Do holiday rentals have an impact on long-term rentals prices?

Last year the impact of the holiday rental industry within Spanish media was overwhelming due to the social awareness of mass-tourism in Spain. But, are holiday rentals also the cause of the long-term rentals increasing prices?

A study released at the beginning of 2018 by The Spanish Federation of Holiday Rentals Associations (Fevitur in Spanish) and the consultancy company inAtlas, the report shows the relation between holiday rentals in Madrid and their contribution to the long-term rental market.

 

What is the real impact of holiday rentals on real estate market prices in Madrid city? According to the Fevitur report, there is no impact on real estate prices but does conclude the following:

  • Holiday rental properties represent just 0.7% of the total amount of properties available in the Madrid market with just 10.895 properties.

  • As Gonzalo Bernados, an economic analyst and consultant stated: "There's a lack of holiday rentals in Madrid". The Spanish capital still has enormous potential to accommodate the growing industry of holiday rentals.

  • Long term rentals are cheap in Madrid. Compared to the rest of European capitals, Madrid hold the second-last position of the long-term-prices list. Prices in Madrid are 58% cheaper than London's and 30% lower compared to Paris.

And yet, prices went up

Like the conclusion from the recent Barcelona study showed, Madrid has experienced a growing demand for long-term rental properties. Something that has not gone unnoticed by professionals in the sector as prices per square meter rose up from 9.02% in 2015 to 15.6% in 2016.

2014 ended with the first positive growth in the real estate market after 7 years of economic crisis. The residential rental price experienced an interannual growth of 1.86%, with a generalised increase in all neighborhoods of the capital (some of them grew by over 30%).

Holiday rental properties have been blamed as the cause of the shortage of residential housing and causing a direct impact on the decrease of the residential rentals on offer, causing the consequent increase in the price of housing in several areas of the City Center (Palacio, Sol, Lavapiés-Embajadores & Chueca-Justicia). 

It is estimated that only 1.19% out of the 7.41% increase of the long-term rental prices comes from the impact of holiday rentals in Madrid. The report uses an example of a 63.8 m2 house use as a long-term rental with a price of € 1,000 per month. During 2016, rental properties increased their prices by € 138 per month, however, only € 10.23  are a direct consequence the increase of holiday homes in those areas.

What influences the price increase

Fevitur affirms that several factors were associated with the growth of long-term rental prices in Madrid:  

  • Long-term rentals increased demand

  • Increasing financial freedom due to:

    • Higher Education levels

    • International profile of residents

    • Increased Employment rates

The sustained growth of the demand in the north and centre of Madrid together with a change of the family unit composition has attributed to the trend of increasing long-term rental prices in the most attractive areas of the capital.

Between 2014 and 2016, both rental prices and population numbers increased dramatically by more than 50.000 new residents in the city with an international representation of 6.17% (Europe and USA mostly).


 

The figures of residents with higher education have also changed. A fact that implies a change in the economic profile of the families living in the neighbourhoods of Madrid. The indicator of the number of inhabitants with higher education studies has increased by 36.787 people (30.7%), between 2014 and 2016.

The number of family units in Madrid has increased between 2014 and 2016. The average number of people living per property changed from 2,19 people in 2011 to 2,02 in 2016.

Employment also influenced the rising prices. Madrid has registered a decreasing trend of unemployment rates between 2013 (-6,37%) and 2016 (-9,15%). As data shows, decreasing rates of unemployment in the City Center is not always related to the number of residents meaning that unemployed people might be replaced by employed people.

Increasing number of properties available in Madrid

Madrid has increased its supply of available properties in the last three years with 211.387 properties in 2015 and 215.218 in 2016.

In addition, with the reduction from five to three years of the rental period, with the reform of the Urban Rental Law in 2013, the demand of long-term rentals increased dramatically in 2016 as all rental contracts signed with the new law ended on that year.

In the meantime, holiday rentals grew by 64% its stock in district Center. And, according to Fevitur and inAtlas, from the total amount of available properties in Madrid, just 0.7% were holiday rentals (10.895 out of 1.530.955 properties).

Overall impact of holiday rentals on long-term rental market

As long as we take City Center out of the analysis, the impact of holiday rentals in the long-term rental prices in Madrid is minimal. If we focus on this particular area of the capital, the impact of holiday rentals in the long-term rental prices was represented by 1.19%. Only 4.09% of the available properties in this district were used for tourism purposes (1.239 out of 30.259 properties).

There are four reasons explaining why holiday rentals in Madrid do not impact long-term rental prices:

  1. There is no decrease in the supply of housing for residents. In the last five years, the number of households has grown by 23,591

  2. In spite of this fact, the substitution of residential rentals for holiday rentals is not significant. In the Center the number of rental agreements (26,954) is similar to the number of long-term rentals (27,885).

  3. The price increase is homogeneous to the capital. The 26 neighbourhoods with the highest price growth are distributed in 16 of the 21 districts of the city.

  4. The growth in the prices of long-term rentals is proportional to the level of turnover of the real estate market by districts.

The graph shows the interannual variation between supply and demand regarding the variation of the rental price.

 

  • Green - Price of the house (rent): The increase in the rental price starts during the last quarter of 2014, however, it is in 2015 (9.02%) and 2016 (15.6%) when it accelerates.

  • Red - Unemployment: Unemployment trended to negative growth of -8.30% in 2015 and -9.15%

    In 2016. An inversely behavior to the increase in rental prices in the City Center.

  • Dark Blue - Employment: Reached 107,504 jobs for the city between 2014 and 2016

  • Light Blue - Unemployment rate: Start a negative growth inversely proportional to the increase in the rental price.

  • Purple - GDP: together with employment, and the decrease in unemployment, they are unmistakably read as the determining factors in the upward displacement of demand.

  • Brown - Holiday rentals: the exit of housing from the market to be used for tourism has a concentrated impact in 4 neighbourhoods of the Centro district, and zero in the rest of the city.

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