What's Behind the Drop in Rents in Catalonia: Self-sabotage

In the Generalitat (and in the Department of Housing, that is, in Moncloa) they have popped the champagne in front of everyone. Rents have decreased by 3.7% in Catalonia and an unbelievable 6.4% in Barcelona. In light of this alleged reality, the political authorities - PSC and PSOE - have claimed the usefulness of the law regulating rents.

President Illa, for example, has pointed out that Catalonia has been "pioneering" in this area. On the other hand, Collboni, Paneque, and the minister of the department, Isabel Rodríguez, also did not hold back on applause and kind words. The law works and "we're changing the rules of the game," said the mayor. But nothing could be further away from the truth.

As is common with regulated markets, the situation lends itself to deception and false hopes. Because, indeed, prices have dropped, but at the cost of also reducing supply and contracting the market. This is nothing new and has been warned about for a long time.

Providing Absolute Figures and Not Relative Ones

In her press conference, Councilor Paneque was quick to try to refute the fact that supply has fallen. According to her, not only have prices dropped thanks to regulation, but the number of contracts has even increased. Specifically, in the tight areas, we have 2,401 new contracts, and 416 more in Barcelona city. Where's the catch?

The catch is in giving the figures in absolute terms. Indeed, there may be new contracts, but what matters is knowing whether there are more or fewer compared to last year. This is like large companies: They can present million-dollar balances and at the same time fall on the stock market because revenues decline compared to the previous year.

Using this statistical trick has not been an obstacle for the political authorities of the PSC to admit that temporary contracts have increased. In this case, relative data is given. Thus, for example, temporary contracts are only 15% of new contracts, but that represents a 45% increase compared to 2023. As is evident, they have not explained whether there is a link between this increase in temporary rentals and the real drop in residential rental supply.

Because if anything is clear, it is that the residential rental supply has fallen, as shown by data from companies in the sector. According to the Safe Rental Observatory, Catalonia has lost almost 40,000 homes (25.7% less). This explains why real estate portals have seen a spectacular increase in the number of people interested in a home: from 65 to 331. But it's not that there are more people, but that there are fewer apartments.

This Was Already Explained

As economists have explained time and again, lowering rental prices is not a legal problem, that is, related to a law. It is a supply and demand problem. More specifically, it is a problem of chronic lack of supply and a population concentration derived from immigration.

What the regulator seems not to assume is that if the overdemand continues, the market will take care of meeting that demand because housing is a fairly inelastic good for most. And, in the particular case of Catalonia, the market found two solutions to the new law. i) Temporary rental, and ii) room rental. That is, precisely what was left out of the law (and what they now want to regulate as well).

What will happen if temporary and room rentals are regulated? Well, the cat-and-mouse game between the market and the regulator will continue until the black market expands more and more. However, it is not necessary to reach a pure black market to observe worrying dynamics. Many we already see: doing a 'casting' for clients, discarding any risky profile, charging part of the rent under the table, etc.

Similarly, as ESADE already explained with the Catalan law of 2021, regulation favors the richest and harms the poorest. And that is because when supply is withdrawn from the market, the best quality is withdrawn, which either goes to buying and selling or remains empty. This leads to lower-quality apartments creating a ceiling effect, that is, taking advantage of the lack of supply to stick to the price decreed by the regulator. This is what explains why many users on social media say that "good" apartments have disappeared. Or that they only see ads with the "temporary" label.