Limiting or banning selling homes to foreigners: pros, cons and possible consequences

The Canary Islands Government is considering requesting a restriction on the purchase of homes by foreign capital on the islands. This is the result of the demographic saturation in tourist areas and the lack of housing stock for Canary Islanders. Other EU areas have these limitations, but their regulation is from before they joined the European Union. Is this measure feasible in Spain? What does the legislation say? What consequences could this measure have for the real estate sector?

In the European Union, the Treaty on the Functioning of the European Union (TFEU) states, in Article 63, that all restrictions on capital movements between Member States and third countries are prohibited. This includes the purchase of real estate, which means that any EU citizen has the right to purchase property in any member state without significant restrictions.

However, "there are exceptions negotiated in the accession treaties for certain countries, such as Malta, Denmark and the Aland Islands in Finland. These exceptions were agreed before these countries joined the EU, which allowed them to maintain certain specific restrictions," says Mercedes Blanco, CEO of Vecinos Felices Administración de Fincas y Alquileres and member of the legal advisory committee of the Colegio Oficial de Agentes de la Propiedad Inmobiliaria (COAPI) in Barcelona.

Limited possibilities, but exceptions to the measures

Arantxa Goenaga, partner and lawyer at AF Legis, points out that restrictions on who can buy a property in Spain are possible and that a series of residency requirements can be established. "It should be clear that with the current European regulations, this restriction cannot be imposed on EU citizens, but it could be contemplated for other countries outside the European Union".

To establish a ban or a limitation, it must be correctly grounded in the law that establishes it, it should be based on criteria that favour Spanish citizens or residents who could be harmed by such purchases, "but given that it is a limitation of a free market such as real estate, it should be substantiated in a very clear and forceful way so that it cannot be considered unconstitutional".

Likewise, Mercedes Blanco points out that Spain could face great difficulties in imposing restrictions on the purchase of homes by foreigners who are EU residents due to the rules on the free movement of capital. However, "it could explore the possibility of imposing restrictions on non-EU residents, as long as these restrictions are considered necessary, proportionate and non-discriminatory".

The case of the Canary Islands, with their status as an outermost region (OR), could provide a basis for arguing for certain restrictions based on their remoteness and island status. However, any attempt to impose such restrictions would require a strong justification from the European Commission and the backing of the Spanish central government, according to the CEO of Vecinos Felices.

Canada and Malta, are examples to look at

In Canada, several provinces have implemented restrictions on property purchases by foreigners. For example, in Ontario, taxes have been introduced on foreign buyers to curb property speculation and protect housing affordability for local residents.

According to Mercedes Blanco, in Malta, EU citizens can buy a single property without restrictions, but to buy more than one property, they need to have been resident in the country for at least five years. This measure was agreed in Malta's EU accession treaty.

For her part, Arantxa Goenaga states that in both countries, the aim is to prevent non-residents from buying because they consider the market to be very inaccessible to nationals and residents, and they are trying to reduce speculation in this market.

Consequences for the real estate sector

Restricting the purchase of housing by foreigners could keep housing prices more affordable for local residents and reduce speculation, bringing stability to the real estate market, according to Mercedes Blanco.

However, she points out that it could also reduce foreign investment and affect the local economy, as well as reduce demand for new builds, which would impact employment in the construction sector.

"The main beneficiaries would be local residents who would have access to more affordable housing, and local governments who would gain more control over urban development. On the other hand, property developers could face lower demand and foreign investors would lose investment opportunities in attractive areas such as the Canary Islands".

Arantxa Goenaga does not believe that the measure is good for the real estate sector, "a foreigner buying a property in Spain is not going to fix the problems we have in the market. What the public authorities must ensure is that everyone has decent housing, and to do this they must apply real and effective measures, not bans".

Spain is a very touristy country where many foreigners are looking for a second home. "If what is intended is that foreign speculators can intervene in the market, the only benefit is for nationals, what they should seek is less speculation and a balanced market".