In recent days in Barcelona, there has been a discussion about regulating the price of rent. It is a general feeling that access to housing becomes complicated; prices increase faster than wages.

As in all issues, there are at least two opposing positions on whether or not to apply regulation; some say that applying restrictions on prices will limit the supply of rental properties and will create a black market, encouraging that in the end, there are payments for other concepts to choose between those interested, or when it comes to adjusting prices annually.

On the other side, those who defend the application of tight regulation. They base their position on the fact that property owners are, in most cases, people who live off the rents and who increase their wealth through the inexorable need for housing of others.

I am writing this article because after looking at the evolution of multiple market variables. I believe that the variation in prices may be included by factors other than the owners’ rapacious profit motive (which I do not rule out). Instead, it transcends macroeconomic and monetary levels, which cannot be combated under the conditions proposed.

Let’s do the exercise for someone who has been living in Barcelona for ten years and try to answer questions such as: how much of his income has he dedicated to renting an apartment, how much has his salary varied over these years, which will help us understand the magnitude of the variation if any.

The data we have come from the city council are the prices per square meter extracted from contracts signed between the first quarter of 2014 (1Q-2014) and the third quarter of 2020 (3Q-2020).

 

 

For this article, we will not detail by area, why some varied more than others, or the magnitude of prices. While I was cleaning the data for the analysis, I was betting that Sarrià-Sant Gervasi would be the district with the most significant change over time, and as you can see, it was not. 

 

The change in the prices of the square meter of rent in Barcelona between the periods 1Q-2014 and 3Q-2020 is 36.49%, far exceeding the average salary increase between 2013 and 2019, which according to estimates, was 5.80%.

The questions that arise are, how is it possible that the price of housing increases at a greater rate than the ability to pay for them, what factor or factors generate these changes, let’s try to answer them.

One thing we can say for sure, the demand for apartments has been maintained despite the increase, insofar as, if the data that we analyze arise from signed contracts, there has indeed already been an agreement for the usufruct of the property.

The second, what causes this increase, is generally associated with:

  1. The stock of limited properties, Barcelona, has two natural geographic barriers. It is surrounded by the sea and by the Collserola, so it does not have many surfaces to develop new houses.
  2. Increase in the number of apartments dedicated to short stays, mostly for holidays, such as Airbnb.
  3. Accumulation of properties by a few forks, which increases the prices artificially.

As for the first thing, Barcelona has reduced its stock of homes by 1.11%, but this does not explain the more than proportional jump that this small reduction has at a price per square meter. It is, therefore, discarded for the moment.

 

Another commonly mentioned factor is the proliferation of tourist rental housing, which is diverted from the long-term rental market to the short-stay, high-turnover market.

The statistics regarding this sector are unclear, as there seems to be no census adjusted to reality. If we visit airbnb.com and look for a stay in Barcelona, the page indicates more than 300 properties to choose from; it is impossible to see the total number.

Suppose we go to the official sources, according to the last Census d’establiments d’allotjament turístic vigents amb num. d’expedient municipal, the total of properties properly registered reaches 696 properties.

If we stick to this number, not inquiring about its plausibility, its relative weight compared to the total number of housing units in the city of Barcelona (of any type and size) represents 0.09% of the residential real estate market.

The third point, that of large housing units, on July 29, 2020, La Vanguardia published the following:

According to the report, which is based on data from the municipal cadastre of Barcelona and the deposits made in the Catalan Land Institute, there are 212,901 homes for rent in the Catalan capital in the hands of 100,200 owners, giving an average of 2.1 homes for rent per owner.

However, 69,037 (32.4%) of these homes are concentrated in 2,344 owners (2.3%) who have more than 10.

The report referred to was produced by the Barcelona Metropolitan Housing Observatory (O-HB).

From this reality, we could assume that the decision of a few people affects the entire market. If there were collusion to set prices, this would be easily enforceable due to the ‘power’ it gives to a small group over almost a third of the rental housing market.

A widespread and coordinated increase in prices would be exploited by smallholders seeking to maximize their income, a phenomenon that is repeated in any supply and demand market.

However, there are no indicators that temporarily describe the change in rental prices in properties offered by large holders; the market is analyzed as one, and leaving all the explanation of variations in a single factor is not very responsible, from an analytical point of view.

How plausible is it to think that monetary policy affects pricing? 

Since 2008, in response to the great financial crisis caused by the fall of Lehman Brothers, the Federal Reserve, the European Central Bank, and the Bank of Japan has expanded the money supply, not only in the form of circulating money but also in the form of bonds and shares. This graph shows the change in the balance sheet of the ECB, on the asset side, which presents in purple what is called ‘securities,’ financial instruments to raise capital. Increasing its level means that the bank bought debt commitments from third parties in exchange for cash.

This money created by the bank enters the financial stream through the banks to boost aggregate demand in search of a supply response, which will translate into more employment and consumption. Until then, everyone is happy and in agreement.

 

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Source: European Central Bank

 

 

The problem arises when these funds produce the so-called ‘Cantillon effect‘, through which the first ones to receive the funds are the best placed, having an advantage over the other companies and individuals. This advantage translates into the possibility of acquiring goods at a lower price before the system absorbs the increase in the money supply.

Graphically:

 

 

This then reinforces a cycle of accumulation in which personal property purchase is one of its expressions. The intrinsic nature of these, the inexorable need for a roof, and the limited and even decreasing supply in their number has caused the price per square meter of rent to increase more than the cost of gold in 2014-2019.

Regulation, therefore, is ineffective, useless. In this regard, I do not advocate full freedom in the property system, as the rental market and housing, in general, have much more profound implications than, for example, taxes or even the labor market. The ideal scenario would be a free fluctuation of supply and demand –if the effect of expansive monetary policy did not exist-.

Statistically, the evidence is clear. The increase in rental prices corresponds almost entirely to the rise in Euros’ money supply, which we determine through a simple correlation.

If there is no relation between the variables, the result will tend to 0 (zero), and if there is, the result will be closer to 1.

 

 

The value 0.96 (result) indicates that the two variables’ growth follows the same pattern.

According to a press release, in November 2020, the European Central Bank announced that it was “preparing to extend in December the program of emergency purchases of public and private debt due to the pandemic (endowed up to now with 1.35 trillion Euros until the end of June 2021) and the injections of cheap liquidity to the banks so that they can grant credits.

These funds are expected to further inflate the prices of rents and properties themselves for two main reasons:

  1. liquidity tends to end up in the same hands, those with the capital to acquire more goods and/or get into debt for that purpose.
  2. The excess liquidity will keep interest rates very low, increasing the risk.

The issue of rent, therefore, is a two-sided coin. Europe is an important economy, the first market in the world. Its measures to encourage spending and reactivate the economic cycle are the same that generate unwanted side effects.

It is implausible that the expected growth can be achieved from a non-expansive policy, so in Barcelona, two phenomena will coexist, the first, more than a third of the stock of housing in the hands of few hands, the second, a regulation that will encourage agreements and payments outside the law.

Juan Carlos Golindano S.

November 13th, 2020