Local tenants vs. global capital in search of assets.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Spain has become a difficult country for many tenants. In the most populous provinces rents are rising ten times faster than salaries. In its two biggest cities, Madrid and Barcelona, they’re rising 30 times faster. In 2017 alone 36,138 rental contracts at an average monthly price of €873 were signed in Barcelona, a city where 65% of under-30-year-olds earn less than €1,000 a month.
Barcelona City Council – which is run by the leftist mayor Ada Colau, a former housing activist – has decided that enough is enough. The council has halted renovation works on two buildings on grounds that the developers were carrying out major reworks without requesting the appropriate authorisation. Both developers — an investment fund and a real estate company — began the work with permits only for minor alterations when in fact they were completely renovating the buildings.
In one case the new owners also appeared to be violating the rights of tenants, said the city councilor in charge of housing, Josep Maria Montaner. “Barcelona will not accept these snide attempts to dodge the rules. Legislation and the rights of residents and local people must be respected.”
In the last year or so, over 75 apartment blocks have been bought up by investment funds, many of them from overseas. They are systematically targeting what have come to be known as “vertically owned” properties — apartment buildings that have been owned exclusively by a local person or family for generations.
Here’s how it works: First, a building’s mail boxes are bombarded with flyers offering to buy flats within the building or buy up the entire building itself. The flyers claim to be from an individual person with an innocuous sounding name like Miguel or Silvia but in reality the sender is an investment fund most likely domiciled in a tax haven like Panama or the Cayman Islands.
If the owner of the building takes the bait and sells up, the fund quickly moves into action: The first thing it does is to alert all the building’s tenants that the next time their contract runs its course, it will not be renewed or the rent will be increased by 50-100%. Many tenants will promptly start looking for somewhere else to live, especially if the building becomes a hive of loud, hugely disruptive building activity.
Naturally, some tenants will decide to stick it out until the end of their contract. In response some funds resort to “real estate mobbing” — the use of distinct forms of harassment and intimidation — to try to “clear” the apartment. According to a study published by the City Council in November 2017, the occupants of as many as 38 buildings in Barcelona are being “pressured” by funds to leave their homes.
In one neighborhood alone, the once staunchly middle class district of Sant Antoni, an estimated 3,500 families are at risk of losing the flats they live in during the next couple of years, either through termination of contract or a massive hike in their rent.
The public backlash has already begun. In May 2017 the city saw the launch of its first ever tenants union, modeled on the associations already in existence in other European countries. The City Mayor, Ada Calau, applauded the initiative, describing it as “in sync” with her own policies, which include occasionally fining banks hundreds of thousands of euros for keeping properties they own empty.
The union’s stated goal is to serve as a “voice to defend housing as a right in the face of those who consider it merchandise.” The group says it will defend rent control and longer leases, and offer its members technical and legal advice. It is not ruling out a city-wide rental strike as happened in Barcelona in the tumultuous 1930s.
Barcelona’s rental market is red-hot for a number of reasons, including a surge in demand for rental properties in the wake of the collapse of the real estate bubble in 2008, the massive growth of Barcelona’s tourist boom, and the subsequent strain that growing numbers of apartments that have been converted to vacation rentals are putting on the city’s housing stock.
Government regulation has hardly helped matters. In its Urban Leasing Act of 2013, Spain’s central government reduced the minimum duration of rental contracts from five to three years and eliminated any caps on rental hikes when a contract comes up for renewal. The law also exempted real estate investment trusts (REITs or in Spanish, SOCIMIs) from having to pay corporation tax while offering them the chance of a 95% refund on the capital transfer tax. Once the law was passed global banks and private equity funds began piling in to the market to pick up the juiciest real estate assets being auctioned off by Spain’s publicly subsidized bad bank, Sareb.
These were assets that the government had bought off Spanish banks with taxpayer funds at high prices, so as not to wreak further damage on the banks’ already deeply compromised balance sheets, and sold very cheaply to REITs belonging to firms like Blackstone subsidiary Fidere, Lone Star, Apollo, KKR, Goldman Sachs’s Madrid-based subsidiary Azora, and US private equity firm Cerberus Capital Management LP. They included huge batches of public housing, despite the fact that Spain has one of the smallest public rental housing stocks in Europe. In next to no time, contracts were terminated and rents were hiked.
Even today, following months of political uncertainty in Catalonia, Spain is the second most attractive European country for real estate investment after Germany, according to the London-based real estate consultancy Knight Frank. For Spain’s central government this is a sign of success, and it has no intention of changing the law that helped fuel Spain’s rental bubble, in spite of all the damage it’s doing across cities like Madrid, Barcelona and San Sebastian.
Barcelona City Council may have been able to stall two large real estate projects but its influence is relatively limited, especially when faced with the combined opposition of Spain’s executive and judiciary branches. But grassroots opposition continues to grow and as the example of the advocacy group Platform for Mortgage Victims (PAH) has shown, when entire neighborhoods mobilize in Spain, they can have an impact. By Don Quijones.
For the first time in over a decade, I spent a few days flat-hunting. Read… Barcelona Rental Market Is Out of Control
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Sorry, but I am a capitalist and economist.
The buildings belong to their owners, not the tenants.
I have seen the long term result of rent controls – nothing being available to rent.
If people can’t afford high rents, they have no business living in high rent districts.
If people cannot afford the rents, they can always live in the streets. Millions of people live in the streets. It can’t be that bad, right?
/sarc
When housing becomes a financialized asset class, like stocks, you cannot create enough housing to satisfy investor demand because this demand it artificial and limitless since investors can always borrow more to buy more and acquisitions are spun off into financialized products traded on the stock exchanges.
This is the problem in housing. You don’t have to live in stocks. If there is a bubble in stocks, it doesn’t make life impossible for regular folks.
But that’s not the case when housing becomes unaffordable because of artificial and limitless demand by highly leveraged investors from around the world that is focused on a few cities and inflates prices into the stratosphere. This has real consequence that are – as you should know as an economist – not good for the local economies.
And because these dynamics cannot be maintained, the end result is the implosion of the housing bubble – which will be called a “disaster,” rather than the cure that it is. And authorities will try to reflate it with taxpayer money and central bank money printing to save the investors’ butts and prevent the cure from taking hold.
Been there, done that.
thank you so much for that, Wolf. it gets tedious.
in your comments you described Sydney perfectly. Prices started with a slow melt (22 weeks in a raw 0.25% weekly falls). Expect to accelerate as Chinese buyers just went missing.
This is the best concise and to the point analysis of the plague of rampant real-estate speculation I have read in a long time. Thanks, Wolf.
Exactly right Paul. Market demand bids up the rentals and every renter wants to live in the attractive areas. No one by choice wants to rent in dumpy areas and you have to rent where you can afford. When you have heavy underlying demand (regardless of where this demand comes from) rents will go up unless you have a significant excess of desirable properties so that renters have lots of choice and there are more available attractive properties than there are tenants wanting to rent them.
I have been involved in renting out my properties for years and when you offer a property in a desirable area at a reasonable price in periods of strong demand renters will out bid each other to get the property they want. I have never had a property vacant that I could not rent out again at market rentals within 7-9 days to a tenant of my choosing which is not the first punter that comes along.
Governments can interfere as much as they like in rental markets but they cannot do anything much about supply and demand other than to encourage new dwelling investment and these have to be in areas where most people want to live. But if they want to make it unattractive to rent out the property, owners will sell and take their investment cash somewhere else and others will simply not buy to put the property out to rent. The sold property may or may not then go into the rental market and if there is detrimental Government interference in the rental market the property probably will not.
If you want to be a renter rather than a buyer fine. But don’t whine like a baby when your rent inevitably goes up and up and up over time because there are thousands of other people who don’t want to buy either and want to live in the same area as you.
Where was Don when the price of property crashed across Spain when the bubble burst offering numerous cheap buying opportunities to purchase property as an investment to rent out or to live in. I bet there are a litany of excuses.
Boards like this one across the internet were filled with comments from punters who were dissing people who jumped in to buy quality property in various parts of the world where there was a significant correction in property prices with the GFC. They were smart because they were renting and property values were going to go down even further they postulated. Yeah right. Good one. Enjoy renting for the rest of your life.
Cam.
“Where was Don when the price of property crashed across Spain when the bubble burst offering numerous cheap buying opportunities to purchase property as an investment to rent out or to live in. I bet there are a litany of excuses.”
Possibly unemployed, without the means to purchase or borrow, given this is what happens in a debt deflation cycle.
History show us how destructive asset bubbles are and how disruptive to the productive economy they are. They key is to avoid them. Ideally, rents should only rise at the pace of income, generally wages, reflecting capacity to pay. Any higher reflects a shift in income to the rentier class and impacts on aggregate demand in the wider economy.
I’m not proposing rent control, I’m proposing credit control. You can achieve the same return at lower property values and therefore rents. Win-win. Price will adjust to demand centered around desirable amenity, but will hopefully reflect income, not credit access. Long-term, a land tax might be best, replacing other taxes in a revenue neutral fashion.
Cameron,
You ask:
“Where was Don when the price of property crashed across Spain when the bubble burst offering numerous cheap buying opportunities to purchase property as an investment to rent out or to live in. I bet there are a litany of excuses.”
Between 2009 and 2013 I was just trying to get through the worst financial crisis I’d ever experienced. I wasn’t unemployed, as AJS posits; I was self-employed. Some of my clients went out of business, others merely cancelled my services as part of their drastic cost cutbacks. Luckily I was highly diversified with eight or nine different clients. I also picked up some new work from wherever I could and had enough savings put by to enable my wife and I to whether the storm.
What I didn’t have was €150,000 lying around in a bank account just waiting for a moment to profit from the chaos. If I had had that sort of money, I would have got a mortgage and bought myself the flat of my dreams. Unfortunately it wasn’t to be.
That’s my excuse.
And by the way, not everyone round here is chasing the rental bubble. I know of three landlords (my own included) who continue to raise rents in line with inflation. They could charge hundreds of euros more a month but choose not to.
As an economist you should know better.
As Wolf explains, speculative demand will outstrip supply, pushing up prices and requiring rent increases to attain a certain rate of return. It’s false economy, because you could achieve the rate of return at lower levels of rent if only the value wasn’t pushed sky high. Each property is like a monopoly because they are each spatially unique with inelastic supply. The best thing that can be done is to adopt Minsky Lending Rules and ban external (overseas) capital from purchasing property because it cannot be controlled by the usual policy tools (i.e. interest rates), or at least without such a blunt impact. You could also consider a land tax, but I think lending rules are a first step in a wider restructure of policy and tax. Shelter is a human need. Denial of such leads to social breakdown. Then you have people firebombing these nice apartments.
Sounds a lot like what Seattle has become.
“Rising 30 times faster than salaries”. Concrete numbers need to be put here. Either people had been underpaying on rent and they are just catching up or most tenants are now foreigners and the above numbers don’t apply to them because their salary are rising 30 times faster than rent.
Either way, some guys are able to pay and the other side of the coin is “my income from rent is way up”. Anyone sleeping on the streets yet? None? No crisis. Moving on.
I still think rent control is coming to large segments of the US. In NYC when they implemented rent control, during WW2, they froze rents for decades.
If they implement rent control in Barcelona, they can roll the rents back to any point they want. This is the only way to stop them, otherwise get ready to move, and move.
The use of dwellings as (liquid) tradeable securities is not just a Spain problem. It is all over the world. Australia, a backward out of the way place, has some of the most unaffordable housing on the planet (Sydney). In that case it is the chinese who are contributing to the damage by trying to park their funds in a safer place than the chinese stockmarket casino. Many dwellings there are just sitting vacant and now there is talk of a vacancy tax. It is happening all over the world and is an abject failure of capitalism. It is now plainly obvious to anyone who is not corrupt and/or evil that the essentials of life: food, shelter, health etc etc need to be heavily price regulated. Otherwise it is just enhancing the “Trickle Up Economics” effect of the current economic model. We are fast returning to the feudal system where a Baron owns the land and the serfs pay tax to him for the privilege of living. Rent increases of 50% are plain and simple usury. I believe that now is the time for some radical thinking to ensure that dwellings are not treated like sharemarket equities: leave the speculation to the stockmarket! Obviously rent increase freezes and caps are now mandatory. But even further, maybe things like freezing the rate of increase in dwelling prices to inflation could be looked at. Yes, there are many problems with that, but they *can* be worked out so that “Big Money” loses and “Widow Jones” wins. Rampant speculation needs to be pushed back to the share markets where it belongs and where there is far more oversight than there is in other markets. This does not mean socialism, but it does mean benevolent democracy where the government is actually OF the people and FOR the people and not against them as it currently is (especially as shown in this article regarding the Spanish government). If this is not done, history shows that the “peasants” will be forced to revolt and it won’t be pretty.
A declining standard of living for the younger, native born generation. What’s the worst that can happen ?
I’m with PaulT… and N O T H I N G Ever good comes from government intervention in the free market …
‘N O T H I N G Ever good comes from government intervention in the free market ‘
You mean a free market that relys on unlimited supplies of ‘paper’ fiat money that is printed on a central banker’s whim?
So the trillions printed should be able to muscle into local neighborhoods like a mafia and buy up ‘real stuff’ and displace families so Blackrock can turn a profit?
There is no free market. But people still have government, flawed though it may be. These kind of ‘speculative land grabs’ are not creative capitalism but rather dumb money looking to shake down people for their most fundamental needs.
What TG means is – lie all ‘libertarians’ (ie people who don’t like paying tax, but who have no conception whatsoever of what created the first-world conditions they happily live in) is that the ‘free market’ should be allowed to do what it likes as long as he profits from it.
When he stands to lose, he’ll whinge and cry like a little girl and hold out his hand for state assistance.
Exactly as we saw those ‘masters of the universe’ do in 2008.
Free market? Gimme a break.
Bailouts == not free market.
TBTF == not free market.
ZIRP == not free market.
QE == not free market
and so on…
Free market has died a long time ago. It has been replaced with a giant casino where, aided and abetted by a bought government, normal people are being scr*wed over by big finance.
A genuine free market is a level playing field, supervised by an impartial government as a referee who defines and enforces the rules but is not a player himself. When is the last time you saw that, if ever?
…but TG put it S P A C E D C A P I T A L S Jos – so you know his opinion must be the absolute truth!
The capitals tell you so.
And what ‘free market capitalism’ means to people like him is ‘free to make profit, free to get handouts when it suits’.
They’re all the same.
Do you drive or fly?
Don’t use the Internet then. It came exclusively through the use of government dollars. Or any medications that evolved through research from the tax-payer funded NIH.
Waste of breath I’m afraid – he’s a victim of neoliberal propaganda and unable clearly to use his critical faculties to separate reality from dogma!
I’ve been to Barcelona and it was nice but very touristy and certainly not where I would choose to live full time I’m sure there are lots of affordable alternatives up and down the coast My good friends live near Alicante and houses aren’t overly expensive My nephew got robbed of his camera in Barcelona during lunch Lots of grifters doing petty crimes due to all the tourists
In Australia we have negative gearing. This allows owners to rent properties at lower rates and get a tax credit on the difference. [It can also push up prices too]. The Chinese don’t like their new properties to look “second hand” and so prefer to leave them vacant.
It is important to have a variety of rental rates. It’s not capitalism to double a rent overnight. it’s just greed.
One day I’ll figure out why when people mention markets free of government intervention you then mention a bunch of stuff that is government intervention, printing booklet of money being just one example…
As for government intervention in real estate we need only look to rent controlled NYC, and back when that happened a lot of private owners got screwed… Oh well
Just remember these two:
Thou shalt not Covet
Thou shalt not Steal
in the diagonal area of barca there are huge blocks that have been refurbished and are now mostly empty… enquire about rents and they are in the stratosphere… completely out of reach for the vaste majority of locals. they sit empty with signs plastered all over.. these prime places are now tokens in the casino, no doubt bought with borrowed money and kept for the government contrived asset inflation with shows them as a paper profit… any renting is cherries on the cake..
Government are meant to help the majority and protect them from the gangsters but seem to have been taken over by those same al capons and now act for them. obviously the Mafioso does not care for genuine government who may stop them fleecing the locals.
I’d like to know whom Cerberus, Azora and Apollo would like to rent or sell these new properties.
Real wages in Spain have declined using official metric in 2017 (-0.4%), albeit the decline is not as marked as in Italy (-0.6%).
That decrease in real wages, coupled with extraordinarily loose financial conditions inflating all kinds of localized bubbles is what accounts for the whole “recovery” in those two countries over the past decade.
If rents go up even 10% under the new corporate landowners only a small part of the renters would be able to keep up with increases while not seeing a noticeable dip in their discretionary spending. The others would need to cut down somewhere else to keep pace. Or maybe borrow: consumer-oriented banks such as Santander have long been trying to export Northern European style “consumer credit” to the rest of the Continent. While wildly successful in some sectors and moderately successful overall in some countries, most people remain wary of financing discretionary items such as smartphones and vacations.
To get back to the topic at hand, Housing Bubble 2.0 is not touching Spain in the same way as Housing Bubble 1.0.
The first one was insanity on national scale, with whole towns being built in the middle of nowhere for very rich buyers which failed to materialize and municipalities and banks approving every harebrained scheme involving concrete and escavators. Until you have seen modern ghost towns such as Badaguas in Aragon (not to be confused with nearby Baraguas) you cannot understand the scale of what that bubble was.
The present one is more insidious. REIT’s are scooping up properties where people still migrate from rural areas in search of better conditions (Madrid for example) or in prime tourist locations, such as Barcelona.
This is sending ripples across the whole Spanish RE market. Prices in second and third rate markets are being dragged up because people think real estate is white hot again (which is true, only not in most places) and this is helping heating up inflation, which is already going up on its own (mostly monetary) accord, which helps real wages stagnate or go down on the average because conditions for consistent inflation-beating wage increases across the board are simply not there.
A vicious circle nobody seems able to stop, at least not without violent and serious disruptions.
I never understood *what* it was about “The South of Spain Villas/Real Estate” (wink wink etc) real estate (presence of “sunshine”(!) did not seem to be a real advertising point to me) till i saw some hollywood flick finally allude to the “straight dope”….literally dope (drugs) easily shipped from nearby Morocco etc. (The drama was called “The Night Watchman”, btw).
But anyways, you have to understand what this Wolf-street article is saying in context of THE PURGE in London:
https://ufile.io/v5o9l
I own a rental in southern California and rent it out a little under market value so my renter’s feel like they have a deal and in turn usually treat the place nicer. It also makes them want to stay and not find a new place to live which saves me a ton of time and lost rental income to find new renters.
I plan to not raise the rent pretty much as long as they decide to stay there as I’m happy with the current rate of return.
They enjoy the place, feel like they are getting a deal, pay rent on time, and I don’t have to feel like it’s a second job managing it.