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Housing Law project and rental price control

The two parties that form the coalition government in Spain, PSOE and Unidas Podemos (Communist party), agreed to carry out a new regulation for the rental housing market, but due to differences in their ideologies, they have very different points of view on how to do it.

For this reason, in the General State Budget for 2021 approved on October 2020, both parties agreed to bring a proposal to regulate the Housing Law including rental measures, to the Council of Ministers within a maximum period of three months. The debate is on the table and the proposal promoted by United Podemos to implement a law with the necessary mechanisms to control rental prices worries many sectors as well as many landlords in Spain, specially at a time when due to Covid-19 rents are falling and this should freeze for the moment the haste to take measures in this regard.

Rental prices have in fact suffered constant annual increases since 2015 (except during 2020 due to the effects of Covid-19), especially in large cities such as Madrid or Barcelona. However, to try to counteract these increases with price control measures which have already been tried and tested in other countries such as France or Germany and have failed, especially in the medium and long term, does not seem the right thing to do.

Furthermore, these types of measures are difficult to implement without provoking injustices. What does the government propose to take into account to establish rental limitations: the price? Normally the highest rents are located in areas or neighborhoods where the income generated by its residents is also higher than average. If the proposed price control was carried out in these areas, the measures would benefit tenants with medium-high incomes and not those with low incomes. Another option is to follow what was has been done in Catalonia since September 2020 and establish a maximum percentage of the tenant’s income for housing costs.

For José Luis Ábalos, Minister of Transport, Mobility and Urban Agenda "housing is a right, but it is also a sector that generates economic activity" for him it is “preferable and more effective to promote than to impose”. For this reason, the socialist party (PSOE) proposes that rental price regulation be carried out using tax incentives. Currently, landlords benefit from a 60% reduction in their personal income tax (Impuesto sobre la renta de las Personas Físicas or IRPF).

The Socialists' proposal is to decrease the existing reduction to 50% for all new rental contracts (maintaining 60% for existing ones) and to compensate for that 10-point tax loss by offering various incentives to landlords who fulfil certain requirements. For example, the reduction could be increased to 70% for renting properties to young people (aged 18 to 35) or if landlords include their property in a public housing program.

An important point is to define how to determine the so-called “stressed areas”, where rents have risen the most steeply in recent years and where the proposed measures would be implemented. The autonomous communities or the town councils would be in charge of determining these areas. Landlords could benefit from up to 90% reduction in their personal income tax if they agree to reduce the monthly rent of their properties by 10% compared to the previous contract. However, properties that are offered for lease for the first time in these stressed areas, or offered again after years without being rented, would only benefit from a tax reduction of 70%.

The position of the communist party Unidas Podemos is very different from that of the socialists and revolves around the creation of a Registry of Rental Contracts to allow public authorities to monitor prices and have a statistical control of the real estate market.

Registration would not be mandatory, but all landlords who want to take advantage of rental aid or tax incentives would have to previously register the rental contracts. The registration would include, in addition to the contract, the year the property was built, surface area, number of rooms and other information such as whether it has an elevator and air conditioning and heating, whether it is rented furnished or if the rent includes supplies.

They also propose to create an official benchmark index in the “stressed areas” in order to verify that rental prices do not go above this index. The autonomous communities would be the ones to decree these areas, they would determine it with “objective methodologies” and subject to periodic reviews. In these areas, the price of a new contract could not be higher than the rent recorded in the last lease in force in the last five years. However, the price would be modulated depending on specific characteristics of the property such as state of conservation, year of construction, access to public transport, etc. In any case the price cannot be increased by more than 2.5% the price of the benchmark.

In the proposal presented by Podemos, they urge the Community of Madrid to “prepare and deploy legislative, statistical and information tools to develop the rental price index in the Community" to serve as reference and enable citizens to have reliable information on rental prices and avoid possible abuses. They should also regulate the concept of “stressed” housing markets to be able to take measures on them.

Other regions in Spain like the Valencian Community or the Basque Country also have their own statistics, but they have never been used, until now at least, to limit the rental prices.

Maximum rental price

The key question is what will be the maximum rental price to which these tax incentives could be applied, especially the one up to 90% the PSOE proposed. This has not yet been confirmed, though in won’t in any case apply to high-income rentals.

This maximum rent that can benefit from tax incentives, will also be different depending on where the property is located, since the rent paid in Madrid or Barcelona ​​for example, cannot be compared to other cities.

When the local administrations detect a “stressed area” the declaration must be maintained obligatorily for a 3-year period, with possible annual extension afterwards and with a specific action plan designed with measures aimed at correcting the situation.

Opinions about the proposed measures:

The association of rental homes owners (ASVAL), as well as international investors and housing experts, believe private property needs to be defended and formulas such as tax incentives have to be found instead of choosing the rental price limits.

The market has been warning for some time now, of the danger that the new regulations may pose for the stock of rental houses, the rental price evolution and of the damage that undermining legal certainty can cause.

For Eduard Mendiluce, CEO of Aliseda Inmobiliaria and Anticipa Real Estate, legal certainty and the increase in the supply of rental properties should be the two pillars of any housing policy. “The Housing Law should not contemplate fines for landlords who have vacant houses, whether they have more that ten or even five, as recently proposed by Unidas Podemos. This law cannot protect squatters or regulate and control the rental price. Instead, it should focus on offering tax initiatives for homeowners, such as a 100% deduction in personal income tax and IBI for those who rent their property for bellow the market value. " For Mendiluce "all must be based on legal certainty" and he sees it necessary for representatives of the public and private sectors to sit down and agree on solutions.

For Pablo Hernández de Cos, governor of the Bank of Spain, rent control to limit the increase in housing prices could lead to medium term increases since a consequence could be a reduction in the number of houses available on the market. This short-term price control may improve accessibility to rent for the most vulnerable groups, but in the long run, if housing supply is reduced with this type of measures, the effect would be the contrary of what it is sought making prices more expensive.

For Luis de Guindos, vice president of the European Central Bank (ECB), legal certainty in rental matters is crucial. "It is very important, because if owners are given sufficient guarantees to put their homes on the market, there will be a greater supply, which will allow prices to drop." He believes that the key is "the guarantee of a stable and favorable legal framework."

Javier Rodríguez Heredia, partner of Azora and president of the Leasing Commission of the APCE (Association of Construction Promoters of Spain) thinks that "regardless of its constitutionality, price control is a measure that is not only complex to apply technically, rather, it is ineffective and with its introduction generates the opposite impact that is sought, drastically reducing the supply in the area that is regulated and raising prices in neighboring areas rapidly ".

Rent control policies can seem a suitable solution to limit rental market prices in stressed areas and make housing more affordable, but they have an impact on the private rental market reducing investors’ interest in the housing market and putting housing supply at risk. They also endanger investments already made by millions of private citizens specially in Spain where income from rental properties is a complement to low pensions.

Empty houses

In general offering vacant homes for rent is seen as a positive measure and a matter on which some autonomous communities, like the Balearic Islands, have already legislated.

Currently in Spain there is not a defined concept of ‘empty house’, so it is impossible to quantify the number of empty houses that exist.

Unidas Podemos wants to establish a state tax (with an autonomous section) on empty houses, the Socialists however propose to encourage rental market offer by imposing a surcharge of up to 50% on the tax on real estate (IBI) that the municipalities could apply to empty houses.

This idea put forward by the socialists is a possibility already included in the law regulating local estates since 2004, not developed until now since there is not a definition, at state level, on what to consider an empty house. The PSOE is asking that the norm that regulates the IBI specify that properties unoccupied for more than two years (with certain exceptions like moving for work reasons) could be especially taxed. Right now, there is only a generic reference "properties for residential use that are permanently unoccupied". The governing parties want to reach an agreement to define the concept and the requirements to be considered an empty home, thus avoiding legal problems when the local entities intend to impose this surcharge on the IBI tax.

Owners of more than 10 properties

Another obstacle encountered by the governing partners is the role of large homeowners, as the future legislation intends to put the burden on them to provide housing for the most needy. a “large owner” was defined as one who had more than 10 urban properties or one that having less than 10, owns a surface area greater than 1,500 m2. Unidos Podemos wants to reduce it to more than five properties and to force large owners to assign at least 30% of their properties to social rent. The PSOE prefers to link the definition of large owner to a specific purpose and only in relation to the declaration of stressed area.

Although the large holders do not know the details of the plan and the possible incentives the government will offer them according to Minister José Luis Ábalos these funds will contribute 30.000 homes to the plan. The funds logically ask that the agreements that are established be linked to ensuring a smooth regulatory context and avoid rental control prices.

The government agreement states that "additional obligations for large homeowners will be studied" by offering on the one hand, fiscal measures to curb rental prices and on the other allocating a percentage of these houses to social rental housing scheme.

Ione Belarra, stated in a session for the coordination and monitoring of the Spanish strategy to achieve the Sustainable Development Goals that " big property owners in Spain will allocate 30% of their properties to social rent, this way we could increase in a few months available housing in 140,000 or 150,000 units, helping to put an end to the housing emergency that our country is experiencing. "

We will see, with time where these measures proposed by the governing partners will take the real estate sector and the housing problem.


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