Rental costs in Europe The influence of a regulated Rental Market Montserrat Pareja Eastaway University of Barcelona, Spain Housing Market Challenges in Europe and the US any solutions available? Session 4: Housing Policies in Europe Oesterreichische Nationalbank September 29, 2008 Vienna
<<Regulation per se is neither good nor bad. What matters are the costs and benefits of specific regulations under specific market conditions>> (Turner & Malpezzi, 2003:15) 2
Contents 1. A change in the economic scenario 2. Dynamics in the rented sector in Europe 3. Regulating the rented market 4. The Spanish case General scenario Tenure Rental Regulations Macroeconomic context New initiatives 5. Conclusions 3
1. A change in the economic scenario Economic crisis about recession? Since the beginning of August 2007 Financial crisis the subprime issue a structural economic change? Stock exchange market instability crash? Slow down of the real state sector bursting house price bubbles 4
1. A change in the economic scenario Real estate sector mostly affected Image: Montserrat Pareja Housing market collapse (paralysis!) Speculation and huge increase in construction (or basic infrastructure developments) in certain areas Increase in the number of fraud and political extortion cases Downward trend in real housing prices Disequilibria in the mortgage/disposable income ratio of families 5
Increase in homeownership. 2. Dynamics in the rented sector in Europe Fall in size and quality of rented dwellings Decrease in social programmes oriented to facilitate access to housing: the rented sector as an alternative to social housing Increase in affordability problems 6
Private rented housing, % housing stock Source: O Sullivan & De Decker (2007) 7
2. Dynamics in the rented sector in Europe 70 60 50 40 30 circa 1980 circa 1990 circa 2000 20 10 0 Austria Italy Germany Spain Netherlands UK Source: ECB, 2003 8
3. Dynamics of the rented sector Trends in rents Real rents have increased in the long run (except for Portugal and Denmark) Cost of construction land Cost of housing services Quality improvements The real rent is less cyclical than house prices and fluctuations are usually linked to regulatory reforms. 9
Private rented regimes in Europe 2. Dynamics in the rented sector in Europe Mediterranean regimes (-) Liberal Regimes (+) (Greece, Italy, Portugal, Spain) Social Democratic Regimes (+/-) (UK, Ireland) Corporatist Welfare Regime (-/+) (Denmark, Finland, Sweden, Norway) (Belgium, France, Germany, The Netherlands) Source: O Sullivan and Pascal De Decker, 2007 10
2. Dynamics in the rented sector in Europe Why the share of rented dwellings has decreased since 1980? a. The strictness of rent controls may have reduced rental accommodation b. Ownership has become more attractive given - Lower cost of mortgage credit - Favorable tax/subsidy policies - Expectations of capital gains from rising housing prices 11
3. Regulating the rented market Reasons for rent regulation (Haffner et al, 2008. EJHP) Looking for efficiency when the market is not competitive Information asymmetry Landlord monopolistic power Sunk costs of tenants Regulation as a balance of interests between landlords and tenants 12
3. Regulating the rented market Reasons for rent controls/ regulation in Europe? (ECB, 2003) a. Provision of affordable accommodation b. To avoid segregation c. To redress the landlord-tenant negotiation d. To limit rent volatility (debate: is this a market failure?) 13
3. Regulating the rented market Fundamental aspects in rent control systems a. Regulations governing how the initial rent will change in a multi-year contract b. Control on the initial rent negotiated in a new contract c. Regulations governing contract termination (eviction) 14
3. Regulating the rented market Typologies of rent regulation (Arnott, 1995) 1st generation: freeze on nominal rents (2nd decade of XX century) 2nd generation: automatic rent increase (from 1970 s onwards, inflation control mechanism) 3rd generation: rent control within a tenancy and not between tenancies 15
3. Regulating the rented market Typologies of rent regulation (Lind, 2001) Protection against higher rents due to high transaction costs for the sitting tenant Protection to guarantee a reasonable return of the landlord Protection against segregation - regulation of all types of contracts- (all people can rent at a price below market rent) Protection against monopoly-related rents higher than the market Protection against the short-term price effect (overshooting) (increase of demand and inelastic supply) 16
3. Regulating the rented market What s the situation of the rented market regulations in Europe? Most EU countries have moved to a system that allows annual rent indexation in a simple way (i.e. CPI, housing costs). Also provisions on renewing contracts (limits to landlord negotiation power) Widespread agreement in policymakers that rents should reflect market conditions Most EU countries have moved towards a process of decontrolling rents in new contracts Most EU countries have shown a tendency to allow free negotiation of the duration and contract termination rules. 17
3. Regulating the rented market Main difficulties The problem of slow regulation transition: Revision of rents and conditions of old contracts. One-off adjustments? The rented market remains in most EU countries segmented. Two parallel developments? Old and new contracts. Others 18
And what about Spain? 19
4. The Spanish case: general scenario Bursting bubble of housing prices in 2008 Collapse in the real estate sector (unemployment, developers bankruptcy, etc. ) Affordability problems of certain collectives (immigration) Social housing and the rented sector as an alternative to the private sector stagnation Source: Barcelona Economia, 2008 20
4. The Spanish case: general scenario Starts. Variation rate in the last 12 months Housing Transactions in Barcelona province Source: Barcelona Economia, 2008 Source: Barcelona Economia, 2008 21
Tenure in Spain. 1950-2001. In percentages 4. The Spanish case: tenure 1950 1960 1970 1981 1991 2001 Social rent 3 2 2 2 1 1 Private rent 51 43 30 21 15 10 Owneroccupation Rent 54 45 32 23 16 11 46 51 64 73 78 82 Others 0 4 4 4 6 6 Total 100 100 100 100 100 100 Source: Instituto Nacional de Estadística. Censos de vivienda de 1950, 1960, 1970 y 1981. Censos de Población y Viviendas, 1991 y 2001 22
4. The Spanish case: tenure Amount and typology of rented housing in Spain Catalonia 25.7 % 3 AACC represent 58.1 % Madrid 18.5 % Andalusia 13.9% Rest of AACC 41.9 % Source: Ministry of Housing, OEVA
Number of contracts and rents. City of Barcelona 4. The Spanish case: tenure 30000 16 25000 20000 14 12 10 15000 8 10000 5000 6 4 2 0 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Number contracts Rent/sqm Source:Generalitat de Catalunya, Direcció General d Habitatge. 24
4. The Spanish case: rents Housing prices in Barcelona (and in many other cities in Spain) have started to show a slight decrease in real terms, with the exception of rental housing. This segment has been benefited by public policies oriented to subsidize rented dwellings for young people. 25
Precios del metro cuadrado 4. The Spanish case: rents In 2006, the average rent paid in Spain was 5,36 euros per square meter. (6,69 with furniture; 4,77 euros without) 9 8 7 6 España 5 4 3 2 1 0 Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla y León Castilla-La Mancha Cataluña Comunidad valenciana Extremadura Galicia Madrid Murcia Navarra País vasco La Rioja Ceuta y Melilla Comunidades autónomas Euros/m2 26
4. The Spanish case: rental regulations Till 1980 s: Ley de Arrendamientos Urbanos 1946 Between 1985 and 1994: Boyer Decree 1985 From 1994 on: Ley de Arrendamientos Urbanos 1994 27
Till 1980 s: 4. The Spanish case: rental regulations Ley de Arrendamientos Urbanos 1946 Freeze of rents and indefinite contracts 28
Between 1985 and 1994: Boyer Decree 1985 4. The Spanish case: rental regulations Complete liberalisation of rents and length of contracts 29
From 1994 on: 4. The Spanish case: rental regulations Ley de Arrendamientos Urbanos 1994 Free negotiation of rents, minimum duration 5 years 30
4. The Spanish case: macroeconomic context Returns from rented housing and public debt. 1996-2006 9 8 7 6 5 Public debt 4 3 Rent 2 1 0 mar-96 mar-97 mar-98 mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 31
Interest rate trajectory. 4. The Spanish case: macroeconomic context Interest rate for mortgages Euribor 12 32
Returns ownership (left side) 4. The Spanish case: macroeconomic context Returns rented dwelling (right side) Source: Inurrieta, 2008, forthcoming 33
Housing prices and Consumer Price Index (CPI). 1983-2007 4. The Spanish case: macroeconomic context Housing prices CPI Source: Ministry of Housing and INE 34
Mediation of public sector between tenants and landlords 4. The Spanish case: new initiatives Public guarantee of contracts Risk insurance Favorable financial conditions for the landlord (in case of repairs and improvements) Stimulus for owners of empty flats (vacancies problem) Fiscal advantages for landlords (Income tax: deductible rents (50%/100%)) 35
4. The Spanish case: new initiatives New REITs (Real Estate Investment Funds) linked to new societies oriented to manage and rent housing, commercial offices, hotels, commercial centers or other types of buildings. 36
5. Conclusions The rented market has been affected by other factors rather than exclusively by rental regulations Regulations are stable since 1994 in Spain, rents and rented housing are not Macroeconomic forces are determinant to the amount and quality of the rented market The current situation is uncertain (in many aspects ) Rents and prices do not strictly follow an expected path The rented sector is nowadays one of the alternatives in Spanish housing policy 37
5. Conclusions << Private rented housing can play a role in dampening overheating in the owneroccupied housing market, and may facilitate labour mobility. If private rented housing did not already exist, there would be good reasons to invent it>> (Priemus & Maclennan, 1998: 203) 38