   • The decree was also meant to encourage investment in the improvement and maintenance of rental properties. Under the old system, with fixed rents, landlords often had little incentive to renovate or maintain their properties. By allowing rents to rise, the government hoped to encourage urban renewal and better housing conditions.
5. Social Impact:
   • While it liberalised the market, the Decreto Boyer also led to rent increases, particularly in urban areas. This created affordability challenges for many tenants, especially those with lower incomes.

Objectives of the Decreto Boyer:

• Increase the supply of rental properties by making it financially viable for property owners to rent out their properties.
• Attract private investment in the housing sector by giving landlords more control over rental prices and contract terms.
• Reduce the black-market rental sector, which had emerged due to the distortions created by rent controls.
• Encourage urban renewal by incentivizing landlords to maintain and improve their properties.

Bigger picture

The liberalisation of the Spanish rental market was part of broader economic and social reforms aimed at modernising Spain’s economy and aligning it with the evolving European economic context. The reasons for this move were multifaceted and included the following:

1. Economic Modernization and Market Liberalization

Felipe González’s government sought to liberalise the economy in order to transition Spain from its more rigid, Francoist-era structures to a more dynamic and modern market economy. This included a push for greater market flexibility, which extended to the housing market. By liberalising the rental market, they aimed to make it more competitive and responsive to market forces, with less government interference.

2. Increase Housing Supply and Mobility

Franco’s rent controls had discouraged investment in the rental market, resulting in a housing shortage and a stagnant rental market. The government hoped that by liberalising rents, more properties would be made available for rent, increasing supply, improving housing conditions, and promoting urban mobility.

3. Attract Private Investment

The pre-existing rent controls were seen as a disincentive for private investment in the housing market. Landlords had little incentive to maintain or improve properties because they were unable to raise rents or evict tenants easily. By removing some of these controls, the Decreto Boyer aimed to encourage more owners to put their homes on the rental market and invest in housing stock, thereby improving housing quality and availability.

4. Urban Renewal and Gentrification

Another motive behind this reform was to encourage urban renewal in Spanish cities, particularly in older neighbourhoods where rent controls had led to housing deterioration. By liberalising rents, the government hoped that landlords would have the incentive to renovate and maintain their properties, contributing to the revitalisation of urban areas. This was also intended to combat informal or black-market rentals, which were common under the previous regime of rent controls.

5. Aligning with European Economic Policies

Spain was in the process of integrating more closely with the European Community (EC), which it officially joined in 1986. European economic policies were trending toward liberalisation and deregulation at the time. By liberalising the rental market, the Spanish government aligned itself with broader European norms regarding market-driven economic practices.

6. Reducing Fiscal Burden on the State

By liberalising the rental market, the government could shift some of the financial burden of housing provision from the state to the private sector. In the context of fiscal constraints, the socialists sought to reduce the state’s direct involvement in the housing market and rely more on private sector dynamics to meet the country’s housing needs.

Impact and Criticism

While the Decreto Boyer succeeded in increasing rental market dynamism and attracting more properties to the rental market, it also had unwelcome consequences. The liberalisation of rents led to rising rental prices, which disproportionately affected low-income renters. This generated social tensions, as some segments of the population struggled with housing affordability, exacerbating inequalities.

Déjà vu

Spain is no stranger to rent controls so there is plenty of evidence to draw on from the country’s own recent past when trying to predict what will happen this time round in those areas like Catalonia that have decided to implement rent controls. If the past is any guide to the future we can expect the results to be lower rents for a fortunate minority like sitting tenants, but a decline in the quantity and quality of rental housing in the medium to long term, which means there will be more losers than winners from the policy. It is almost a certainty that the overall impact will be negative, and society as a whole will be worse off, although some groups will benefit.

Rent controls have already led to a collapse in the supply of long-term rental homes in places like Barcelona, where you will now struggle to find homes advertised for long term rent as landlords and owners have switched to seasonal / midterm (temporada) rentals instead. The government’s response has been to look at ways to clamp down on seasonal rentals rather than reconsider rent controls that have caused the problem. So the immediate impact of rent controls has been a collapse in the long-term rental market, and the situation will get worse over time.

Spain is not the only country to experiment with rent controls, though it does appear to be one of the most enthusiastic. Rent controls have been tried all over the world at different times, so there is plenty of evidence to judge how well they work, and who wins and loses from the policy. In this video, Thomas Sowell argues that politicians are the main beneficiaries of rent controls.