Sweden’s Home Shortage Sparks Attack on Rent RegulationsNiclas Rolander and Niklas Magnusson
Sweden’s rent regulations, which for decades have kept housing affordable, are now fueling a surge in home prices that’s threatening the Swedish economy.
The low rents in attractive areas such as central Stockholm have encouraged many Swedes to stay put in their apartments and discouraged builders from constructing properties for lease. This has exacerbated a housing shortage that has sent prices and private debt to record levels in Sweden.
A growing number of builders, landlords and analysts are calling for the government to scrap rent regulations to alleviate the housing shortfall. Home prices have more than doubled since 2000 and Swedish households with mortgages owe their creditors an average of almost four times their disposable income. The central bank and the International Monetary Fund have warned that soaring debt levels make the economy vulnerable to a severe shock if unemployment rises or prices collapse.
“It should be phased out completely over time,” said Anders Danielsson, executive vice president at Skanska AB, Sweden’s largest builder. “The regulation creates lock-in effects that make mobility too low and reduce demand for new housing.”
Record-low borrowing costs have helped push housing prices higher. The average short-term mortgage rate at Swedbank AB, Sweden’s largest home lender, fell to a four-year low of 2.44 percent in July.
After capping mortgages at 85 percent of property values in 2010, the Swedish Financial Supervisory Authority raised capital requirements for banks and is considering forced amortization, requiring borrowers to make principal repayments, to try to stem debt growth. The regulator said last week it’s also considering lowering the mortgage cap, introducing loan-to-income limits and restricting the use of floating mortgage rates.
“If you want to further address the issue of household indebtedness then you probably have to look at all types of measures that are directly aimed at households,” said Uldis Cerps, executive director for banking at the FSA in Stockholm. “It’s a broad set of issues we’re presently examining.”
While the growth in household borrowing slowed to a 20-year low of 4.5 percent in the middle of 2012 following the mortgage cap, it has since accelerated as housing prices have continued to gain. Credit growth sped up to 5.5 percent in July, driven by a 5.8 percent increase in mortgage borrowing, Statistics Sweden said Aug. 27.
Rent regulation is a part of Folkhemmet, a decades-long quest for equality that uses high taxes to reduce income disparity and build a comprehensive welfare system. Rent rules were designed to protect tenants from losing their homes in times of increased demand and reduce segregation in a country with a population today of 9.7 million. In Sweden, 37 percent of all apartments were owner-occupied in 2012, with renters occupying the rest.
The regulations, which were enacted in the 1960s and cover most rental units, have benefited millions of Swedes who currently pay an average rent of 4,980 kronor ($720) a month for a one-bedroom apartment. The average monthly cost for owner-occupied apartments in the city of Stockholm is 63 percent higher than for rental housing, according to preliminary data from an analysis by the Swedish Union of Tenants. The union, which negotiates rents with landlords, aims to keep payments below 25 percent of its members’ disposable incomes.
The combination of low rents and a lack of vacant units means that Swedes with apartments in attractive areas have little incentive to move. Some have more space than they need, which adds to the housing shortage. This inefficient use of housing has led to a shortage of 40,000 units, the Swedish National Board of Housing, Building and Planning estimates.
Stockholm residents have to hunt for years to find an apartment to rent in a popular area through the publicly administered housing waiting lists. On Aug. 20, only two central Stockholm apartments were available to rent on the list. One of them was a four-room, 86 square-meter (925 square-foot) property in the trendy Hornstull area of Soedermalm for 8,403 kronor a month.
The Housing Crisis Committee, founded by the Swedish Property Federation and the chambers of commerce in the biggest cities, in June called on the government to dismantle rent regulations and reduce capital-gains taxes on residential sales to increase movement in and out of homes and make better use of existing units. The committee wants landlords to be able to gradually increase rents by a maximum of 5 percent a year until they reach market levels.
“The biggest societal and economic costs stem from housing not being used efficiently, poor movement and movement chains that are blocked,” the committee said in a statement on its website.
Abandoning the regulation “would create a more well-functioning rental market that could absorb some of the demand pressure,” said Bo Soederberg, head of analysis at the national housing board. “That should moderate co-op housing and single-home prices to some extent.”
The government has made some tweaks to the rental system. Last year it extended the period developers are allowed to charge a higher price for newly constructed homes to 15 years from 10 years.
Construction of new homes for rent and purchase rose 55 percent last year to 31,400 starts, the most since 2006, according to the Swedish Construction Federation. The government estimates that up to 50,000 homes need to be added annually in coming years to fill demand of Sweden’s growing population. That’s more than double the average amount constructed a year from 2008 to 2012.
While rent regulation slows down housing development, some builders say construction rules play a bigger role.
“The biggest obstacle to new production is not the system for setting rents, but construction regulation and availability of land suitable for rental homes in a certain price category,” said Peter Wagstroem, chief executive officer of Swedish construction company NCC AB.
Marie Linder, head of the tenants union, said gutting rent regulations will not solve Sweden’s housing shortfall.
“We don’t believe changes to the negotiating system like introducing market pricing would increase the number of homes; it would only mean that some people will not be able to stay in their homes,” Linder said. “Other measures need to be taken to increase home construction.”
The shortage has steadily pushed up housing prices, with the cost of apartments and single family homes rising an annual 7 percent in July, according to Svensk Maeklarstatistik AB, which compiles monthly data on housing prices.
The rising prices have prompted Swedes to take on more credit. The average debt load as a percentage of disposable incomes for Swedes, including those with no debt, has soared to a record of 174 percent last year from below 130 percent a decade earlier, according to the central bank.
Sweden’s Finance Minister Anders Borg and Riksbank Governor Stefan Ingves have said that Sweden needs to do more to limit debt, such as forced amortization, and potentially reducing interest-rate deductions on mortgages. Borg has said such changes must be based on broad political agreement and introduced gradually in order not to repeat the experience of the Netherlands, where house prices slumped after the government tightened borrowing criteria and limited interest-rate deductions.
Policy makers in Sweden are treading cautiously on measures that would increase living expenses in the run up to the Sept. 14 national elections.
Prime Minister Fredrik Reinfeldt’s coalition government and the opposition Social Democratic Party led by Stefan Loefven have both promised measures to boost housing construction. Reinfeldt has promised to ease construction rules and build a new Stockholm subway if he’s re-elected, measures he says will result in 150,000 more homes. Loefven said the premier’s proposal isn’t far-reaching enough and promised 250,000 new homes by 2020.
The two politicians have steered clear of any suggestion that rent regulation should be changed or scrapped. Magdalena Andersson, the Social Democrat economic policy spokeswoman who would probably become finance minister if her party wins the election, said today that she supports keeping the system intact.
“There is a broad political consensus in Sweden that we should keep the regulation for rents, and I am happy about that,” Andersson said in an interview on the sidelines of a press conference in Stockholm. “It’s better to focus on supporting construction of new rental homes than sharply increasing rents.”