Unintended consequences of rental price control in Catalonia

EsadeEcPol Center for Economic Policy analyzes the impact of the rental price control policy approved in Catalonia in 2020. The study has been carried out by professors José García Montalvo, Joan Monras and José Mª Raya. They compared the evolution of prices in the housing affected by the regulation and in the surrounding non-affected housing. According to them, the problem of high rental prices is due more to a problem of supply and higher demand, than to market power, so the problem of housing affordability involves increasing the supply of rental housing, through public-private collaboration and offer greater incentives and legal certainty to owners who put their homes on the market.

Main takeaways from report:

• The price of expensive homes falls, but that of cheap ones rises: The analysis finds a downward effect on the aggregate rental price of 5%, concentrated in expensive homes, and in contrast a significant increase in cheaper homes that tended to stick to the “ceiling” marked by the reference index. According to the authors, the regulation would act in the opposite direction to that originally planned, harming households with lower income.
  
  
• Decrease in the rental offer of around 10%: Especially among the most expensive apartments. In the long run, this lower the offer as, in light of the evidence from other places where price controls have been applied for rent, it could:
  
  
  • raise prices and move rental housing to sale, only accessible to higher-income households
  • reduce future construction due to lack of incentives
  • move demand to neighboring areas or cities (where prices do rise)
  • lower the average quality of properties because the best ones are not put up for rent
    
    
• High degree of non-compliance, since the analysis finds numerous apartments for rent above the reference prices, consistent with the evidence in other cities of the creation of parallel black markets to circumvent the regulations.
  
  
• The solution to the problem of housing affordability involves increasing the supply of rental housing through measures such as: public-private collaboration, reserving a percentage of housing promotions for rental, tax incentives for owners who put their homes in the affordable rental market and improve legal certainty for owners.