Scottish landlords don't know how good they have it – look at Spain

The housing issues in Scotland are well-known. High rents, low-quality rental housing stock and a shortage of supply have created an exceptionally unbalanced housing sector where all of the power lies with landlords. Not every country accepts this situation. Spain has taken a very different approach to regulating the housing sector.

Spain was lauded for its success in limiting inflation over the summer. Rather than relying on the European Central Bank to use interest rates to try and reduce prices, it decided to take direct steps to reduce prices. Its windfall taxes on banks and power companies signalled the government's willingness to act against profiteering. It capped the price for energy generated in Spain.

Price reductions across public transport reduced the pinch for Spaniards across the country. It limited rent increases across the board. And it worked. In June, the UK had 7.9% inflation, the highest in Europe. In Spain, inflation dipped below the ECB target of 2%. It turns out that reducing prices is a great way to reduce prices. Who would have thought it? Spain has a national government that is not afraid to step in and directly affect sectors of the economy, including housing.

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Spain is far from a landlord paradise

Spain is not a particularly good place to own property to rent. A significant barrier is the 10% stamp duty applicable to all home purchases. A buy-to-let property of €250,000 in Spain leads to a €25,000 tax. In Scotland, a £250,000 property leads to a tax bill that is £10,000 lower. If you sell that home in Spain, you must pay capital gains. In the UK, an individual can earn £12,300 in capital gains without paying any tax. The UK tax system has been designed to support and incentivise buy-to-let properties in a way that is unthinkable in Spain.

A Spanish landlord will have taken a hit from that 10% stamp duty, and they will not find it easy to recoup that amount by increasing the rent. In 2022, the socialist government imposed a temporary limit of 2% on rent increases to help with the cost of living increase in Spain. From next year no rent will be able to increase by more than 3%. In 2025, a new reference price index will be introduced to replace the consumer price index. Linking rents to this index will likely lead to lower and more stable rents, which helps households budget and plan for the future. So does a secure tenancy.

Tenants in Spain are protected by five-year rental agreements that can be extended to seven years on the same terms. For most households, you could consider this a secure tenancy. So to summarise, as a landlord, you must pay a large tax to the government when purchasing a property and tax when you sell it. Rents are indexed linked, and once you sign up a tenant, they have a tenancy for up to seven years. Do Scotland’s landlords realise what a fortunate position they have?

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All renters in Scotland, using the Spanish government definition, are stressed

Things got much better for Spanish renters in April. Until spring, the renter paid all the fees that estate agents charged to list a rental property, normally around 10% of the annual rent. But this has been reversed. The landlord now pays these fees, saving renters 10% of their annual rent, a significant rebalancing. But perhaps the biggest changes have come in "stressed areas", where renters are subject to extra protection.

In these areas, rents are set and fixed. It is illegal to offer a home for rent above these fixed amounts. So, what makes an area stressed? If in a given area, perhaps a few blocks or a whole barrio, the average cost of a mortgage or rent plus basic expenses and utilities is more than 30% of the average household income, you are in a stressed area. Let’s apply this to Scotland.

There are huge regional disparities across Scotland, and data on household earnings is not robust, but we can estimate how stressed Scotland’s renters are. According to the Home Let Renta index, average rents in April 2023 were £868 per month. The average disposable income across the UK in 2022 was £31,300. So, using these two figures, we can see that 30% of disposable income is going into rent.

However, the figure for renters is likely to be significantly higher. If you were to exclude London from this average, look at the average earnings of renters, which are typically lower than those with mortgages, and include "essential expenses and utilities". This is likely to move beyond 40%. We would be confident to say that using the Spanish government’s definition, almost every renter in Scotland is "stressed".

When we allow the market to allocate homes, it does it via the pricing mechanism. You get what you can afford. Apparently, this is the most effective way to allocate homes. Even if this is the case, who or what says that efficiency should outweigh fairness or effectiveness as the primary force in the allocation of homes? No economic law says one is more important than the other. Only economic and political opinion makes this distinction.

We would argue that it is fair that everyone should have a decent home and that housing everyone is an effective way to deal with a huge number of social and economic issues, including low productivity and high health and social care costs. The market is not the answer. All levels of government across the UK have to play a more active role in the housing sector. It can, and it must be done. Wellbeing starts at home.

Join us to discuss housing issues in Scotland on September 27 on our monthly LIVE Q&A on YouTube.