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Unpacking Spain's Controversial Housing Law
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Unpacking Spain's Controversial Housing Law
The Housing Law has been in force for seven months. Born amid controversy, it continues to stir up debates and has brought more uncertainty than clarity, affecting both tenants and small and large property owners, as well as real estate agencies. The rental market supply is shrinking, alternative leasing options are growing, and prices are on the rise not only in provincial capitals but also in other cities and metropolitan areas.
The Genesis of the Housing Law
The development of the Housing Law dates back to late 2021. The first draft of the law was approved in October 2021, and a few months later, in February 2022, it was passed as a bill, heading to Congress for urgent processing.
After more than a year stuck in the Congress of Deputies without the coalition government and its investiture partners reaching a consensus, the Housing Law almost remained shelved among the unapproved regulations from the previous legislature.
However, more out of necessity than natural progress, it came into force on the eve of the regional and municipal elections on May 28, attempting to be a boost for the left against polls that confirmed political changes in many administrations, as ultimately happened. This legislation has indeed drawn a distinctive line between progressive and conservative parties in the Congress of Deputies.
In April, the coalition government of PSOE and Podemos, along with ERC, EH Bildu, or Más País, reached 176 votes in favor, against the 167 votes against from PP, Vox, Cs, Junts, PDeCat, or PNV, among others.
More Negative Than Positive Effects on Rentals
Since then, the sector has complained about legal uncertainty and other negative effects, such as the increase in other types of leases, a decline in activity for many real estate agencies, or an extension of eviction processes for non-paying tenants.
According to professionals and associations speaking to idealista/news, in recent months, the legislation has led to a drop in the revenue of companies in the sector, layoffs, and a shift in business towards property sales due to difficulties in finalizing rental transactions that are no longer profitable for many agencies.
In the short term, an improvement in the scenario is unlikely, leaving many companies in the sector in a critical economic situation. The National Federation of Real Estate Associations (FAI) states that rental management operations in real estate agencies have decreased by almost 30%, and half of the surveyed agencies have experienced a decline in the rental inventory.
In fact, seasonal rentals have become a major player since the approval of the Housing Law, reaching 10% of all properties on the market in the third quarter of 2023, according to a study by idealista.
During the same period, permanent rental properties have decreased between July and September (-1%), accumulating a year-on-year fall of 12%.
The government was already aware that this problem would arise sooner or later. In the fifth additional provision of the Housing Law, in May, the establishment of a working group to improve the regulation of lease contracts for uses other than housing was already set, especially for seasonal leases of urban properties for housing purposes.
The 3% Cap on Rent Renewal and New Rental Tax Deductions Arrive
Starting from January 1, 2024, the extraordinary limitation on the annual rent update in rental contracts governed by the Urban Leases Law (LAU), applied since late March 2022, will be extended. Since then, the reference has shifted from the Consumer Price Index (CPI) to the Competitiveness Guarantee Index (IGC), with a maximum application of 2%.
Now, during the corresponding annual rent renewal, landlords and tenants will have to negotiate the new increase. In the absence of an agreement, the increase cannot exceed 3%.
Other novelties expected to arrive sooner rather than later include the publication of reference price indices for rent. The Ministry of Transport, Mobility, and Urban Agenda (Mitma) published a first state system for the reference price of rental housing, based on tax sources of data on habitual housing rentals, with data up to 2021.
Another upcoming change in 2024 is new tax reductions for landlords, which will come into effect on January 1, 2024, impacting the income tax return for the fiscal year that will be filed in the spring of 2025.
The main change is a general reduction in the net income from rent that landlords can apply to new lease contracts, decreasing from the current 60% to 50%.
The law includes new reductions, incompatible with each other, applicable in tensioned residential market areas, with deductions of up to 90%.
However, so far, no Autonomous Community, except Catalonia, has requested the application of tensioned residential market areas in 140 Catalan municipalities. The Central Government is awaiting the Generalitat to provide details on how it will reverse these tensioned areas (with a planned deadline of three years) and the application of the price index.
Another region that has made some progress is the Basque Country. Recently, the Basque Government's Housing Observatory identified 41 municipalities that partially or totally meet the conditions to be declared tensioned residential market areas.
However, the Housing Law has faced numerous constitutional challenges from several regional governments, including Catalonia and the Basque Country, denouncing the invasion of regional competencies by much of the normative text.
The Constitutional Court has admitted the appeals filed by Madrid, Andalusia, the Balearic Islands, Catalonia, and the Popular Parliamentary Group.
Understanding the Housing Law
The Law for the Right to Housing has introduced significant changes in the residential market. While not all measures have taken immediate effect, some have been fully operational since May 26, 2023, while others will require implementation by the Autonomous Communities. Here are the main provisions of the law and when they came into force.
In effect since May 26, 2023:
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Cap on Rent Increases: Since March 2022, there has been a limit on the annual rent increase in lease contract renewals. Until December 31, 2023, this increase cannot exceed 2%. In 2024, the limit increases to 3%, and from 2025, a new Rent Index will be applied.
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Minimum Information in Property Transactions: Requirements have been established to provide detailed information about property purchase and rental transactions, including data about properties and their owners. This implies more administrative work for real estate agents.
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Extraordinary Extensions for Vulnerable Renters: Tenants in situations of social and economic vulnerability can request a one-year extension of the lease contract, provided the landlord is a large property holder.
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Property Tax Surcharge on Empty Homes: Municipalities can apply a surcharge on the Property Tax (IBI) for homes that have been vacant for at least two years. The surcharge could be up to 150%.
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Regulations for Protected or 'Incentivized' Housing: Stricter regulations are established for protected and affordable housing, including restrictions on sale or rental and authorization by the Autonomous Community.
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Electronic Payments: New lease contracts must specify that rent payments be made electronically, unless one of the parties does not have access to these means.
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Definition of Large Property Holder: The figure of a "large holder" is defined as one who owns more than 10 urban properties for residential use. The definition may vary in declared tensioned areas and may be reduced to 5 properties.
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Real Estate Management and Contract Formalization Fees: Real estate management and lease contract formalization fees are borne by the landlord.
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Changes in Evictions, Foreclosures, and Property Auctions: Significant changes are introduced in eviction procedures, mortgage foreclosures, and property auctions, providing greater protection to occupants in vulnerable situations.
Measures Pending Activation, Subject to the Declaration of Tensioned Residential Market Areas:
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Existing Contracts in Tensioned Areas: Existing lease contracts in tensioned areas will maintain limits on annual renewals for their update.
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New Contracts in Tensioned Areas: For new lease contracts in tensioned areas, limits will be established based on whether the lessor is a small owner or a large holder. These limits will be linked to previous rents or reference price indices.
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Expenses in Rentals in Tensioned Areas: Landlords cannot pass on new general expenses in lease contracts if the property is in a tensioned area and did not have this provision in the previous contract.
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New Reference Index for Annual Renewals of Lease Contracts: The National Institute of Statistics (INE) is expected to define a new reference index before December 31, 2024, to be used for the annual update of rental contracts.
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Tax Deductions: New tax reductions for landlords in tensioned residential market areas will come into effect on January 1, 2024, with fiscal effects from 2025. These reductions are linked to rent reductions and other specific circumstances in lease contracts, reaching up to 90% under certain conditions.
The main change is that the general reduction in the net income from rent that landlords can apply to new lease contracts decreases from the current 60% to 50%.
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