Madrid rental market: default risk tops 50% as rent eats 42% of income
Families in Madrid spend 42% of their income on rent, default risk exceeds 50%, insurance doesn't cover moratoriums and microloans to pay rent are on the rise.
English · Original discussion in Spanish · Published
Renting in Madrid: default risk tops 50% and families already spend 42% of their income on rent
The rental market in Madrid is in a situation that recalls the subprime mortgages of 2008: families spend on average 42% of their income on rent, well above the recommended 30%, and default risk now exceeds 50%, according to figures reported by El Economista. The paradox is that prices keep rising, and the market seems to be sustained by demand from South American immigrants, while Spaniards are having to move back in with their parents.
The fine print that renders rent default insurance useless
One of the most striking points in the debate is the real coverage of rent default insurance. Policies explicitly exclude defaults "legitimized by order of a legal authority" and "extraordinary circumstances" that alter the functioning of the State. In other words, if the Government decrees a rent sarracena like the one in 2020, the insurance does not cover the default. The landlord ends up with no income and no possibility of evicting due to slow courts. Those who thought they had a safety net have discovered it is full of holes.
Microloans to pay rent: the symptom of the bubble
Another warning sign is the growing use of microloans to pay rent. Payments are already falling behind by mid-month, and tenants are turning to consumer credit to make ends meet. This is not very different from what peine in the United States with junk mortgages: when people took out loans to pay for their home, the system eventually collapsed. The difference is that here there is no mortgage, just a lease that can be broken at any moment.
The mirage of infinite demand
Some analysts point out that the overall market enjoys "excellent health" thanks to the arrival of immigrants from South America, who sustain demand. But that is a mirage: if demand is kept up by people willing to pay more than 40% of their salary in rent, and who resort to credit to get through the month, the bubble is being served. When that bubble bursts, the impact will be greater than in 2008, because the rental housing stock is larger and more concentrated.
The question left hanging: what will happen when the market can no longer raise prices because default risk makes any increase unsustainable? The Laffer curve of rent has a limit, and Madrid seems to have reached it.
Related discussions in the forum
The rental market in Madrid is in a situation that recalls the subprime mortgages of 2008: families spend on average 42% of their income on rent, well above the recommended 30%, and default risk now exceeds 50%, according to figures reported by El Economista. The paradox is that prices keep rising, and the market seems to be sustained by demand from South American immigrants, while Spaniards are having to move back in with their parents.
The fine print that renders rent default insurance useless
One of the most striking points in the debate is the real coverage of rent default insurance. Policies explicitly exclude defaults "legitimized by order of a legal authority" and "extraordinary circumstances" that alter the functioning of the State. In other words, if the Government decrees a rent sarracena like the one in 2020, the insurance does not cover the default. The landlord ends up with no income and no possibility of evicting due to slow courts. Those who thought they had a safety net have discovered it is full of holes.
Microloans to pay rent: the symptom of the bubble
Another warning sign is the growing use of microloans to pay rent. Payments are already falling behind by mid-month, and tenants are turning to consumer credit to make ends meet. This is not very different from what peine in the United States with junk mortgages: when people took out loans to pay for their home, the system eventually collapsed. The difference is that here there is no mortgage, just a lease that can be broken at any moment.
The mirage of infinite demand
Some analysts point out that the overall market enjoys "excellent health" thanks to the arrival of immigrants from South America, who sustain demand. But that is a mirage: if demand is kept up by people willing to pay more than 40% of their salary in rent, and who resort to credit to get through the month, the bubble is being served. When that bubble bursts, the impact will be greater than in 2008, because the rental housing stock is larger and more concentrated.
The question left hanging: what will happen when the market can no longer raise prices because default risk makes any increase unsustainable? The Laffer curve of rent has a limit, and Madrid seems to have reached it.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (12 replies).
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