The Government cap on rental prices does not affect the profitability of landlords
“The worst thing about this law is its interventionist nature.” Juan Bravo, the PP’s deputy secretary of Economy, assured this week that the future Housing Law poses a dichotomy between “interventionism and freedom”. In the background, the limit on rent increases that it proposes in an attempt to stop the escalation of rents, especially in certain areas of large cities and tourist areas, which excludes a part of the population from an affordable or commensurate rent what your income allows.
Keys to the housing law: a 3% ceiling on rent in 2024 and a future price index that will limit increases
In reality, this rent review cap has been in place for a year, since the coalition government approved it last spring and placed it at 2% as a measure to control inflation, given that most rents link their review to the CPI and this shot up after the Russian invasion of Ukraine.
Despite the messages from the right, this price control has not hit or caused a setback for the profitability that landlords obtain from their properties and this is confirmed by the Bank of Spain.
At the end of 2022, with almost three quarters in progress from this ceiling to the review of leases, the gross return on rental housing stood at 3.5% on average, according to the statistical indicators published periodically by this institution.
That 3.5% is above, for example, the profitability of the six and 12-month Treasury bills that the State auctioned in December 2022 and that set their interest rate at 2% and 2.4 %, respectively.
The trend of recent years continues
The gross rental yield data published by the Bank of Spain indicate a slight drop in the fourth quarter of last year compared to previous ones, but it must be put in context.
At the end of the second and third quarters –already with the ceiling on the increase in rents– this return obtained by owners for renting their flats was 3.6%. At the end of the first three months of 2022, the return was 3.7%.
In reality, this downward trend comes from previous years and remains practically constant. For example, between 2017 and 2018 it already dropped two tenths. It is also exactly the same fall that occurred between 2018 and 2019. And, if we go further back in time, it repeats what happened between 2015 and 2016, two tenths of a fall, again according to the data published by the Bank of Spain.
In recent years, the gross profitability of rentals peaked in 2014, when it reached 4.6%. Since then it has been going downhill. On the other hand, the lowest point was marked in 2008, at the gates of the bursting of the real estate bubble and with the sales of home ownership soaring. In fact, a certain correlation is perceived: when the sale of real estate is on the rise, the profitability of the leases suffers. On the other hand, when the sale of flats clicks, the profit that landlords obtain for their flats scales.
In fact, the greatest reductions in gross rental income take place in the most vigorous years of the housing bubble: between 2000 and 2001 and between 2002 and 2003 it fell by 0.6%; between 2003 and 2004, 0.5%; while between 2004 and 2005 and between 2005 and 2006 it fell by 0.4%.
a new scenario
In the current scenario, the housing market is in a situation that until now had not experienced. On the one hand, because rising interest rates have already caused a drop in the sale of houses and a halt in prices. This week, the National Institute of Statistics (INE) reported that the sale of homes contracted by 6.6% during the month of February. In some autonomous communities that drop is much higher. In Madrid, for example, it exceeds 15% and in La Rioja it shoots up more than 23%. Thus, it breaks the trend maintained for a good part of 2022.
On the other hand, this change in the home sales curve, after months of rise, will coexist with the maintenance of the rental income review. On Thursday the Housing Law will be voted in the Congress of Deputies, with the support of ERC and Bildu, the two parliamentary groups that have agreed on the text with the coalition government formations; and with the unknown of what the PNV will do, whose representative in the Transport, Mobility and Urban Agenda Commission, Íñigo Barandiaran, acknowledged that the negotiations will continue over the next few days.
The text agreed upon by the progressive formations states that, this year, the current rent review limit of 2% remains in force. In 2024 it will rise to 3%. From then on, in 2025, a new index will be created that is intended to be more stable and lower than the evolution of the CPI and for which a group of experts will be created to design it, according to the Minister of Social Rights and Agenda. 2030, Ione Belarra.
The effect of capping rents
In addition to ensuring that the future Housing Law is interventionist, some autonomous community governed by the PP –Madrid– has already advanced that it will take the text to the Constitutional Court for invading its powers. Conservative formations also criticize that the rent cap reduces supply. Something that is not so clear, because the experts do not reach a consensus on the matter.
In 2020, Catalonia approved the first regional legislation that regulated the rental price and ended up being struck down by the Constitutional Court. This law lowered the rental prices in the municipalities where rents were regulated, but housing experts do not agree on the drop percentages, as analyzed in this information.
Along with European cities such as Berlin or Paris, rent control is a particularly widespread practice in cities in the United States, such as Oregon, Los Angeles or Palo Alto. Regarding the latter, an analysis carried out by The Haas Institute for a Fair and Inclusive Society of the University of Berkeley concluded that rent limitation policies can provide “a profitable, immediate and generalized solution in stabilizing prices” that should go accompanied by an increase in the number of homes, especially affordable ones.
Jen Butler, spokesperson for the National Low Income Housing Coalition (NLIHC) – an association that seeks solutions to the housing problems of citizens with low incomes – explained to elDiario.es that “if those tenants are spending 50%, 60% or 70% of their income to rent, rent-controlled properties are still not affordable”. It should be remembered that, in the last week, the President of the Government, Pedro Sánchez, has announced that 50,000 Sareb homes will be allocated to social rental and, also, that this park will be expanded with another 43,000 properties with affordable rents. Homes that have to be developed over the next two decades.