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Swedish housing policy leaves rich even richer

1 Oct 2013, 14:27

Published: 01 Oct 2013 14:27 GMT+02:00

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The construction stall in Sweden is seen primarily as a problem for those who need to rent a home. What's less discussed is the massive shift in wealth to those who already own homes at the expense of those who need to buy a home in the future.

A new Reform Institute report show the effect varies widely between municipalities and between the rich and poor. It could prove disastrous for social mobility in Sweden.

We already know the reasons why Swedish construction companies are building so few new homes, compared to similar countries. Construction costs have skyrocketed due to long planning processes, regulations that vary depending on location, a costly appeals process, and laws on how to set rents. To make matters more complicated, different municipalities have dealt with these obstacles very differently.

The Reform Institute's study used Finland as a reference case because its

construction rate is typical of a northern European country without very restrictive building regulations. What would Sweden's housing situation look like today if Sweden's politicians had followed Finland's lead 15 years ago?

About a half-million new homes in a country of nine million would have been built.

It would have also generated economic benefits for society - of around 74 billion kronor ($11.5 billion), according to Reform Institute estimates based on how consumers value their homes in relation to how much it would have cost to build them.

Furthermore, companies looking to expand would have been able to tell would-be employees that they could easily find a place to live - allowing job creation and in-house transfers. That would have fostered industry and employment and contributed to national economic growth.

Yet the most remarkable effect of the Swedes' inability to build new homes is how it has distributed wealth, a from-riches-to-riches effect that has barely been studied in Sweden before.

Since 1997, house prices rose by 120 percent. The price of tenant-owner apartments (bostadsrätter) shot up even higher. Had the Swedes taken a leaf out of the Finns' book, house prices would have been 30 percent lower according to our estimates.

The scarcity of housing has simply pushed up the prices of homes, in effect adding value to a capital asset of many existing homeowners. These Swedes have, in essence, been paid to live in their homes.

Barriers to building can seriously hamper social mobility. When house prices are high, it becomes harder for people without sufficient capital to leave a place where unemployment is high and home prices are low, and instead try their luck in cities with many jobs but few homes.

Young people with cash-flush, ready-to-help parents, however, simply buy their way into the housing market. This has implications far beyond housing.

People with parents whose homes have substantially appreciated in value can move for studies or work, in the end having no problem setting up home in an area with employment opportunities despite daunting obstacles to finding a place to live. Furthermore, we argue that they have better opportunities for investing, starting businesses, getting further education, and become better prepared to deal with various life crises.

SEE ALSO: Check out the latest home listings in The Local's Property Section

Reform Institute estimates show that Swedish homeowners enjoyed a wealth boost of 972 billion kronor compared to if Swedish construction had followed the Finnish example.

These 972 billion kronor probably make up probably the biggest transfer of assets in Sweden's history. To put this in comparison, when Sweden still had a wealth tax, society's richest paid in an additional six billion kronor annually to the state coffers.

And the richest of the rich benefit the most. Of that total sum, 865 billion kronor went to the richer half of the population and 350 billion - about a third - to the richest ten percent. Homes in Stockholm County alone, for example, are worth 375 billion kronor more due to the housing supply shortage.

Wealth effects vary widely, however, from one municipality to the next. They are least noticeable in municipalities with declining populations. In contrast, several well-to-do suburban municipalities that have seen the greatest wealth effects are also trying to stop new construction.

The municipality with the largest wealth gain is the upscale Stockholm suburb of Danderyd, where every resident in the richer half of the municipality's population has earned nearly 800,000 kronor on the construction stall. Residents of Lidingö, another posh Stockholm suburb, have earned the second most.

Between declining towns and the wealthy suburbs, we find emerging regions that have unleashed new construction, places like Umeå in the north, Uppsala in the east, and Halmstad in the south – places that are therefore experiencing some wealth effects.

The slowest builders are Eskilstuna municipality in central Sweden, as well as Gävle and Norrköping in the east. In Eskilstuna, for example, an additional 8,000 homes should have been build to match the Finnish construction-to-population-growth rate. Instead, rising home prices put 2.8 billion kronor into the hands of the town's ten percent richest - which is 280,000 kronor per person.

Some people getting richer can sometimes increase social mobility, but that applies when people set up successful companies. But when a major redistribution of wealth takes place in silence through restrictive regulations, that's a danger to society.

A growing sense of alienation among Swedes out-priced from owning a home could create a demand for higher taxes and more social benefits. This in turns risks feeding a vicious circle, with cash-strapped Swedes having a harder time finding work.

We must, therefore, look at redistribution with fresh eyes. It can't be right to focus only on relatively small changes in pensions or unemployment insurance to create a more equal society, while political decisions are shuffling huge fortunes around in secret.

We need a much more detailed analysis of how Sweden's dysfunctional housing market creates redistribution effects.

The government's various reforms to facilitate new construction are a move in the right direction, but it will take a long time before they have any impact and the effects are uncertain. The government's 2010 amendment to the planning and building law, for example, was meant to facilitate construction, but has probably had no effect at all.

The new proposals to abolish municipalities' special requirements for new buildings and to move some of the decision-making power from the local to regional level are good, but probably not far-reaching or quick-acting enough. Meanwhile, home prices continue to rise rapidly.

SEE ALSO: Check out The Local's latest Property of the Week picture galleries

Story continues below…

There are therefore grounds for more radical and immediate action. Several countries, including the UK, have periodically opened up for "new towns", excluded from much of existing regulations. Finland, our benchmark country, simply abolished rent control in 1995, which boosted construction. Germany has in many cases abolished zoning requirements.

The dysfunctional Swedish housing policy supported for so long by both political blocs has instead created substantial wealth redistribution to homeowners with nary a whisper of debate.

The parties that oppose rapid and powerful measures to build new homes are on track to turn Sweden into a completely different society than the one we know.

Stefan Fölster, head of the Reform Institute

Daniel Jahnson, economist, Stockholm University

Jacob Lundberg, economist, Uppsala university

Authors of the Reform Institute report, 'Redistributive effects of supply constraints in the housing market' (Fördelningseffekter av utbudsrestriktioner på bostadsmarknaden).

This article was originally published in Swedish in the Dagens Nyheter (DN) newspaper. English translation by The Local.

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