Guide to Spain's New Housing Law Approved by the Government
Guide to Spain’s New Housing Law Approved by the Government
The approval by the Council of Ministers of the preliminary draft of the new housing law is the first step in advancing regulation that will be sent to Congress by the end of the year.
Now that the Council of Ministers has given initial approval to the preliminary draft of the new housing law, it has become clear that despite numerous disagreements, the government is capable of reaching agreements on pressing issues, especially when there is an urgent need to approve the budget. The only question is the price.
Minister of Transport and Urban Development Raquel Sánchez announced the preliminary draft law, which from today will be considered on an expedited basis for presentation to Congress by the end of the year. Sánchez emphasized that the law “provides legal certainty to the owner and does not threaten property rights. We do not think it will create risk for investment funds,” she stated at a press conference after the Council of Ministers meeting.
But the truth is that there is no clarity either regarding the timeline for adopting the law, nor about which autonomous communities will begin to apply it, what indices or indicators will be used to control price growth or vacant housing, whether there will be sanctions and how owners are planned to be monitored. If the private sector has now breathed a sigh of relief, it’s not because the law inspires confidence, but because of low expectations for its implementation.
On the other hand, after prolonged negotiations and numerous leaks with socialist proposals, it’s quite normal that the law’s image in society is full of doubts and inaccuracies. Below are the key innovations of the law, according to the draft and preliminary text.
Spain’s Housing Legislation 2021: What You Need to Know
Main innovations:
The government expects the law to be ready in the second half of 2022.
For owners of small apartments in “stressed” zones, a price freeze is provided (with exceptions).
The law does not include penalty sanctions for non-compliance, but autonomous communities will be able to decide independently whether to introduce them.
Communities that have not declared “stressed” zones will not be able to provide their citizens with certain tax deductions for rent.
Developers who allow construction delays will be required to pay compensation to clients.
Developers must allocate 30% of housing for social housing, but administrations will have to compensate them for this.
When will the law see the light?
The government has presented the preliminary draft of the Law on the Right to Housing. The final text can be publicly studied starting today, and comments or legal opinions from other ministries can also be sent.
The idea is that by the end of the year, the text with these comments will be presented to the Council of Ministers for a second reading. After that, between the end of 2021 and the beginning of 2022, it will go to Congress, where the government hopes to consider the law on an expedited basis. However, there are no guarantees regarding approval timelines. Minister Sánchez clarified: “Our scenario for approving this law is the second half of 2022.”
But the ministry acknowledges that the parliamentary process may drag on. Moreover, given that general elections will be held in 2023 and the balance of power in Congress may change, there is a considerable probability that the law will never see the light and will be buried under amendments.
A year and a half to develop an index that couldn’t be created in three
The Unidas Podemos party has been pressuring PSOE for years to advance rent control. The problem is that the basis for this control is an official rental index, which does not currently exist. The government developed one version, which took three years, but it only contains data for 2015-2018 - that is, it is neither current nor covers the necessary five-year cumulative period. Therefore, the law provides for a grace period (vacatio legis): after the law is passed, up to 18 months may pass before price control takes effect. During this time, the administration will have to develop an updated price index. The plan is to do this with the help of a rental registry, where landlords will be required to register rental properties and the amount of rent.
However, it would be too optimistic to believe that in 18 months one could do what couldn’t be done in a much longer period. It’s worth noting that 18 months is exactly the period until the 2023 general elections, which confirms suspicions of delaying the problem.
Who declares zones with “stressed” housing market situations?
The decision to recognize a zone as “stressed” will be made by autonomous communities based on a report confirming price pressure. For this, two conditions must be met: average household rental expenses must exceed 30% of their income, and rental prices must have grown 5 points above the consumer price index (CPI) growth over the last five years.
What will happen if a municipality wants to declare a “stressed” zone, but the autonomous community doesn’t?
This competency belongs to autonomous communities, so the municipality’s hands will be tied.
Carte blanche for autonomous communities to introduce fines
When it comes to sanctions for owners who don’t comply with price control, the government gives autonomous communities the right to decide whether to introduce fines and of what size. This could lead to formal price control (if the community decides not to monitor), as in the case of Catalonia, which introduces fines up to 90,000 euros.
Rent regulation for companies owning more than 10 properties
In “stressed” zones, companies owning more than 10 properties will be required to set rent in accordance with the reference index (which doesn’t exist yet) and reduce it if it exceeds this index.
However, they will be able to raise it annually in accordance with CPI.
Will this affect existing contracts?
No. Rent control will apply to contracts signed after the measure takes effect and after the 18-month grace period expires.
Price freeze for everyone else
All other owners (companies with fewer than 10 properties and individuals) of apartments in “stressed” zones will be required to set rent for a new contract at the level of the price of the last signed contract.
For existing contracts, they will have to choose one of two options:
Extend the rental contract for another three years without raising rent (with the possibility of annual CPI indexation), since tenants can demand an extraordinary three-year extension. Thus, the total rental period can be eight years (for a small landlord) or ten (for a large one). Curiously, the three-year extension is exactly the term for which a “stressed” zone is declared, according to the definition that will be included in the law. Practically, the possibility to extend the rental contract for another three years is equivalent to freezing rent for the entire period of the “stressed” zone.
Sign a new rental contract with the tenant (for five or seven years, depending on whether the landlord is small or large). In this case, rent can be increased up to 10%, but only in three cases: if the contract term exceeds 10 years, if property improvements were made, or if energy renovation was carried out, leading to 30% savings in non-renewable primary energy consumption.
Compensation for developers
Spain, where social housing comprises less than 2% of the total housing stock, lags behind European countries - such as the United Kingdom (17%) or France (14%) - where subsidized housing is more accessible.
The law requires developers to allocate 30% of new properties for social housing (half of which must be rented as social rental), but autonomous communities compensate them for these costs. According to sources in the ministry, to compensate for obtaining this land, the administration will have to establish compensatory measures - economic or usage-based - providing land in other complexes or city districts. This will require Catalonia, where the 30% reserve exists but developers don’t receive compensation, to pay companies the debt.
Developers must compensate for construction delays
In addition to the 30% of new housing that developers must allocate for social housing, another innovation is the obligation of developers to compensate damage to clients or insurers. If construction is not started or delayed, the client can demand from the developer the return of amounts paid, including applicable taxes and interest, which may include penalty sanctions up to 25% of amounts whose return must be insured, or other amounts in accordance with autonomous community regulations.
Property tax (IBI) surcharge up to 150%
Property tax (IBI) is paid by the owner once a year with the possibility of splitting into several payments. The annual rate is from 0.4% to 1.1% of the cadastral value of the property.
Municipalities will be able to apply a surcharge up to 150% to the IBI rate for residential properties that remain vacant. Any owner - both individual and legal entity - whose property has been vacant for more than two years and who owns more than four properties, may be subject to these surcharges. The IBI surcharge existed before - it was 50%, however municipalities didn’t apply it due to the lack of a clear definition of vacant housing.
With the future law, such a definition will appear (if the property is vacant for two years and belongs to an owner with four or more properties), and the surcharge can increase to 100% with three-year vacancy and up to 150% in case the owner has two or more properties in one municipality. However, this measure also risks remaining unused. Currently, there are no current official statistics on the number of vacant apartments.
The government indicates that compiling these statistics is the responsibility of municipalities.