The rental bubble

Where are the rental prices going to stop rising? In large cities they’ve once again reached the record levels of 2007. Working against this situation which is critical for tenants, the (central and local) governments are trying to ease the problem and once more facilitate access to housing. Will they be able to manage this without explicitly regulating prices?


7 December 2018 |

Where are the rental prices going to stop rising? In large cities, they’ve once again reached the record levels of 2007. Working against this situation, which is critical for tenants, the (central and local) governments are trying to ease the problem and once more facilitate access to housing. Will they be able to manage this without explicitly regulating prices?

With rental prices across the country having risen over 15% in a year, are we in the middle of a new real estate crisis affecting tenants? The experts think not, because this time the increase in prices is not the result of speculation, but rather a phenomenon of accelerated recovery following the crisis. The authorities are beginning to act with urgency.

Both in Madrid and Barcelona, rental prices have been rising rapidly for over 5 years (in Barcelona, the overall increase during this period is more than 35%), and is reaching levels comparable to 2007. During this time salaries have not increased, presenting a real problem for access to housing, especially in large cities. Symptomatic is the fact that young employees live in shared flats with colleagues and can’t imagine any alternative to this formula. According to Eurostat, in 2016, 43% of Spaniards renting private properties, spent more than 40% of their earnings on rent, compared with 28% in the EU.

What are the causes of this rapid inflation?

We find, amongst other principal factors, the pressure of a (local and foreign) demand facing a very limited supply. Population density is a clear sign in this regard: Barcelona, with 16,000 inhabitants per Km2, exceeds New Delhi.  Enclosed between the sea and the mountain, it can’t push back its natural boundaries. Another factor is the mobility of the workforce; young graduates, of whom a lot of flexibility is demanded, no longer feel attracted to buy a house. Neither should we forget the phenomenon of tourist rentals which is ever more attractive to owners for its higher returns. It has reached a peak of 15,000 adverts in Barcelona, in AirBnB alone. Finally, we mention the empty housing owned by banks and investment funds (REIT) that don´t enter in the market.

In light of the shortage of affordable housing, emergency measures have been implemented by the Barcelona City Council, the Government of Catalonia and the Government of Pedro Sánchez.

The Barcelona City Council is led by Ada Colau, the ex-spokesperson of the PAH (Platform for People Affected by Mortgages) and a devoted activist of the “right to decent housing”. With this in mind, she set herself firmly against the concept of “hive accommodation” which arrived from overseas, revoking its license. But what solutions are her administration proposing?

Among the priorities: there is a 50% increase over six years in the quantity of subsidized social housing and 72 projects will supposedly add more than 4,500 units of social housing. Furthermore, since September 2018, promoters of residential projects over 600m3 are obliged to contribute 30% of the developed area to price-regulated housing; a measure that has infuriated the professionals within the sector[1].

Additionally, 750 dwellings will be recovered by the direct acquisition or pre-emptive right of the administration (right of first refusal and right of remedy) by May 2019. Finally, the subsidies for integral restoration (a budget of over 40 million euros) are now contingent on the freezing of rental prices by the proprietors. This policy will “protect” around 16,000 homes, and therefore 40,000 inhabitants.

Similarly, the council has launched an advertising campaign to acquire rental apartments to augment the city’s housing pool. Calling upon the citizens’ sense of responsibility, this mechanism promises proprietors subsidies for renovations, as well as guarantees of retail payments (guarantee fund), providing the monthly payments don’t exceed a certain amount (roughly 30% less than the market price).

For their part, MAB (The Metropolitan Area of Barcelona) have finished building a public-private company, to augment the social housing pool.  The entity called “Habitatge Metropòlis Barcelona”, will have 60 million euros for an initial phase of 600 social dwellings.

Furthermore, among the measures planned by the regional Government of Catalonia, is the recovery of the Act 4/2016 (Catalonia housing act) regarding measures to protect the right to housing for people at risk of social exclusion. This act, provisionally suspended by the constitutional court, refers to empty housing which belongs to banks or large proprietors. Finally, to help compensate for the deficit of affordable rental housing, there is a planned injection of 250 million euros to finance the construction and purchasing of housing. In total, there is a budget for the “purchase” of 1,800 units resulting from evictions, in order to regenerate the social housing pool[2].

At a national level, Pedro Sanchez’s government also legislated in mid-December 2018 to protect the tenant[3]. This involved a reform of the LAU (Residential Tenancies Act) which was promoted by the previous Rajoy government in 2013. Among other significant changes, we note the increase in the legal duration of rental contracts, which change from 3 to 5 years, a tacit extension of 3 years, and a restriction of the security deposit to two months’ rent.

On the other hand, in spite of the rumours, the law does not include measures to regulate the rental prices (the imposition of a maximum price per area, as is the case in Paris). For the moment, there is only contemplation of the introduction of a system of monetary incentives to stem the increase in rental prices (a mechanism inspired by what is currently happening in Barcelona).


We will see if the public authorities’ intervention is able to stem the frenetic increase of rental prices. Following their effectiveness in Northern Europe, some see the creation of tenants’ syndicates as an alternative, but they have only recently appeared in Barcelona. The reality of the market’s evolution is difficult to predict, especially in the knowledge that Airbnb has over 10,000 residences available in Barcelona, while the pool of affordable housing in the city barely reaches a thousand units. Profitability remains a determining factor, especially for property owners who have signed high-rate mortgages.

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