Price controls on rentals affect the supply and quality of apartments: a report warns of the consequences

Spain is experiencing a housing crisis . There is high demand but limited supply. Consequently, prices are rising. This is the basis of a problem that many economists argue is not new but rather close to a structural situation.

This week marks two years since the Housing Law was passed, which introduced concepts such as "stressed zones" and paved the way for price controls by public authorities. The goal was to address problems that, 24 months later, still exist and have even worsened.

A report from the University of the Hesperides, led by Santiago Calvo and titled "An Overview of the Housing Market in Spain: Why Rent Control Is a Bad Idea," delves into the situation facing this sector in our country, with tenants being the biggest victims.

It highlights that since 2013, housing prices "have increased by 53% in nominal terms, while rental prices have registered cumulative annual increases of 7% to 8% since 2015." It also emphasizes the financial burden of renting, with "39.4% of rented households spending more than 40% of their income on housing costs, the highest percentage in the European Union."

As a result of all the tensions facing this market, authorities have "implemented stricter regulations to balance the market and protect both tenants and landlords." However, through a review of a series of studies, the authors emphasize that "the evidence suggests that regulating rental prices is not a good idea."

Specifically, there are four effects on this issue: price, mobility, supply, and quality . Regarding the first, they emphasize that regulation lowers or contains the price of affected homes but " increases prices for unregulated homes due to the greater pressure on demand in this segment."

Regarding mobility , they assert that the supply is less circulating since " tenants tend to stay in their regulated housing due to the relatively low cost and the security provided by controlling the rental regime."

Price controls also reduce "the supply of rental housing," as owners can choose to convert their properties to self-occupied housing or withdraw them from the market. Finally, they mention the decline in quality : "This is because owners' reduced income limits their ability and incentive to carry out maintenance and improvements ."

The study cites surveys conducted by the University of Chicago to assess economists' opinions on economic policies, including rent controls. In this regard, most of them were opposed.

"Although the intention to control rental prices is to alleviate the financial burden on tenants, the unintended consequences could outweigh the expected benefits," they explain. Thus, they emphasize the advisability of exploring other options "without resorting to measures that distort the functioning of the market."

To support this thesis, they also review what has happened in different markets such as areas of Germany or London and also Barcelona .

Measures of this type were introduced in Barcelona in 2020. They note that, on average, prices fell by 5% in regulated areas, but emphasize that "within the regulated market , the lowest rental prices rose to the maximum threshold allowed by regulations , while the highest prices decreased significantly." Therefore, the study points out that this report suggests that price controls can influence the internal structure of the market.