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Risk Of A Bubble In The Rental Home Market?

4 November 2016 – El Mundo

The rental sector stopped being the bad guy the movie about the residential market a long time ago. Following the burst of the real estate bubble in 2008,  this option for accessing a home (so vilified in previous decades and so closely linked to numerous prejudices in a country where the ownership culture was deeply entrenched) quickly became an attractive an option. Its popularity has been so great that rental housing now accounts for more than 20% of the residential stock and that figure is on the rise. So much so, there are now concerns in the sector about the risk of a bubble.

The EU office for statistics, Eurostat, states that the percentage of the Spanish population living in rental homes now amounts to 21.8% and Spain’s National Institute for Statistics (INE), in its Continuous Household Survey for 2015, said that the figure amounts to 22.7% – the percentage is even higher in major cities such as Madrid and Barcelona -. If we look at this with some perspective, we see that the number of tenants has soared since 2007, when they accounted for just 6% or 7% of all dwellings.

Although perhaps most importantly, beyond the numbers, is the change in attitude towards renting. Nowadays, the hackneyed expression that renting is throwing money down the drain is no longer heard, and Spain is becoming more European in this sense. Currently, the national percentage of renters in Spain is higher than in Norway (17.2%) and is getting close to the levels seen in Portugal (25.1%), Greece (26%), Italy (26.9%), Belgium (28.6%) and Sweden (30.7%). Nevertheless, it is still a long way below the level in Switzerland, where more than half of inhabitants rent their homes (55.5%) and Germany (47.5%) (…).

Meanwhile, Servihabitat has published the first indicator that points to a boom. According to a study by the servicer’s investigation and market analysis platform, the average rental price is expected rise by more than 10% in 2016. Moreover, in the provinces of Málaga, Barcelona, Gerona and Alicante and in the uniprovincial communities of the Balearic Islands and Madrid, rental price increases are expected to exceed the average.

One of the most qualified people to talk about this situation in the rental segment is the firm Alquiler Seguro, which was established in 2007 and which nowadays brokers and manages tens of thousands of rental contracts all over Spain. The President of the company, Gustavo Rossi, acknowledges that the risk of a bubble does exist, above all, in the major cities and in the most touristy areas. “In those enclaves, the supply is insufficient for the demand that exists and, therefore, we see bull markets, with rental prices on the rise. If demand continues to grow and supply continues to stagnate, then we may see a price bubble”, he warned. Nevertheless, he points out that this possible bubble “would not be anything like the one seen with owned properties, when the construction sector stopped focusing on housing needs and took decisions based purely on speculation targets.

Antidotes to avoid the boom

To avoid the threat of a boom, Rossi advocates reactivating the supply, both from individuals as well as from property developers and investors. “The first step would be to put closed housing on the market and regulate the high flow of tourist homes”, he suggests. Similarly, he argues that “we should advance more in the professionalization of the sector to allow owners to lose their fear of renting. He also supports the need for Local Governments to commit to the rental sector “by creating specific courts to rapidly resolve conflicts and boost tax benefits for both owners and tenants, preferably via the income tax framework, and at the same time bring those rents that are submerged in the black market up to the surface”.

The forecasts for rental price increases are starting to cause problems, especially for renters. Currently, good tenants (those who pay on time), so sought after in recent years, are no longer the treasures they once were because the demand for quality is increasing. Some landlords, aware that rental prices are rising, are becoming increasingly less flexible and harsh with their current tenants, for example, when it comes to signing tacit contract renewals or granting ad hoc requests. (…).

In terms of prices, Servihabitat estimates that the average rental cost in Spain amounts to €540 for a home measuring 80m2 to 90m2, with significant variations depending on the autonomous region. In this way, the most expensive average rents are charged in the Balearic Islands (€980/month), the Community of Madrid (€940), Ceuta (€880) and País Vasco (€840), whereas the cheapest rents are paid in Galicia (€280), Extremadura (€370) and Castilla-La Mancha (€380). The servicer also identifies the trend in rental prices, which it describes as increasing in every autonomous region with the exception of Extremadura, Castilla-La Mancha, Navarra, Asturias and Ceuta and Melilla, where prices are stable. (…).

Original story: El Mundo

Translation: Carmel Drake