“In Stockholm, the average rental increase would be … 50%. The increase means that the households renting their homes on average lose almost 12% of their income” if the next government introduces a policy of market rents.

Welcome back to part 3 of our elections blog. In the first instalment we said that there was a lot on the line for expats. In part 2 we looked at tax, and at how the Alliance parties are arguing for significant tax reductions, while the red-green government seeks to keep taxes high. This time, we look at housing, where, as the above quote suggests, shocks could be in store.

Housing is a huge issue in Sweden. Basically, in the cities there is not enough of it, and what there is, is too expensive. Those wanting to buy property are forced to take on unsustainable levels of debt, relative to their income. Those wanting to rent struggle to find a place at all. All parties say they have plans to shake up the property market. But before looking at their policies, we need to understand what’s behind them.

What went wrong

For decades, the 1960 Miljonprogrammet policy resulted in a market being in balance, and, given low immigration and population growth, the market functioned adequately, although with a number of state controls. A property tax kept the lid on prices. See Mundus’ back story on this issue featured in the Monthly Policy Review.

A decade ago the Reinfeldt government removed the property tax. This, combined with a lack of supply and easy access to credit began to drive prices up.  The situation was supercharged after the Financial Crisis when interest rates dropped to zero. House prices increased by a further 50%. As the chart shows, Swedish housing prices have increased by more than any other country – except Australia.

After just a few years Sweden was suffering from a multi-headed hydra; with house prices beyond the reach of ordinary people, buyers overstretched by home loans that they could never hope to pay off and insufficient property to house a growing population. Mundus knows this only too well, having lived in a cottage in the forest for a year because adequate accommodation was unavailable.

Property prices became the talk of the town, and the Löfven government was forced to act. Eventually it decided on a policy of forcing new homeowners to pay-off their loans. With buyers forced to recognise the real cost of home ownership the market went into reverse this Spring. This further complicated an already horrible market situation. Prices were still unaffordable, but with house prices dropping buyers lost confidence. Worse still, property developers who had been constructing new housing in large numbers suddenly started to cancel projects. Housing construction had been one of the factors supercharging Swedish GDP growth, and the loss of confidence has resulted in economic growth slowing.

The situation is most acute in the large cities, especially Stockholm and Gothenburg, where job growth is occurring. Although buying property has its challenges with extreme prices, the problems can be even worse in rental markets, where the system of rent controls and rent queues was designed for insiders (Swedes), working actively against the interests of expats. It would take an expat 9 years on the waiting list to get access to a first-hand contract on a rent controlled apartment. This pushes many foreigners moving to Stockholm into taking second-hand contracts, at much higher prices, on the black-market.

What the political parties are saying

The Moderates are considering allowing ‘market rents’, meaning that rent controls would be removed, and the price would be determined by the market. In a fully liberalised market the Tennant’s Association predicts rent increases of around 50% in Stockholm and Gothenburg, 31% in Halmstad (on the west coast) and 24% in Helsingborg (in the south). In fairness to the Moderates, they haven’t said that they would allow full liberalisation, but their words have allowed the Social Democrats to argue that this is what they are saying.

Increases of such a magnitude would take a large chunk out of people’s disposable income, which would clearly be politically unpopular. Therefore, the Alliance’s partners – the Liberals (L), Centre Party (C) and Christian Democrats (KD) – say that they would only allow market rents in newly built buildings. This policy would neatly sidestep the political implications, meaning that only a fraction of votes would feel the price increases, but ensuring that property developers could get an attractive return on their investment, and thus build more apartments. Furthermore, L, C and KD have been careful to argue that they want to strengthen tenancy protections, although C has said that it wants to promote the rights of individuals, rather than encourage centralised bargaining via the Tenancy Association.

When asked for an opinion of the likelihood of Sweden moving to market rents after the election, Martin Hofverberg, the Chief Economist of the Tenancy Association said “It depends on how much the Moderates and Centre Party want it. When it comes to newly built apartments, we have every reason to be worried, as all Alliance parties are calling for such a policy”.

Practically speaking, many foreigners living in Stockholm and other larger cities are already exposed to market rents through the black market, so this may not affect their personal situation as drastically as it might Swedes. The other thing to consider is that the reason the Alliance is looking at such policies is to attract far more construction, and the supply of more properties onto the market will bring rents down. However, this would take several years to take effect.

The policies of the other side of politics are quite different. The Social Democrats (S) and the Left Party (V), as well as the Greens (MP) all favour systems where construction is promoted by offering subsidies to construction companies to take the risk of starting new projects. This system has already been in place for many years, and has assisted with getting construction started. However, given the magnitude of the crisis in the property markets, it seems that the incentives have been insufficient to bring on new properties at the scale or pace that they are needed.

Those who have bought, or are looking at buying property face a different set of risks. In addition to the challenges presented by a volatile market, homeowners need to be aware of the political risks. A contributing reason for the property price rises was the tax deductibility of interest payments on mortgages. The Social Democrats had the choice to remove this deduction in 2017, but opted instead for forced amortisation. Despite being common sense for an economist, the issue is clearly political dynamite. S says that it is willing to consider removing the deduction, but wants the decision to be “broad-based” across other parties, which means that they do not wish to take the blame for its implementation. Generally all political parties say that they are open to phasing out the deduction, so it is not unlikely that a minority or coalition government forming after the election will agree to do so. In addition to effecting after-tax incomes, this would have an effect on the value of properties.

There are other risks too, such as the treatment of capital gains on housing, but we leave those for another day.

What does it mean for you?

Clearly it depends on your personal situation and preferences. If you are lucky enough to have a rent-controlled property today in a good location, you are unlikely to lose out too much. For those unable to find good property, choices will probably increase under an Alliance government, but at a higher price. Property owners face a major risk if a new government reduces tax deductions on interest, which effects the value of their properties. Given expats time horizons tend to be compressed, they are less able than locals to ride out the volatility in real estate prices.

Plenty to think about …