Is Spain finally going to be for rent?

Housing has become a chronic problem in Spain. But it was already a vexed issue during the property bubble of the last decade, when thousands of citizens were priced out of the market while thousands of others got themselves mortgaged for life. And it continues to be a problem now, when the financial crisis and soaring unemployment are preventing young people from moving out of their parents' homes even as the growing number of mortgage defaults are throwing entire families out on the street.

And all this is happening in a country where home ownership is the rule and rental homes represent a persistently small percentage of the housing stock.

Now, the Popular Party (PP) government of Prime Minister Mariano Rajoy is planning to bring more flexibility to the rental market with a set of measures that make it easier for landlords to get their properties back and for tenants to terminate their lease.

For instance, once the reforms are enacted, owners may demand that a tenant leave the property at any time regardless of the duration of the lease, while tenants will be able to walk out with just one month's notice. Until now, contracts were for five years by default, and a further three if neither party said anything to the contrary. The executive wants to bring these periods down to three years and one year, respectively.

Spain has always had a weak rental market because of the overwhelming Spanish preference for home ownership.

The latest Eurostat figures, dating back to 2010, show an owner-occupancy rate as high as 83 percent in Spain, with the only partial exception to the rule being the city of Barcelona, where rentals represent 25 to 30 percent of the property market.

They are getting it wrong again; supply isn't the problem, but lack of demand"

Several countries from Eastern Europe had even higher owner-occupancy rates, while in Denmark, France, Britain and the Netherlands between 30 and 40 percent of homes were rentals.

In Germany that figure is 46.8 percent, while in Switzerland it reaches 55.7 percent, meaning that a greater number of people rent their homes rather than seek to buy.

The shortage is even greater when it comes to subsidized rentals, which represents just one percent of the entire housing stock in Spain according to CECODHAS Housing Europe, compared with 19 percent in France, for instance.

So will the PP administration's measures be enough to redress these imbalances? Not everybody is convinced they will.

What we need is to bring a minimal degree of dignity to renting"

"The government is getting it wrong yet again," rules Gonzalo Bernardos, vice-rector of Barcelona University's Economics department. To him, the real problem of the rental market is "not a lack of supply, but a lack of demand."

"There are simply not enough people demanding rental homes. Immigrants go back to their countries; there are fewer people who move to a different city for work purposes; and fewer young people leaving the family home. For the first time there is an excess on the supply side, and that is why prices are really going down," Bernardos explains.

The current market conditions can be summed up by a demand that can no longer afford home ownership and must resort to renting, and another category of demand that cannot even afford to rent their own place.

Last year, 58,200 families were evicted from their homes, a 22-percent rise from 2010, according to the General Council of the Judiciary (CGPJ).

The owner could say he has a better offer and put up the rent all of a sudden"

Many people are also being forced into rentals after they default on their mortgage payments and subsequently reach a deal with the bank to remain in the property as tenants.

"I don't think the measures will help encourage renting. It will be the market, rather, which will force people to consider renting instead of buying," says Miguel Hernández, a property expert at the IE Business School.

Hernández notes that, before the crisis, the gap between buying and renting was in the price: it made better business sense to pay a mortgage than to pay rent. Or in other words, people lived by the well-established mantra according to which "renting is throwing away your money."

On the supply side, in late 2010 there were 687,523 empty homes without a buyer. And that is just counting new housing stock. The 2001 Population and Housing Census placed the total number of empty homes at more than three million, and experts believe that this figure, soon to be updated, will now turn out to be even higher.

This change is for the financial sector, making evictions easy to carry out"

Beatriz Corredor, a former housing minister under the previous Socialist government, thinks that the main problem is that many of these empty homes are not fit for renting, either because of the conditions they are in or their location.

Professor Bernardos, on the other hand, proposes that the government act on the supply side, by doing things like putting out homes that were foreclosed by banks out on the market for a top rent of 150 euros a month, "affordable even for a family in difficulties."

Little by little, though, the lack of demand is forcing prices down. According to the latest report by the real estate website Idealista.com, the Spanish leader in its market, prices went down in the first quarter of 2012 in 31 out of 42 provincial capitals. Many of them have been experiencing back-to-back drops.

Figures also show that the supply of rental homes has nearly doubled across the country between 2009 and 2011. The Catalan government, which is able to produce reliable official figures because it is mandatory to keep the rental home's deposit in a public company called Incasòl, recorded a 30-percent rise in rental leases over the same period.

Public Works Minister Ana Pastor said in the Senate that the draft reforms aim to "preserve the freedom of tenants and landlords" and ensure a greater degree of "equity" in their relations, since tenants will be able to break the lease without any penalty if they must move for economic reasons.

But Bernardos begs to differ. "All the measures are aimed at improving profitability for the owner, but they forget that there is a very important social component to renting. The government sees it strictly as a market issue, but leases are very much limited by that social factor," he says.

The former minister Corredor agrees. She says that the government views rentals "as an investment, not as a gateway to housing."

"It's about bringing a minimal degree of dignity to renting," she argues. To her, ways to encourage rentals include making fiscal conditions similar for owning and for renting, and stimulating young people's desires to fly the family nest. Instead of that, she notes, the current government has eliminated a public subsidy to help youngsters move out, and reintroduced tax breaks for home purchases.

Another one of the measures included in the government's plans is the elimination of the Consumer Price Index (CPI) as a reference for raising the rent. Instead, the parties will have to negotiate the raise, or whether there should be one at all.

Corredor recalls that the 1995 liberalization of rental prices did nothing to improve the rental market, and instead made rents go up. Bernardos says that the reform should protect the weakest party, that is to say, the tenant.

"You don't have equal conditions for tenants and landlords," he says.

Fernando Encinar, of Idealista.com, believes that the reforms bring no substantial improvements to the situation of tenants, but that all the measures are favorable to the landlord instead.

"Removing the CPI as a reference introduces enormous instability for the tenant. The owner could say he has a better offer and that he is putting the rent up all of a sudden even though the tenant wants to stay," Encinar warns.

Does the draft reform protect the owner too much at the tenant's expense, then? In boom times, it was believed that legal insecurity for the landlord was behind the lack of a rental market, and that is despite the fact that the default rate on rentals was around one percent, much lower than for mortgages.

Another one of the measures entails streamlining the process for the legal eviction of tenants who don't pay the rent, something that has traditionally put many property owners off letting out their homes due to the chronic backlog of cases in Spain's courts.

Ignacio Navas, the general coordinator of the Housing Observatory of the Council of Notaries, approves of any measure that brings "legal security" to the landlord, but he criticizes what he sees as a pseudo-liberalization - in other words, a liberalization that is "excessive" for the tenant.

"I'd approve of giving both parties freedom [to set the rent] when both parties are individuals, but not when the landlord is a company," he notes.

The charity Cáritas Barcelona, which acts as a mediator between banks and mortgage holders to prevent evictions, is more critical with regard to the government's project, and has asked that it be scrapped because it serves the interests of "the financial sector," which wants to be able to rent homes in the short term with few restrictions, and with "everything in their favor when it comes to evictions."

In the NGO's opinion, Spain has a unique opportunity to develop a social housing stock if it chooses to use the "idle" property portfolios now in the hands of nationalized banks. This, says Cáritas, would be especially opportune at a time when thousands of families are teetering on the edge of social exclusion