Sweden’s housing problem

Sweden’s housing problem

The word “crisis” is rarely attached to any subject in Sweden, but housing is one of the exceptions. There has been a lack of housing in the country for several years, with house prices rising and renters in metropolitan areas struggling to find somewhere to live. In this article, Mundus will examine how policy made decades ago impact today’s housing market, why more houses have not been built and whether the current construction boom carries any risks.

A brief look back

Housing policy throughout the decades has had impacts both intended and unintended that have helped feed the issues Sweden has today with housing, some of which are examined below:

The Million Programme (Miljonprogrammet)

There was an increasingly rapid urbanisation in post-war Sweden, with housing shortages becoming something of a political liability for the ruling Social Democrats. This was something they sought to address through the building of a million new dwellings between 1965 and 1974. In total, they succeeded in building 1,005,578 homes during that period – a figure that represented a substantial increase in Sweden’s housing stock. It was another step in Sweden’s ambition to serve its citizens from cradle to grave, with the aim for everybody in the country to be able to live in a nice home for a reasonable price, regardless of their income.

A third of the million new homes were single family dwellings, a third were multifamily housing of three stories or less, while the final third consisted of large concrete apartment blocks of four stories or more, with which the programme is often associated. Many of the new dwellings were often built on or beyond the existing urban fringe, which made them unattractive to some groups, as did – in some cases – inadequate public transport and a delay in the building of social and commercial centres that were supposed to be a part of the development. As the programme wound down, demand for new housing had started to decline. In addition, a change in tax rules meant it was cheaper and therefore more attractive to buy a house. Consequently, vacant flats began to be common in many of the new areas created as part of the Million Programme.

Segregation

As those multifamily flats became empty, they were increasingly taken up by new arrivals in the housing market, such as young families and immigrants. Those who could afford to move often did within a couple of years and they became areas of low demand that people who required social assistance – such as recent immigrants, people with addiction issues and those with mental health problems – were increasingly placed. Not surprisingly, many areas gained a bad reputation and some, including the likes of Rinkeby and Rosengård, have become so stigmatised that many of the same comments that one would have heard thirty years ago still persist today. Critics of the Million Programme say that it has come to symbolise a decline in architectural values and led to immigrant and poorer members of society being segregated. Upwards of 20% of Sweden’s housing stock still consists of housing built during the Million Programme.

Urbanisation

As mentioned earlier, rapid urbanisation following the Second World War preceded the Million Programme. Since the financial crisis of the 1990s, there has been a new wave of people leaving the countryside and moving to Sweden’s cities. This combined with population increases, has resulted in earlier surpluses of accommodation in metropolitan areas disappearing.

Despite Sweden being the second least densely populated country in the EU, metropolitan areas with at least one million inhabitants are home to 52.4 per cent of the population. In the EU, only Spain has a higher proportion of its population living in metropolitan areas of more than a million people. To emphasise the skew towards urban areas, while they constitute less than 2 per cent of Sweden’s total area, their share of GDP is at least 20 times as high as rural areas.

A chronic lack of housing

The building of houses and flats has failed to keep up with the pace of population growth. Of the country’s 290 municipalities, 255 say there is a lack of housing. That number has increased significantly in just the last two years, after Sweden experienced a large growth in population. Recent immigrants are having the most difficulty finding accommodation. Building has also not kept up with the pace of urbanisation and there are stories in the media on a near daily basis about the shortage of accommodation, particularly in Stockholm, which is one of Europe’s fastest growing cities.

Anyone who is over 18 and with a Swedish personal identification number is entitled to join the queue to be allocated a first-hand rental contract. The rent is capped, with the average cost of renting an apartment in Stockholm around SEK 6,500. The problem is, that the queue for first-hand contracts now has more than half a million people on it – seven times the number 15 years ago – and the average wait time is now more than nine years. Meanwhile, second-hand contracts are exchanged for far more on the black market. The price to rent from private owners has also been pushed up due to a change in the law in which tenants could be charged based on mortgage costs in their neighbourhood, as opposed to rent prices.

Inevitably, at the same as the rental market seeing the consequences of housing shortages, there have also been increasing house prices. Last year, 295 billion kronor worth of properties changed hands, which was a record amount. There is a correlation between the rise in house prices in a municipality and how the population has increased. In Stockholm, for example, house prices have doubled in the past decade.

Why have more homes not been built?

The reasons why too few homes were built has been hotly debated in recent years, with broad agreement that it is down to more than simply one factor. In an analysis from 2015, the Riksbank outlined several.

  • Land prices and construction costs have risen
  • State subsidies for construction companies have been reduced, increasing their risk
  • Land acquisitions and planning approvals take too long
  • Building rental properties where rent is capped is less profitable than building tenant-owned housing

Another theory is that it is not in the best financial interests of big construction firms to build more apartments and houses, as more supply would lower prices and thus their profitability. It has been difficult, however, to prove this claim.Monthly Policy Review

The building boom

Stefan Löfven’s government had pledged to build 700,000 new homes in a decade and the past couple of years have finally seen the increase in building that was so desperately needed. The construction of more than 37,000 new dwellings began in the first half of this year – a 22 per cent increase on the same period last year. Of that number, 30,450 were apartments, which represents a 24 per cent increase compared to the same period last year. If the same numbers continue to be built this year, 2017 will be the biggest year for the construction of new homes since 1990, when 70,000 were built.

Whether the ramped-up construction will be enough to combat shortages and a growing population, though, is another matter. Last year, the National Board of Planning and Housing said housing equivalent to a new Stockholm must be built every five years. It said 440,000 new homes needed to be built by 2020, at an average of 88,000 per year.32 The increased construction has stimulated economic growth, helping Sweden’s economy tick along at a higher rate than many of its fellow European countries. That has caused some concern though, with Viktor Munkhammar writing in Dagens Industri33 there are dangers that Sweden’s economic health could be too reliant on one sector of the economy.

“There are dangers that Sweden’s economic health could be too reliant on one sector of the economy.”

– Viktor Munkhammar, Dagens Industri

There have long been fears that there is a housing bubble in Sweden, with increased house prices and people taking on a bigger debt burden. Many are concerned that Sweden’s situation resembles that of the US just prior to the 2008 financial crash and Sweden’s crisis in the 1990s, when a fall in house prices coincided with a recession and a banking crisis. Last year, the Riksbank put out a paper saying it did not think house prices in Sweden were overvalued, but the high valuation of Swedish homes would only be sustainable if real interest rates remained low for the foreseeable future.34 In its analysis of the Swedish economy earlier this year, the OECD said a debt-financed housing boom had created vulnerabilities in the economy35. Among its recommendations to keep house prices down was a debt-to-income cap, and if prices continue to rise, an easing of rental regulations and phasing out mortgage interest deductibility.

Comment

Sweden’s housing problems were not created overnight. Unforeseen consequences of previous policy and underinvestment over decades, fuelled by inflexibility and high building costs, helped create the lack of housing seen today. Those problems will not be fixed quickly, with even the current construction boom unlikely to alleviate the problem. While an increase in building is a step in the right direction, policy makers need to be very careful in order to avoid a crash in prices that could have drastic consequences for the country’s economy.

Note: This is a shortened version of the original article, which was published in the September 2017 edition of the Monthly Policy Review. Footnotes and graphs are only available in the subscriber version of this article.

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