The Government got the necessary support to approve the General State Budget for 2023. And among the agreed measures (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 temporarily established and we can already see that it is in the process of becoming permanent, is recover old leases, which caused so much damage to rent in Spain. Let's see if it's true.
old rentals
In 1964, the Urban Lease Act (LAU) was passed, which established very pro-tenant tenancy 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 entered into under said law are called old rent.
On the one hand, it was virtually impossible to raise the rental price. but on the other contract extensions were unlimited if the tenant so wished, 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. The landlords saw how the rents deteriorated year after year and it didn't come to them to cover the expenses. The houses couldn't be sold either because nobody wanted to take care of the tenants. In short, Spain has gone 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 successive amendments to the LAU, which have become more neutral, what triggered rent in spain was the real estate crisis that started in 2007-08. There, many people were left without the possibility of buying due to high prices, but they also saw the downside of owning a home with a mortgage when asset prices decline.
Finally, Spain returned to normalcy in relation 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 put pressure on prices in some areas and led to the return of populist measures to curb it, such as price controls or setting a cap on rent revenue updates.
Shall we go back to the old lease?
Returning to the beginning, Is the government measure a return to old income? The truth is, no. Some experts say yes, but there is a fundamental difference between what it is now and the 1964 LAU.
2. The Aluguel Antiga, approved in the 1960s, was also “temporary”.
Over the years it has completely destroyed the rental market. It left a devastation of few houses, dilapidated and expensive. 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. That is, during the first five years of the contract, increases are limited to 2% (while continuing to approve extensions), but after five years you can set a new rent or evict 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 an indefinite extension and the impossibility of raising 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 landlords 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, since it aims to give stability to landlords, falls exclusively into the hands of private individuals (it's very easy to help people with other people's money), which is not very logical. But to infer from this that we are recovering the old lease is an exaggeration..