The Government obtained the necessary support to approve the General State Budget for 2023. And among the measures agreed (in this case with Bildu) is the extension of the income increase limitation for 2% until December 31, 2023.
This measure should be exceptional given the high levels of inflation we have seen, as most contracts refer to the official CPI when setting the annual increase. Some point out that this measure, which was established temporarily and we already see that it is about to be permanent, is recover old rental contracts, which caused so much damage to rentals in Spain. Let's see if it's true.
old rentals
In 1964, the Urban Leasing Law (LAU) was approved, which established very pro-tenant rental standards. A rule that still governs some contracts and that effectively (it is not very clear whether intentionally or not) destroyed the rental market in Spain. These contracts signed under the aforementioned law are called old rent.
On the one hand, it was practically impossible to increase the rent price. but on the other contract extensions were unlimited If the tenant so desired, he could also subrogate the contract to third parties in certain circumstances (spouses, children...).
The truth is that this structure, that the Law was not modified until 1985 and the high inflation of the 70s They did a lot of damage to the rental market. Owners saw how income deteriorated year after year and it was not enough for them to cover expenses. The houses also couldn't be sold because no one wanted to take care of the tenants. In short, Spain went from a country with a normal level of income to a country of property owners.
Everything seemed to change in the housing crisis
However, in addition to the successive changes to the LAU, which became more neutral, What triggered renting in Spain was the housing crisis that began in 2007-08. There, many people were left without the ability to buy due to high prices, but they also saw the disadvantage of owning a home with a mortgage when asset prices decline.
Finally, Spain returned to normality compared to other countries, with a market for both real estate and rentals and not exclusively real estate. However, the increase in demand for rental housing has put pressure on prices in some areas and led to the return of populist measures to curb it, such as price control or establishing a ceiling on the updating of rental income.
Are we going back to the old rental?
Going back to the beginning, Is the government's measure a return to old income? The truth is no. Some experts indicate yes, but there is a fundamental difference between what it is now and the LAU of 1964.
2. The Old Rent, approved in the 60s, was also “temporary”.
Over the years it has completely destroyed the rental market. It left a devastation of a few dilapidated and expensive houses. I never thought we would make the same mistake again.— Fernando Encinar (@fencinar) November 22, 2022
The difference is that the current LAU does not extend contracts indefinitely. They are still limited to five years. In other words, during the first five years of the contract, increases are limited to 2% (while they continue to approve extensions), but After five years you can set a new rent or kick out the tenants (whether to look for others, sell or enjoy).
This difference is essential. What eroded the rental market in Spain were two factors (contracts with indefinite extension and the impossibility of increasing the price). But each of the factors separately do not contribute to the total destruction of the market.
It is true that this measure is not good, it discourages owners from putting their houses up for rent because their expenses have increased (Contribution, IBI, central heating...) and this increase cannot be passed on to the tenant. What's more, this well-intentioned measure, as it aims to provide stability to landlords, falls exclusively into the hands of individuals (it's very easy to help people with other people's money), which isn't very logical. But to infer that we are recovering the old rent is an exaggeration..