Caps on rents imposed by the Spanish government could defeat their purpose and lead to higher lease prices, Bank of Spain Governor Pablo Hernandez de Cos warned on Wednesday.

Rising housing costs are set to become a key campaign issue as Spain gears up for regional ballots on May 28 and a general election at the end of the year.

After capping this year's annual increase on leases at 2%, the government has proposed a bill limiting it to 3% for 2024 in areas where rents are rising significantly, while it plans to work out a new index to update rental contracts less susceptible to upticks in inflation.

"Economic studies show that price controls can have adverse effects on rental supply, both in terms of quantity and quality, so, ultimately, far from making rental housing cheaper, they end up leading to higher price levels," De Cos said in a speech published on Wednesday.

Following a decline of between 3.5% and 4% in 2021, according to real estate websites cited by the Bank of Spain, rents rose between 7% and 7.5% in nominal terms in 2022, but it said real offer rental prices remained below 2020 levels when taking into account the accumulated inflation.

De Cos said that in this context, it would be essential to rigorously assess the ability of this new regulation to effectively achieve its objectives.

The government is trying to increase the supply of public housing, which at 300,000 homes is just 3% of total housing compared to 9% in the European Union.

(Reporting by Jesús Aguado, editing by Andrei Khalip)