Why building housing isn't profitable in Spain

Housing isn't getting cheaper because building isn't profitable

There is a country with empty flats, unurbanised land and demand that grows every year. And nothing is being built. The housing problem has become a labyrinth where every new rule coexists with the previous one, and the most repeated diagnosis is not political but accounting: the numbers don't add up. Developing a home today costs between 300,000 and 400,000 euros, while the majority of buyers can only afford around 150,000. A market that doesn't fall because it isn't expanding.

Who buys housing in Spain: six profiles and not one crane

The analysis starts by listing the buyers. Wealthy foreigners who buy to live in, large holders who buy to resell or rent out to tourists, Europeans looking for a second home, banks left holding the bad bank's stock after 2008, owners with three, four or six homes —many of them inherited— and a tourism sector that turns flats into accommodation. None of those profiles explains the price on its own, but together they sketch a market in which long-term rental is the least profitable option of all.

Add to that two recurring facts: no new-builds are going up, and homes are sitting empty for antiestéticar of squatting and non-payment. The consequence is a supply that shifts towards holiday rentals and room rentals, formulas that sidestep the annual contract. “Half the price of a new home is land and taxes,” summarises one of the most repeated findings. The other half doesn't come free either.

How much of a new home goes on taxes?

The breakdown in circulation is blunt: the State takes 40% of the price of a first home in taxes, counting from the purchase of the land to the handover of the keys. On top of that, 12% on every sale, 0.3% a year in IBI (local property tax) and other municipal charges, and nearly 8% in indirect taxes on home and building insurance. Anyone who adds it up understands why bricks need to sell dear to be a business.

The conclusion of that camp is that the sector is not liberalised but over-regulated, and that this is precisely why it doesn't work. The opposing camp responds that liberalising without touching demand only passes the rise on to the final price. Both sides agree on something uncomfortable: none of those charges distinguishes between the developer who builds and the one who merely waits for land to rise in value.

Taxing second homes: 0%, 25% and 50%

The most repeated proposal has three tiers: 0% tax for a first primary home, 25% for a second and 50% for a third and subsequent homes. That, it is argued, would end speculation at a stroke. The small print comes later: taxing ownership doesn't lay a single brick, and the penalised owner can pass the cost on to the tenant or take the property off the rental market.

That contradiction comes back again and again: any measure that makes being a landlord more expensive reduces supply, and supply is exactly what is missing. Those who defend high rates respond that supply is already subject to intervention and the market doesn't work anyway.

Land, urban planning and the laws passed to estimulante ilegal things up

The bottleneck almost nobody disputes is land. Responsibility is municipal and regional, and examples pile up: in the Comunidad de Madrid, Ley 9/2001, on Land, and Ley 1/2020 have been passed to boost urban development, with self-certification declarations and less administrative intervention, and the result has not been a shower of cranes. The criticism of those rules is that they deregulate on paper but do not solve the shortage of ready-to-build land or the timelines.

The map doesn't help either. Some point to thousands of empty hectares around Madrid, while others recall that Zaragoza has no metropolitan area with powerful municipalities next to it, unlike Valencia or Sevilla, whose metropolitan areas triple their population. The vertical way out —residential skyscrapers— is proposed where there is no land, but it requires changing height rules and sharing powers that today nobody gives up.

Supply withdrawn by law

Another part of the analysis focuses on rental regulation. The latest rule extended mandatory extensions from five to seven years, and the described effect is that many owners withdrew flats from long-term rental and moved them to holiday or room rentals, a segment regulated differently. There, they say, no housing is lost: it just moves from one drawer to another.

To that is added antiestéticar of non-payment and squatting, which leaves homes closed, and the perception that a tenant who doesn't pay takes months to leave. That is the argument of those calling for short timelines and swift enforcement. On the other side is the evidence that evicting faster doesn't build anything and also pushes out the solvent tenant who is left without margin.

Demand: 500,000 more inhabitants every year

The other side of the scales is demand. The calculations in play speak of an increase of 500,000 people a year and 800,000 a year in the years of highest arrivals, with no equivalent provision in housing, healthcare, education or transport. Add to that the shrinking size of the average household and foreign buying, with countries that directly prohibit non-residents from buying housing.

At that point the debate becomes uncomfortable and also the most simplistic. One side maintains that demographic growth is the main cause and that without slowing it everything else is cosmetic. The other responds that blaming demography hides the obvious: with more people arriving and more cranes, the effect on price would be different.

Is the mortgage market a Ponzi scheme?

The question slips into the exchange and gets an answer that clearly separates two things. In a Ponzi scheme, the return for the old investor comes from the new investor's capital and there is no asset generating external income: it only holds up with growing inflows. In a mortgage, payment comes from a flow outside the system, the borrower's salary or the rental income. Mathematically they are not the same.

The nuance is where the substance lies: if the bank signs solely because the collateral is rising, it is already financing an expectation, and that is Ponzi finance in Minsky's classic sense even if the instrument is sound. The underlying diagnosis: the scheme was reinflated from 2014 through another channel, with zero rates and a central bank buying debt.

The law of supply and demand that some invoke and others consider dead

That is where the two cultures clash. “If the law of supply and demand worked, we would be full of cranes as in 2006, but we are already de facto intervened,” argues one side. The other responds that supply is battered by bureaucracy, permissiveness towards squatting and a society that views it with suspicion, while demand soars. And the figure appears that rebuts the hoarding narrative: more than half of landlords rent out only one or two homes.

Nobody disputes that building is more expensive today. The disagreement is over who pays the difference. And over whether there is the will to touch land, timelines and taxes, or whether the issue has become a terrain where each measure serves to point at a different culprit instead of laying a brick.

With a cost of 300,000 euros, 150,000 in payment capacity and a population that grows every year, the question is no longer whether the problem can be solved. It is who is willing to lose something to try.