Why Are Rents Soaring in Barcelona?

Low building rates, rather than digital nomads, are to blame

"Barcelona" by Davidag is licensed under CC BY-NC-ND 2.0.

I feel so strongly about the futility of arguing with strangers on social media that I once wrote a whole book on the subject. However, I have an argumentative streak and once in a while, I break my own guidance. I recently found myself arguing with strangers, who were blaming “digital nomads” for rising rents in Barcelona. Instead of continuing the debate, I decided to turn my points into a slightly more productive blog post instead. Here it is!

It is true that rents have doubled in a decade in Spain, while salaries have increased by a much lower rate. It is true that the government had granted more than 7,000 digital-nomad visas halfway through last year. It is also true digital nomads tend to earn much more than average - the average income here is just under €27,000, which is just about 70% of the average salary in the European Union (EU), or €38,000.

Multinationals are often happy to pay better-than-local salaries to foreigners who want to enjoy a Southern European lifestyle in Barcelona or to multilingual Spaniards. Around 18% of the workforce in the city are employed by multinationals. However, this is particular true in the industrial sector; and factory workers are unlikely to receive the same generous pay packages as the management class.

Despite these points, blaming digital nomads for rising rents misses the point by a country mile for three reasons. First of all, the population of Spain is rising by 500,000 a year, which implies the need for 250,000 new homes a year. The actual number of new homes being built is less than half that. Without enough new homes, prices will inevitably go up. This would be true even if everyone earned exactly the same amount.

The second big problem is that well-paid digital nomads are actually a tiny minority of the population. Research shows that immigrants as a whole tend to earn less than 33% of the average among native-born Spaniards. A small number of digital professionals barely moves the dial on the bigger picture.

The third issue is that Barcelona has turned into Southern Europe’s largest startup hub. This should actually be very good news for locals! Research from economist Enrico Moretti in The New Geography of Jobs suggests that every well-paying tech job in a hub tends to create five jobs downstream in areas like construction, healthcare and the service industry.

However, we know perfectly well what happens with tech hubs that don’t build enough homes. Ezra Klein and Derek Thompson lay it out perfectly clearly in Abundance: the median home in San Francisco sells for $1.3m. Development periods for affordable projects in the city stretch out to six years or longer, which means that development costs reach up to $700,000 per unit. Poorer families are pushed into longer commutes or even street homelessness. As a result, the Tenderloin district has become a “dystopia,” with tents, human waste, and needles lining the streets.

Klein and Thompson cite a researcher who likes to compare homelessness to a game of musical chairs - a metaphor that applies just as well to Barcelona as to San Francisco and Silicon Valley.

With ten chairs and ten people, everyone will find a chair when the music stops. That will be true even if one of the players is on crutches. With nine chairs, someone while inevitably be left out. That’s when individual life circumstances begin to predict homelessness. If you live in a city with too few homes, poverty and drug abuse and unemployment and mental illness make it likelier you will be among those who end up without a home…

This leads to a reality many prefer not to acknowledge. If homelessness is a housing problem, it is also a policy choice – or, more accurately, the result of many, many, many small policy choices.

The result should be obvious: the Spanish government should create the conditions that would encourage builders to construct many more homes around popular destinations, including Barcelona. Also, any moves to protect squatters while controlling rents will always tend to backfire - many people who inherit homes will tend to let them at sub-market rates to friends or family members rather than risking the open market. This hurts the supply side of the equation even more.

Statistics for 2021 showed that only 16% of Spain’s housing stock was on the rental market. Just over a quarter of the stock, 26%, are homes with outstanding mortgages, while 11% have been inherited. The largest segment, 38%, is for homes where the owners have paid off the mortgage.

The background for this surprising statistic is Spain’s baby boom, which took place between 1958 and 1975. Members of this long generation are now 50 to 67; and entered their twenties between the late 1970s and the mid 1990s. Many of its members were lucky enough to buy dirt-cheap property (with admittedly high interest rates) before Spain joined the euro in 1999; and have long since paid off their mortgages. House prices have more than trebled during the 21st century, meaning that people who bought property in pesetas and managed to pay off their mortgages quickly have effectively won the lottery.

The country began to build massive amounts of housing in the 1960s and today around 95% of its stock was built before 2009. Interest rates used to be relatively high in Spain, but they plummeted when the country joined the euro at the turn of the century, fueling a credit boom. Around 22% of the homes built up to 2009 were constructed between 2000 and 2009.

The large stock of homes without a mortgage saved the day for many families during Spain’s long series of recessions following the credit crunch. The financial crisis lasted between 2008 and 2014. Unemployment surged during these years, going above 25% in a couple of quarters. Many people moved into the spare bedrooms of family members or moved to family-owned properties outside the main cities in order to survive these terrible times.

One result of the crisis was that building work in Spain fell off a cliff, with many promoters going bankrupt. There has been a cautious mood among builders here ever since, which is one of the main reasons why rents and house prices are continuing to move ever higher.

Even if building rates remain low, big changes are coming to the market from the late 2020s, particularly in the 2030s and the 2040s. Spain’s baby boomers are 50 to 67, as mentioned before. The earliest members are reaching retirement age now, with many more to come in the years ahead.

Spain has a retirement age of 67 and an average life expectancy of 83. Nearly two homes out of five are owned by people without mortgages, as mentioned before. As older people downsize, move into care homes, and come to the end of their lives, their homes will be inherited by younger generations, sold or rented out. If future governments take a more sensible line on squatters than the current one and avoid the temptation to set rental prices, the percentage of homes on the rental market could well rise in the decades ahead.

Finally, let me deal with two other arguments about why rents are soaring. Someone I know on social media shared a wildly implausible news article from an otherwise credible publication saying that 57% of Spanish homes are in the hands of multi-property owners, with 42% belonging to people who own three homes or more and 15% to funds. This is alleged to be the reason why rents are soaring.

However, we have already seen that only 16% of Spain’s housing stock is on the rental market. I can only assume that the article refers to 57% of rental homes (10% of the total), which is not quite the same as 57% of all homes. This is more in line with better-researched articles in the press.

Is this problematic? In a recent essay on personal finances, we mentioned the risks of buying one flat to let it out. If it gets squatted, you will end up with very real financial problems, particularly when you compare your returns to those you would have received if you had just put your money in an index fund instead. Small landlords without diversified investment portfolios will also find it harder to invest in their properties when the time comes to make repairs.

Funds and property owners that run a portfolio of flats are actually doing good work for society, particularly when we keep sight of 11% of the country’s housing stock, which has been inherited. Getting more of these flats onto the rental market would massively expand the number of homes available and help keep rents low.

Another argument is more sensible. It looks at holiday homes - an issue we mentioned on an essay on the importance of elected officials running tests, instead of just announcing big, bold plans like banning Airbnb in city centres. Barcelona is due to ban 10,000 tourist flats, which are just over 1% of the city’s total number of houses. It also represents 4% of the total number of flats on the rental market.

Will this measure improve rents? It is certainly possible, to a small extent. However, it will also hurt tourism, which accounts for around 14% of the city’s gross domestic product (GDP). It could also lead to unintended consequences. How many of the 10,000 tourist flats belong to people who rent out their spare rooms in peak season in order to afford slightly nicer property? Without granular data, which is noticeable by its absence, we will simply never know.

Although housing issues can appear complicated, and can be easy to misunderstand, economists will tell you that the deeper issue is tremendously simple. Demand for housing tends to grow as kids leave home, migrants and immigrants move to a new city, couples get married, have kids and get divorced. Some flats will become free as people die and downsize (as well as moving elsewhere), but if the people who inherit flats are worried about squatters, they will be reluctant to rent them out.

So, it is worth repeating that there are two very simple ways keep rents in Barcelona affordable. First of all, build enough enough new flats every year. How about cheap-to-build modular homes? What about opening up the Zona Franca (a formerly industrial area around the port) to more mixed-use development? Secondly, have a process so that home-owners know that tenants who stop paying the rent won’t turn into a never-ending problem. This could massively increase the rental market, particularly for flats that have been inherited.

Finally, let me make a deeper point. It is easy to spot well-dressed foreigners browsing the window of your local estate agent just as your landlord asks for more rent. By contrast, the lack of new buildings is invisible to most people without any training in economics. It is easy to see why so many people get the issue wrong. I’ve also seen some posts on social media about “them” wanting higher rents. Intentionality bias is clearly going to be a risk in this situation. The comments are open. See you next week!

Previously on Sharpen Your Axe

Digital nomads in Barcelona (part one and part two)

Immigration to Spain (part one, part two and part three)

Interest rates

Spain’s dysfunctional housing market (part one and part two)

Recent essay on personal finances

Holiday homes

Unintended consequences

Intentionality bias

Further Reading

Abundance by Ezra Klein and Derek Thompson

The New Geography of Jobs by Enrico Moretti

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