By Rafael Hurtado, a lecturer on the Master in Financial Management at EAE Business Schooll
Over the last few years, Spain has experienced a significant rise in rental prices, especially in cities such as Madrid and Barcelona, but also in regions such as Ibiza. According to statistics reported by idealista.com, in the second quarter of 2017, rental prices for residential properties in the Balearic Islands rose by 34.02% compared to the same quarter the previous year. Over the same period, in the city of Madrid, rents rose by 11.4%, compared to 10.6% in Barcelona.
In view of these significant increases, the first question we have to ask ourselves is what has caused them. The rental market, just like any other market, is governed by supply and demand. In this case, moreover, it should be added that, on the rental market, there is a great number of suppliers (there are thousands of owners offering their properties from rent) and many people creating the demand, meaning that it is far from an oligopolistic situation. If rents have increased, it is clearly because there is so much demand and the supply is insufficient, at least in certain areas.
Demand has grown for a number of reasons, including the clear improvement in economic activity in the last four years. In addition, the enormous tourist flow in Spain has had its impact on rents. Nowadays, there are many tourists who organize their accommodation in Barcelona, Ibiza and other places, by renting flats through platforms such as Airbnb. As a result, this new way of intermediating the real estate market has increased the demand to a great extent (more tourists come and many of them stay in rental flats rather than hotels) and, to a lesser degree, it has triggered a rise in the supply of flats (owners letting their properties through Airbnb generally have greater profitability, incentivizing more properties being put on the rental market). In addition, many young people prefer to rent rather than buy, as it enables them to have higher disposable income, greater flexibility and, in principle, less financial risk. This situation has also led to a rise in demand for rental properties.
People are now talking about the rental bubble. I honestly do not feel that we can talk about a bubble in the strictest sense of the term. Bubbles tend to happen when assets are purchased using significant leverage, which is not the case for rental accommodation.
Within this scenario, certain groups have called for greater regulation such as, for instance, limiting the maximum rental amount or changing the laws on urban rental properties. I sincerely do not believe that this is the best way forward as it may well trigger side effects.
To reduce the increase in rental prices, the only options are taking action with regard to demand or supply. In my opinion, it is more effective to incentivize supply. In cities like Madrid and Barcelona, it is important to enable large operators, such as Socimi, to offer rental apartments. The Spanish rental market is based on rental agreements between individuals. More mature rental markets require a greater and better supply.