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Rental costs in Europe The influence of a regulated

Rental Market

Montserrat Pareja Eastaway University of Barcelona, Spain

Housing Market Challenges in Europe and the US – any solutions available?

Session 4: Housing Policies in Europe

Oesterreichische Nationalbank September 29, 2008

Vienna

2

<<Regulation per se is neither good nor bad.

What matters are the costs and benefits of

specific regulations under specific market

conditions>>

(Turner & Malpezzi, 2003:15)

3

Contents

1. A change in the economic scenario

2. Dynamics in the rented sector in Europe

3. Regulating the rented market

4. The Spanish case • General scenario

• Tenure

• Rental Regulations

• Macroeconomic context

• New initiatives

5. Conclusions

4


• Economic crisis…about

recession?

• Financial crisis…the subprime

issue

• Stock exchange market

instability…crash?

• Slow down of the real state sector

…bursting house price bubbles

Since the beginning

of August 2007…

a structural

economic

change?

5


• Real estate sector mostly affected

• Housing market collapse (paralysis!)

– Speculation and huge increase in construction (or basic infrastructure developments) in certain areas

– Increase in the number of fraud and political extortion cases

• Downward trend in real housing prices

• Disequilibria in the mortgage/Disposable income ratio of families

Image: Montserrat Pareja

6

2. Dynamics in the rented sector in

Europe

• Increase in homeownership.

• Fall in size and quality of rented dwellings

• Decrease in social programmes oriented to facilitate access to housing: the rented sector as an alternative to social housing

• Increase in affordability problems

7 Source: O’Sullivan & De Decker (2007)

Private rented housing,

% housing stock

8

0

10

20

30

40

50

60

70

Aus

tria

Italy

Ger

man

y

Spa

in

Neth

erland

sUK

circa 1980

circa 1990

circa 2000

Source: ECB, 2003

2. Dynamics in the rented sector

in Europe

9

3. Dynamics of the rented sector

• Real rents have increased in the long run (except for Portugal and Denmark) – Cost of construction land

– Cost of housing services

– Quality improvements

• The real rent is less cyclical than house prices and fluctuations are usually linked to regulatory reforms.

Trends in rents

10

2. Dynamics in the rented sector in

Europe

Mediterranean regimes (-)

(Greece, Italy, Portugal,

Spain)

Liberal Regimes (+)

(UK, Ireland)

Social Democratic

Regimes (+/-)

(Denmark, Finland,

Sweden, Norway)

Corporatist Welfare

Regime (-/+)

(Belgium, France,

Germany, The Netherlands)

Source: O’Sullivan and Pascal De Decker, 2007

Private rented regimes in Europe

11

2. Dynamics in the rented sector

in Europe

a. The strictness of rent controls may have reduced rental accommodation

b. Ownership has become more attractive given

- Lower cost of mortgage credit

- Favorable tax/subsidy policies

- Expectations of capital gains from rising housing prices

Why the share of rented dwellings has decreased since 1980?

12


Looking for efficiency when the market is not “competitive”

Information asymmetry

Landlord monopolistic power

Sunk costs of tenants

Regulation as a balance of interests between landlords and tenants

Reasons for rent regulation (Haffner et al, 2008. EJHP)

13


a. Provision of affordable accommodation

b. To avoid segregation

c. To redress the landlord-tenant negotiation

d. To limit rent volatility (debate: is this a market failure?)

Reasons for rent controls/ regulation in Europe? (ECB, 2003)

14


a. Regulations governing how the initial rent will change in a multi-year contract

b. Control on the initial rent negotiated in a new contract

c. Regulations governing contract termination (eviction)

Fundamental aspects in rent control systems

15


• 1st generation: freeze on nominal rents (2nd decade

of XX century)

• 2nd generation: automatic rent increase (from 1970’s

onwards, inflation control mechanism)

• 3rd generation: rent control within a tenancy and not between tenancies

Typologies of rent regulation (Arnott , 1995)

16


• Protection against higher rents due to high transaction costs for the sitting tenant

• Protection to guarantee a reasonable return of the landlord

• Protection against segregation - regulation of all types of contracts- (all people can rent at a price below market rent)

• Protection against monopoly-related rents higher than the market

• Protection against the “short-term price effect” (overshooting) (increase of demand and inelastic supply)

Typologies of rent regulation (Lind, 2001)

17


• Most EU countries have moved to a system that allows annual rent indexation in a simple way (i.e. CPI, housing costs).

• Also provisions on renewing contracts (limits to landlord negotiation power)

• Widespread agreement in policymakers that rents should reflect market conditions

• Most EU countries have moved towards a process of decontrolling rents in new contracts

• Most EU countries have shown a tendency to allow free negotiation of the duration and contract termination rules.

What’s the situation of the rented market regulations in Europe?

18


• The problem of slow regulation transition: Revision of rents and conditions of old contracts. One-off adjustments?

• The rented market remains in most EU countries segmented. Two parallel developments? Old and new contracts.

• Others…

Main difficulties

19

And…what about Spain?

20

4. The Spanish case: general

scenario

• Bursting bubble of housing prices in 2008

• Collapse in the real estate sector (unemployment, developers bankruptcy, etc. )

• Affordability problems of certain collectives (immigration)

• Social housing and the rented sector as an alternative to the private sector stagnation

Source: Barcelona Economia, 2008

21

Starts. Variation rate in the last 12 months Housing Transactions in Barcelona province

Source: Barcelona Economia, 2008 Source: Barcelona Economia, 2008

4. The Spanish case: general

scenario

22

4. The Spanish case: tenure

1950 1960 1970 1981 1991 2001

Social rent 3 2 2 2 1 1

Private rent 51 43 30 21 15 10

Rent 54 45 32 23 16 11

Owner-

occupation

46 51 64 73 78 82

Others 0 4 4 4 6 6

Total 100 100 100 100 100 100

Tenure in Spain. 1950-2001. In percentages

Source: Instituto Nacional de Estadística. Censos de vivienda de 1950, 1960, 1970 y 1981. Censos de Población y Viviendas, 1991 y 2001


Catalonia

25.7 % Madrid

18.5 %

Andalusia

13.9% Rest of AACC

41.9 %

3 AACC represent 58.1 %

Source: Ministry of Housing, OEVA

Amount and typology of rented housing in Spain

24


0

5000

10000

15000

20000

25000

30000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

0

2

4

6

8

10

12

14

16

Number contracts Rent/sqm

Number of contracts and rents. City of Barcelona

Source:Generalitat de Catalunya, Direcció General d’Habitatge.

25

Housing prices in Barcelona (and in many

other cities in Spain) have started to show a

slight decrease in real terms, with the

exception of rental housing.

This segment has been benefited by public

policies oriented to subsidize rented

dwellings for young people.

4. The Spanish case: rents

26

4. The Spanish case: rents

• In 2006, the average rent paid in Spain was 5,36 euros per

square meter. (6,69 with furniture; 4,77 euros without)

0

1

2

3

4

5

6

7

8

9

Andalucía

Aragón

Asturias

Baleares

Canarias

Cantabria

Castilla y León

Castilla-La M

ancha

Cataluña

Comunidad valenciana

Extremadura

Galicia

Madrid

Murcia

Navarra

País vasco

La Rioja

Ceuta y Melill

a

Comunidades autónomas

Prec

ios

del m

etro

cua

drad

o

Euros/m2

España

27

4. The Spanish case: rental regulations

• Till 1980’s:

Ley de Arrendamientos Urbanos 1946

• Between 1985 and 1994:

Boyer Decree 1985

• From 1994 on:


28

4. The Spanish case: rental

regulations

• Till 1980’s:


Freeze of rents and indefinite contracts

29


regulations

• Between 1985 and 1994:

Boyer Decree 1985

Complete liberalisation of rents and length of

contracts

30


regulations

• From 1994 on:


Free negotiation of rents, minimum duration 5

years

31

4. The Spanish case:

macroeconomic context

0

1

2

3

4

5

6

7

8

9

mar

-96

mar

-97

mar

-98

mar

-99

mar

-00

mar

-01

mar

-02

mar

-03

mar

-04

mar

-05

mar

-06

Rent

Public debt

Returns from rented housing and public debt. 1996-2006

32



Interest rate for mortgages

Euribor 12

Interest rate trajectory.

33 Source: Inurrieta, 2008, forthcoming

Returns ownership (left side)

Returns rented dwelling (right side)



34



Housing prices

CPI

Source: Ministry of Housing and INE

Housing prices and Consumer Price Index (CPI). 1983-2007

35

4. The Spanish case: new

initiatives • Mediation of public sector between tenants and landlords

• Public guarantee of contracts

• Risk insurance

• Favorable financial conditions for the landlord (in case of repairs and improvements)

• Stimulus for owners of empty flats (vacancies problem)

• Fiscal advantages for landlords (Income tax: deductible rents (50%/100%))

36

4. The Spanish case: new

initiatives

• New REITs (Real Estate Investment Funds)

linked to new societies oriented to manage

and rent housing, commercial offices,

hotels, commercial centers or other types of

buildings.

37

5. Conclusions

• The rented market has been affected by other factors rather than

exclusively by rental regulations

• Regulations are stable since 1994 in Spain, rents and rented housing are not

• Macroeconomic forces are determinant to the amount and quality of the rented market

• The current situation is uncertain (in many aspects…)

• Rents and prices do not strictly follow an “expected” path

• The rented sector is nowadays one of the alternatives in Spanish housing policy

38

5. Conclusions

<< Private rented housing can play a role in

dampening overheating in the owner-

occupied housing market, and may facilitate

labour mobility. If private rented housing did

not already exist, there would be good

reasons to invent it>>

(Priemus & Maclennan, 1998: 203)

Documents

Rental costs in Europe The influence of a regulated Rental ...8060de94-b2f6-4619-85b3-bb2ae21e326f/... · Rental costs in Europe The influence of a regulated ... O’Sullivan and