Spain to Abolish Rent Controls; 20,000 Small Businesses May Close; Good Thing or Not?

Abolition of rent controls in Spain this month has prompted some landlords to increase fees by tens of thousands of euros. The Guardian claims Spanish rent changes ‘could close 20,000 small businesses’.

Is this a good thing? Ponder that question for a moment, but also consider a few snips from the article.

Up to 20,000 small Spanish businesses could be forced to close when rent controls are abolished at the end of this month, according to the self-employed workers union. Many of the closures will be emblematic shops that shape the urban landscape in cities such as Madrid, Granada and Barcelona.

The Camisería Hernando has been in business since 1857 and has occupied the same shop on Madrid’s Gran Vía for 50 years but is closing after the rent shot up from €3,000 to €30,000 a month.

Barcelona has already lost a toy shop and a secondhand bookstore that have been a feature of the old part of the city for more than a century. Both premises have been occupied by retail clothing chains. Other gems such as the modernista Monge stamp shop and the Quiles grocery are also under threat as the city succumbs to an influx of chain stores.

Local government officials have refused to intervene to preserve the city’s heritage but local artists and intellectuals are taking the case of Monge to court. While some landlords have been prepared to negotiate affordable rent hikes, many shops are in buildings owned by banks and funds that simply notify the shopkeepers of the impending rise.

“About 60% of the 200,000 affected businesses have been able to negotiate a rise of around 35%,” César García, of the self-employed workers union, said. “But most of the rest have received a letter telling them the rent is going up by thousands of euros and that it’s not negotiable.”

“We’re closing after 72 years,” said Susana Esnarriega, owner of Así, a doll shop on Madrid’s Gran Via. “The landlord is giving us till Epiphany to get out but he hasn’t even made us an offer.”

Good Thing or Not?

Is this a good thing?

That's a somewhat misleading question because I was not specific.

Did I mean a good thing that 20,000 small businesses may close, or that rent controls will be abolished? Then again, does it really matter which question I meant? Let's start with rent controls and work our way through.

Without a doubt abolishing rent controls is a good idea. Government interference in the free market is never a good thing.

Will rents soar really from €3,000 to €30,000 a month? I rather doubt it, except perhaps in rare cases of a superb high-traffic location.

And in such cases, if an owner can really collect that much in rent, then yes, it is a very good thing the existing store closes. A new store would have to generate lots of income and create a lot of jobs to be able to pay that kind of rent.

Fear-Mongering

The closing of stores is in and of itself neither a good nor bad thing, but more productive uses of capital are always a good thing. In this case, if stores close and new ones open (which is what one would expect if rents go up) then yes, that's a very good thing.

The fear-mongering 20,000 store guesstimate by the small business association is highly questionable. But the more stores that close, the faster the Spanish economy is likely to grow as the land-owners will make better use of their land.

This was a superb decision by Spain to abolish rent controls. France and Italy should take note of such free-market reforms, because it's going to work.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com