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> cap the rents => landlords will take houses from the markets and sell them instead => there will be a shortage of properties for rent

Won't step 2 increase the supply of houses for sale, thus lowering the prices, thus decreasing the demand for rentals?

Increasing supply won't work with places where the demand is virtually infinite. You have to cut the demand somehow, and in the case of Spain it means preventing foreigners to access such stock. That means public housing, or some law that creates a lot of friction.

Cheaper housing in Spain will lead to induced demand, because there's just too many people willing to move here.

Yes you're right, reducing demand will also work. Which is exactly what capping rents won't do, this will actually increase demand ..

> Really that won't help. These kind of regulations have been tried in so many countries before and the result is always the same: cap the rents => landlords will take houses from the markets and sell them instead

Good. Too many people are forced into renting due to insane property prices as is.