Renting in Spain yields 3%: why rental listings keep shrinking

Renting out a flat yields 3%: less than inflation

A flat worth 100,000 euros would need to rent for 500 euros a month just to break even with inflation, according to the calculation that opens the analysis. In Spain, it rents for considerably less, it argues. That is the thesis behind the analysis: the problem is not that rent is expensive, but that sale prices have risen so much that the rent no longer compensates for the capital tied up. With official inflation near 5%, the minimum rational return required of any investment, a landlord charging 416 euros a month per 100,000 euros of property is losing money before paying property tax (IBI), homeowners' association fees and repairs.

The proposed rule is simple: 500 euros a month for every 100,000 euros of purchase price. If the flat is worth 200,000, one thousand euros. If it's worth 300,000, fifteen hundred. And so on. The corollary is uncomfortable for both sides: the higher property prices rise, the less sense it makes to rent it out, because rental yields do not justify the capital buried in an indivisible, illiquid asset.

Why renting in Spain yields less than a bond

The average yield from renting out a home in Spain is around 3%, below official inflation, according to the analysis. For an investment that requires dealing with tenants, absorbing special levies, defaults and regulatory changes, the return is ridiculous. The comparison used in the analysis is public debt: a top-rated ten-year bond offers around 5.30%, and a thirty-year one close to 5.70%, with no squatters or regulatory surprises. With that alternative on the table, putting capital into property to rent it out is, in the words of the argument, an asylum-level madness.

The argument is reinforced by legal risk. If the landlord's position is precarious, the risk premium demanded rises. Every new tenant protection makes rent more expensive, and capping rents does not make the market cheaper: it empties it. The Catalan case is cited as a warning, with a 70% drop in the supply of rental housing after price controls were applied.

Rental supply down 44% under Sánchez

The figure that anchors the political part of the analysis is the disappearance of 400,000 homes from the long-term rental market since Pedro Sánchez arrived at Moncloa (the Spanish prime minister's residence), a 44% drop in supply. It is not that nothing has been built: it is that the existing stock has been drained, according to this reading. At the same time, sale prices have risen 50% over the same period. If a flat that cost 200,000 is now worth 300,000, renting it out for a thousand euros no longer makes any financial sense.

The conclusion drawn is uncomfortable for those protesting rents: the price of rent is a direct consequence of the sale price. With a growing population, a housing stock that barely expands and construction weighed down by regulation, property prices rise and renting out stops being rational. Demand is asking for the impossible: for someone to lend their capital in exchange for a return below inflation.

Who will rent if the business isn't profitable?

The question runs through the whole discussion. If nobody buys to rent out, who will offer rental housing? The state does not want to become an affordable landlord: it would cost it money and it would inherit the role of the villain. Neither regional governments nor city councils run by the left for decades have built public rental housing. The argument is rounded off with the rice comparison: the grain is freely produced and sold, housing is regulated at every level, and that is why there is no more supply.

Against that reading, another school of thought holds that the financial calculation is correct but the conclusion is inverted: it is not that rent is cheap, it is that sale prices are in a bubble. Those who bought before 2007 get enormous returns; those who bought in recent years, none. The problem would lie not in the rent, but in the price of the asset.

The nominal mirage and the tenant anecdote

One specific case recounted: a flat bought in 2012, lived in for five years by the owner and rented to the same tenant for nine, is now selling for triple what it cost, having collected in rent what it cost. The owner mentions it to announce that he is moving that capital into diversified funds. The reply comes fast: nominal. Discounted for inflation, the mirage shrinks.

The experience as a tenant in the nineties serves as a contrast. Back then, two or three days with a copy of Mil Anuncios (a Spanish classified ads magazine) bought at the newsstand was enough to find a room in a modest but decent flat, with a lift and central heating, for about 25,000 pesetas a month. Today, the equivalent of 300 euros is nowhere to be found, according to that account. The supply has dried up and sale prices have soared.

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One fact remains that throws everything off: hotels. An Ibis in Madrid charges between 50 and 135 euros a night, between 1,500 and 4,000 euros a month per room, and nobody considers it outrageously expensive. Nobody protests against hotels. If residential renting continues to be bad business, the horizon ahead is families living in a hotel room. And then, who will be the villain of the story?