WTF is going on with the Economy?!

WTF is going on with Economy?! #114 - What's up with rent lately?🏢

WTF Economy Editors January 16 2024 · 6 min read

Hey there and welcome to our latest edition of WTF is Going on with the Economy?! -- our bi-weekly(ish) publication on the economy for people living abroad.

For this issue, we’re going to take a look at what’s driving rent increases right now. We’ve seen a lot of chatter lately on this subject, which naturally made us want to dig deeper to see which causes that the numbers support, and which ones are just popular noise.

For context, we’re going to focus a lot on what’s going on here in Spain and Barcelona.

We’re doing so because: 

  • Each property market is different which makes it hard to speak in generalities.
  • Barcelona is our home base so we have a more personal understanding of it.

That said, many of the concepts we’ll cover can apply to other cities, particularly in Europe.

Also, real estate and rental markets are deceptively complicated. There are tons of factors at play, and we definitely don’t have the space to cover all of them. If there’s a point you want to see us cover in more detail, let us know by replying to this email.

A note on the sources: we tried to use as many primary sources as possible. Sometimes, that information was behind a paywall or in Spanish (we want to work with English sources as our readers are from around the globe). In that case, we referenced a secondary source that refers to the primary one.

What the numbers say about increasing rent

It’s probably not a surprise, but the data confirms it: rent on average is up across Europe. From 2010 until the present, rent in the EU increased by 17% (at the same time, the price of real estate for buying went up by 45%).

On a national level, these trends held true almost entirely across the continent, with only Cyprus and Greece seeing rents fall during this period. Conversely, Estonia (+175%), Lithuania (+125%), and Ireland (+75%) saw the biggest jumps in rental prices.

Spain, by contrast, saw only an 8% increase in rent during this time, as the financial crisis of 15 years ago upended the market across the country in ways not seen in other parts of the continent. That upheaval created an enormous supply as investors and banks took huge losses. At the same time, there was a mass migration of talented young Spaniards to other parts of Europe for work. These forces relieved pressure on the rental market as supply outstripped demand.

In Barcelona, though, the story was different. Starting at the beginning of the last decade, the city and region embarked on a reinvention of sorts to become a startup and tech hub

The strategy mostly worked. The city’s tech scene boomed, and today, it consistently ranks among the top startup cities in Europe. As the metropolis on the Mediterranean grew, people from both in Spain and abroad flocked to it for work. As you could imagine this rapid influx of people from across the EU and beyond put upward pressure on the real estate market. According to a report by EY, Barcelona’s rental prices increased by 36% from 2018 to 2022.

However, Barcelona and Spain in general are far from outliers. Across the continent, average rents have steadily increased since 2010. (with a notable exception for Greek-speaking countries. SyncharitĂ­ria Greece and Cyprus!).


Are changing interest rates to blame for increasing rents?

One of the most popular arguments for rent increases lately is that rising interest rates are driving up rent. The logic goes like this:

  • The European Central Bank is rising interest rates to fight inflation. 
  • Landlords have variable-rate mortgages as they prefer the lower payments when interest rates are low. 
  • Because variable-rate mortgages go up when the central bank raises interest rates, the amount the landlord has to pay back increases. The landlord then passes the costs onto the (new) tenant.

Is this actually the case? Sort of, but not to the extent many think it does. Let's take a look.

Changing interest rates

The European Central Bank is raising interest rates right now, with another hike expected later this month. When they do, the effects ripple throughout the economy, including to the benchmark rates for mortgage lenders (banks and other investment funds).

However, Europeans have mostly fallen out of love with the variable-rate mortgage. According to data from the European Central Bank, only 24% of all mortgages right now are variable-rate loans; with the remaining 76% fixed. This number is slightly less than double the all-time low of 13% just last year, but is far from the peak of 57% in 2005.


The percentage of variable-rate mortgages versus all mortgages in the Eurozone. 

(Source ECB)

Spain shows an identical trend, with variable rates making up 26% of all mortgages, down from a peak of 94% (!!!) in mid-2006. It’s worth pointing out that Spain’s financial crisis was a housing one, caused mainly by people borrowing too much money at terms they could never possibly repay. The resulting fallout cratered home prices, put many homeowners underwater, and unleashed a torrent of foreclosures and populist backlash against the system, fundamentally altering Spain's political and economic landscape.


The percentage of variable-rate mortgages versus all mortgages in Spain. 
(Source ECB)

Starting in 2011, interest rates across Europe were at rock-bottom levels. With financing costs near zero and property owners bruised by variable rate mortgages, landlords and property managers took the opportunity to refinance at lower rates, on fixed-term loans. 

Conversely, the 'cheap' credit helped jumpstart real estate transactions. Combined with low prices, property transactions and values began to climb rapidly. As a testament to that, rent increased 17% from 2011 until 2022. During that same timespan, home sale prices jumped 45%. 

Rental contracts are long-term affairs that limit the impact of variable-rate increases.

Despite changing preferences, some mortgages held by landlords are still variable-rate ones. Depending on the terms of the loan, there’s a chance that they’ve seen their margins shrink, or outright disappear as rates go up. (5% annual return before taxes is about the average in most places. In Barcelona, it’s slightly higher at 5.99%).

For landlords with varying mortgage costs, the impact can ripple across the entire rental market. In the UK it’s common for mortgages to start at a fixed rate for a certain time period, then convert to a variable one for the remainder of the loan. When that happens, the property owner could see their costs balloon, which ultimately gets passed down to tenants.

In many countries, landlords have the right to adjust the rent during the contract to account for changing economic conditions, such as inflation or higher interest rates. Here in Spain, landlords can only ask for an increase once a year, and can only raise the rent based on inflation. 

These mechanisms act to both contain price increases and enable property owners to get adequate return for the risk they take by renting through the duration of the contract. It also helps that most rental contracts are for a minimum of three years. The economy regularly goes through contraction and expansion cycles. It’s entirely possible that a tenant can stay in an apartment through the duration of one, which would otherwise limit some of the landlord’s exposure to many economic risks.

Some landlords are getting the business end of the stick thanks to variable rates.

While these mechanisms prevent some landlords from interest rate risk, some still wind up getting exposed. In the UK, for example, nearly 500,000 buy-to-let mortgages (mortgages meant for real estate income investing) will convert from fixed to variable-rate this year alone, adding even more pressure to a tight rental market.

For those with lower margins, rising mortgage payments could mean that they’re not able to cover their loans with the rent.

In these cases, they’re left with two choices:

  • Pay the shortfall out of pocket and take a loss. 
  • Sell their property to someone who is willing to take on the risk or can absorb the cost. 

In either situation, the outcome isn’t pretty. Real estate investing is risky (even if your cocksure friend of a friend says otherwise). 

Are tourist apartments to blame for increasing rent? A little bit, but not like it’s made out to be.

Here in Barcelona, tourists get blamed for a lot of the city’s housing problems, among other issues. Like other major European cities like London, Paris, Amsterdam, Lisbon, and Rome, there was a boom last decade in short-term apartment rentals like Airbnb.

The case against tourist apartments goes like this:

  • Landlords and real estate investors rent their rooms and apartments to tourists for higher profits than if they rent on longer-term contracts.
  • Because they choose the former over the latter, it removes supply for longer-term rental apartments, which increases rent prices.
  • Rent is up everywhere and so is tourism, so tourism and Airbnb are to blame for rising rents.

Let’s break down the last two points.

There aren’t as many tourist apartments as we think.

Based on the popular uproar, it’d look like tourist flats have overran cities wholesale. Yet, the numbers show a different picture. In Barcelona, for example, the Barcelona Tourism Observatory reported that there are 9,397 tourist apartments in the city in 2021.

That might seem like a lot, but keep in mind that Barcelona has:

In other words, tourist flats account today for just 1.13% of all housing supply in Barcelona and 4.73% of rental units, which is mostly an insignificant amount of the overall supply. These numbers align well with studies done before the pandemic when Barcelona had around 17,000 tourist flats.


The total number of homes in Barcelona and the total number of tourist flats in the city. Source: Barcelona City Hall's Open Data Project and the Barcelona Tourism Observatory.

Logically, most of these flats were in the touristy centers of the city. Yet, even then, the highest concentration of tourist flats was only 7.3% of a district’s entire housing supply. (This would be the Ciutat Vella or Old Town; the place with the most tourist attractions).

No other district in the city had over 4.2% of its rental stock allocated to tourist apartments. Excluding the old town, tourist apartments in the rest of the city accounted for 1.67% of all available dwellings pre-pandemic.

Since the pandemic, many of those tourist apartments went off of the short-term market and onto the long-term one. A report by the association of tourist apartments in Barcelona reported in August 2020, 62% of airBnB-style apartments left the market and went to medium or long-term contracts. Indeed, with fewer tourist apartments now than before 2020, the impact of these units on the rental market is greatly overstated.

Tourist apartments remove supply from the market which increases rent, but only a little bit.

A popular argument against tourist flats is that it steals a home from a potential local resident, and increases rent since there's less supply. Real estate is a physical asset built on scarce land. An apartment made available for tourists is one less on the longer-term rental market. That’s certainly true as the laws of supply and demand also apply to property markets.

How much, though, is different than what we might think. According to academic studies, the presence of tourist apartments in Barcelona increased rent by 1.9% overall. In neighborhoods with higher concentrations of these dwellings, prices went up by 7%.

That's...not a lot.

In other words, a 1,000 EUR a month apartment would see a 19 EUR and 70 EUR increase in rent, respectively. That is a noticeable impact, but is far from the substantial one many people and politicians claim are 'ruining' our rental markets.   

So are tourists' apartments to blame for high rents? The data doesn't seem to think so.

The real reason why rent is so high: not enough supply versus too much demand.

As we wrote above, tourist flats account for a tiny percentage of available housing stock. More likely, tourist flats are the more visible sign of rapidly changing economies. 

In many places that saw tourism booms over the past decade, there was also mass economic change. London, Amsterdam, Barcelona, and Paris all saw their economies boom as startups both local and imported took off. Housing, meanwhile, didn’t keep up to meet the demands of people coming from both different parts of the country and abroad looking for work.

Overall, these forces had two effects: 

Ultimately, a lack of supply in high-demand areas is the true driver of higher rents. Without enough rental homes to meet demand, prices will go up as people will pay more to rent in choice locations.

We see this problem everywhere, and there’s only one answer: build. more. homes.

To that end, “gentrification” gets blamed for housing shortages. While we could do a whole other newsletter on this topic, in short, new homes or renovations in high-demand areas with limited supply will always command a higher price. 

The more homes available, the lower overall prices and rents are. Even building “luxury” apartments adds to supply, which helps ease demand, albeit unevenly.

How can we solve the rental problem? Not with rent control.

So what’s stopping us from building more homes? A few factors. 

For one, current real estate investors (including most homeowners) don’t want to see new construction in their neighborhoods. Limited supply protects their home value as again, low supply and high demand drive up prices.

Poor policy is also to blame where building permits get gummed up by bureaucracy, slowing down new construction. Finally, a lack of incentives to rent housing or build new ones chases away much-needed development.

Policymakers should focus on fixing these structural issues. Instead, they choose to intervene in the market, usually in the form of rent control. Disturbingly, rent control is one of the worst policies governments can enact. 

On the surface, it seems like controlling rent will benefit those struggling to keep up with raising rents. However, rent controls take away the incentive to build new houses as the cost of doing so is expensive and the returns are less attractive. It also discourages renovation as there is no motivation to make an investment.

The impacts of such rules are well-documented. In Barcelona, for example, while rent dropped shortly after the rent control law went into place, the amount of supply available fell by 42% in the Catalan capital. 

We’re seeing those impacts today as rents are soaring due to a lack of supply in the face of strong demand.  If you’re pulling your hair out right now while looking for an affordable rental unit, here’s your reason why.

Want more proof that rent control is a poor policy? Just look around the content. Berlin and Stockholm have both tried to control prices through limiting rent instead of development, making it far harder to find affordable housing. 

Only until we create enough supply to meet demand will rents fall.  Otherwise, we'll need to get creative. Teleworking can ease pressure on popular cities. Making markets fairer by cleaning up real estate’s notoriously opaque and shady dealings can lower costs. Finally, investing in strong commuter links to make going from city centers to higher supply areas will give people the incentive to move out.

Don’t reach for the bottle; think smart about money.

If anything, we hope this article at least gives you some context about what’s going on with rental markets. It doesn’t change the fact that people who want to rent are having to make tough choices right now between living in areas they desire and being able to live comfortably while reaching their financial goals.

While we used Barcelona as an example, many of these causes are impacting rent prices in cities around the world. Ultimately, the direction of rental markets is out of our hands, especially for us who are living in places where we can’t vote for the local leadership. (Although feel free to share this article with them; we’d greatly appreciate it).  

Whatever happens, for us living abroad, we have the benefit of already being flexible about where we live. Being able to work with that will help us stay ahead of the curve, and keep rent from getting in the way of our financial wellbeing.