Written by 4:13 pm Expats, Finance & Economics: Explained, WTF is going on with the Economy?!

What expats in Barcelona need to know about rent right now

rent-barcelona

Despite the never-ending deluge of economic bad news, many of us in Barcelona (and really in any big city) are looking for a silver lining. For years, rent skyrocketed, which made finding affordable housing a quixotic quest.

Now, with life slowly returning, people are beginning to look for a new flat or house. After all, with the economy supposedly in the toilet, rent’s gotta be cheaper, right? However, when we check online listings, we’re often shocked to see that rent prices are mostly the same.

Since this question keeps popping up in conversations and on social media, we wanted to take a closer look, and give you everything you need to know about the current rental market. 

Why rent prices aren’t moving (yet). 

There are a few reasons why rental prices haven’t plummeted despite what we’d think. Understanding these points is critical for being able to accurately gauge the rental market.

“ERTE” and other programs are still freezing the market.

In mid-March, when the national government shut down the economy, they put some safeguards in place to prevent it from cratering. 

The ERTE program — Spain’s employee furlough scheme — paid companies to keep workers employed. Additionally, the Spanish government announced loans and mortgage guarantees, allowing participants to delay their rent and mortgage contracts. As it stands at this writing (early July 2020), these programs will last at least until the end of September.  

Because these programs prevent firings and evictions, regular market activity — i.e., renters changing apartments — is stuck. When the markets stop, so do the pricing mechanisms, which brings us to our next point. 

Landlords are “discovering” market prices and conditions…

In the end, landlords are investors. Regardless of the investment type, investors do what’s called “price discovery.” In other words, they try to find out an approximate price for the investment. 

For investments like stocks or currency, discovery is easy: you search for the ticker code or currency pair and get an immediate answer. All the info is at your fingertips — in real-time.  Real estate is different. There is no ‘central clearing market’ that records rental or sales prices. Furthermore, real estate transactions rarely close at their listed price (like what you see on websites or in the windows of agencies).

In short, landlords can’t quickly determine the rental market value of their property. Like any investor, they want fair market value, so they wait. If they were to start discounting publicly (i.e., in listings), then the “herd mentality” would start, driving down rents, which acts against their interests. While that’s great for renters, it’s terrible for investors.   

…and are mitigating risk with current-tenant discounts

However, just because they’re not publicly discounting doesn’t mean they’re not doing it privately. We’ve heard more than a few stories about current tenants getting their landlords to lower the rent.

The best investors (and the ones who can sleep at night) invest within their risk tolerance.
Do you know yours?

This behavior makes total sense. Like any other investor, landlords want to minimize excess risk. It’s impossible to predict the economy, regardless if it’s tomorrow or three years from now. For landlords, offering a discount to existing tenants is a win-win.

First, they can lock in a tenant throughout the downturn (in theory), lowering the chance of their unit sitting vacant, generating zero income.

Second, landlords take a risk when renting to an unknown tenant. By keeping tenants they know, they remove a variable from their risk equation. 

What rent-driving factors you need to watch

Factors — both internal and external — will change rental prices. Let’s quickly go over the ones worth watching. Bear in mind that things are subject to change, but right now, these themes will be at the forefront.

It’s not 2008 again, but there will be some turnover.

We wrote about this topic a couple of weeks back in our newsletter. In short, the “Corona recession” or however you want to call it doesn’t have the same characteristics as the 2008-2011 crash.  

10 years ago, a housing bubble burst, taking the real estate market with it. At the time, banks spent the better part of a decade lending way too much money to people who had no business buying real estate. Likewise, people who had no business buying properties got into the game.

After it all came crashing down, taking down banks with it, the aftermath was grim. With millions of homes going into foreclosure, the amount of supply on the market shot up drastically.

That said, investors bought up most of the excess supply in the ensuing years. Furthermore, banks stopped recklessly lending money. The market is now prepared for a downturn in a way it wasn’t ten years ago.

Therefore, it’s somewhat safe to assume that even if there will be evictions and foreclosures, the amount of those in the next 18 months won’t come close to 2008-2011 levels. 

How long will ERTE (furlough) last?

As it currently stands, ERTE should last until September 30th, 2020. However, the government can easily extend these programs. The idea is that furlough schemes like this should give the economy enough runway to recover. Therefore, when the programs expire, the economy will be able to reabsorb these workers without massive unemployment. 

Of course, there’s no telling when the recovery will intersect with the people on furlough. The longer it lasts, the more time we’ll have to wait to see the rental market change.

What will remote work look like?

I’m sure you’ve heard it, but full-time remote working is supposed to be part of the new normal. Following the last recession, many young, educated Spanish people left their smaller towns for big cities like Madrid and Barcelona (or even abroad), looking for work. 

Now with working from home widely accepted, will we see these internal migrants return to their hometowns? In a lot of ways, this reverse migration would be great for the Spanish economy. The last recession devastated many smaller towns. Bringing remote jobs and income would give the local economy a significant boost.

For big cities like Barcelona, a mass exodus would free up thousands of rooms and apartments. This increased supply of rental units will drive down rents.   

How will universities operate this fall or even this school year? 

Schools are another factor to watch. Many students move to the city to attend college, university, and other higher education programs. If the schools go to online-only learning this fall, will these students need a place in town? And what if schools remain online-only for the entire year? 

Student housing rentals make up a sizable chunk of the market, particularly for short term (11-month) contracts. If the students stay home, these flats remain empty, adding more supply and lowering rents. 

There just isn’t a lot of supply in the market…

Finally, it’s crucial to understand Spain’s property market as a whole. Spain has some of the highest homeownership rates in the world. Occupants own around 80% of all of the houses & apartments in the country. That leaves a mere 20% of the housing stock available for rent.

With such a limited supply, and years of increasing demand for units in popular cities, the rental prices have little room to fall and plenty of space to climb. Unless municipalities and developers work to dramatically increase rental supply, this situation will remain unchanged, even with some tourist flats (AirBnB) re-entering the rental market.

…and negotiating down rents for extensions makes this problem worse.

People renegotiating down rents and extending their contracts exacerbates this problem. With fewer people leaving their flats, less supply enters the market. In turn, rents won’t drop as much, keeping prices somewhat steady. 

What to do if you want to move

We can’t speak to you individually about your decisions, but we can give you some thought guidance. 

Trying to time the market is always a risk, whether it’s stocks, currencies, or real estate. No one has a crystal ball. There is literally no telling what tomorrow will look like. Politicians are now more careless than ever, passing poor policy to win quick votes, even if it is counterproductive to long-term goals.

Therefore, if your contract is coming up, and you don’t necessarily feel like moving, it could be worth asking your landlord for a discounted rent agreement. This arrangement works in everyone’s benefit – you get a bit more cash in your pocket, and the landlord reduces their risk. 

If you feel like you need a change (hello, terraces!), here’s what you should keep. The price could be up for negotiation. A lot of that depends on the location, the apartment type, and the demand for it. 

Barcelona still is a landlord’s market, and short of thousands of new apartments becoming available, that reality will remain. However, it never hurts to ask – the worst that can happen is that you get a “no.”

Besides market considerations, you need to make sure whatever you decide is in your medium-term financial interest.  

Ask yourself a few questions about your current situation: 

  • How secure is your job in the next coming months? 
  • Will upgrading to a more expensive apartment divert money from my savings and investment strategy?
  • Am I okay to ride out the uncertain economic environment in a more volatile economy like Spain, making it cost-effective to change apartments? Or is it better to stay put, knowing it won’t cost me as much if I need to move countries in the next 18 months?

Again, these are questions we can’t answer for you. We only hope that they’ll enable you to make the best decision for your needs.

Boxing it up

Times are weird. While we hear a steady flow of depressing (and often exaggerated) economic news, we try to parlay that into our everyday lives. Housing is at the core of our existence, and it’s normal we look for ways to improve our living situation.  

Understandably, there’s a lot of confusion right now, given the massive uncertainty out there. If the rental market mystifies you, we hope that this piece gives you some clarity. If you have any questions or comments, let us know!