In the 1960s, Spain witnessed the destruction of its rental market under Franco’s regime. While the rental landscape wasn’t perfect before, the post-Civil War economic recovery presented an opportunity to normalize relations between landlords and tenants. However, the 1964 Urban Leases Law (LAU) introduced two measures that completely dismantled the rental market: continued price controls (established in 1920) and the creation of forced extensions, compelling landlords to indefinitely renew leases for their tenants.
Ramifications of the 1964 LAU
How did these measures lead to the demise of Spain’s rental market? It was straightforward: the pro-tenant nature of these measures prompted property owners to exit the market, either by selling properties or leaving them vacant.
When landlords found themselves stuck with long-term tenants, the consequences were evident: properties deteriorated due to insufficient maintenance, as the landlord viewed them more as a liability that cost money rather than an asset generating sufficient income.
It took considerable time to revive a fully functional rental market, with significant changes to the LAU in 1985 and 1994, coupled with a severe real estate crisis that shifted the mindset of Spaniards. The prevailing mentality, fixated on buying rather than renting due to the absence of a functional rental market, gradually began to change.
Challenges with the Recent LAU Amendments by PSOE and SUMAR
The problem with the recently approved amendments to the LAU by PSOE and SUMAR is that they represent a phased and supposedly exceptional return to the 1964 law. It is a law heavily skewed in favor of tenants. Firstly, it imposes restrictions on price increases, even politicizing a neutral entity like the National Institute of Statistics (INE). In an environment of high inflation, this reduces the profitability of properties for landlords, leading to a potential decline in supply.
On the other hand, lease extensions are prolonged, and the anti-eviction decree is extended until the end of 2024. Initially introduced as an exceptional measure in 2020 for a few months, every time it is set to expire, it gets extended for another year.
With all these changes, we are reverting to the 1964 LAU: endless extensions and limitations on price hikes. What will likely happen is a repetition of the 1960s scenario: the disappearance of supply, the destruction of the rental market, leaving purchasing as the only viable option.
The motivations behind these measures echo the same arguments presented in the preamble of the 1964 LAU, emphasizing “unavoidable demands of social justice.” Unfortunately, the consequences are likely to mirror those of the past. A little over a year ago, concerns were raised about the unfolding measures not aiming to restore an old rent regime. Today, those doubts persist and may even have strengthened.