The EU Commission is wrong about the rental market in Sweden

On IUT boardmeeting May 2016 I presented a paper about the importance of affordable rental housing. The paper highlights among other things the big changes in Swedish housing policy since 1990 with enormous subsidies to owned and none to rental housing, which have caused the present housing crisis. The paper shows why the the EU Commission in the land report doesn’t understand and gives completely wrong advices how to handle the rental market in Sweden, that would cause even bigger problems.

The paper: The importance of affordable rental housing could be downloaded here: http://svenbergen.se/Bostadspolitik-och-hyresmarknad/

The EU Commission and economic theory – a sad thing

The housing market has never been and could never become a market with perfect competition. No one of the conditions for perfect competition would be attained. So instead of thinking that neo-classical economic theory could give any solutions we have to do empirical research, to look at the facts of the real world.

But the European Commission, at least its Staff, seems to embrace this theory. I will here give an example. In the country report the Commission Staff writes this about Sweden:

“Market inefficiencies are primarily attributed to the high level of rent control. Sweden is characterized by the highest levels of rent control among EU Member States.

Rent levels are negotiated between the Swedish Union of Tenants (Hyresgästföreningen) and the housing companies. Rental prices are based on a rent valuation model based on a set of characteristics defined as the so-called ‘utility value’ of any given dwelling. These characteristics include factors such as the standard, services offered and the condition of the dwelling, but location is only taken into account to a very limited extent.”[1]

As one of the authors of a rent-setting handbook in Sweden (in which location is one of the main factors that will influence the rents according to the residents’ valuation) and researcher of the rental market in Sweden I must correct the Commission about the influence of the location factor. In most major cities in Sweden the location strongly affects the rents. The rents are always higher in attractive areas than in less attractive ones if you compare apartments with the same standard and size. But landlords sometimes argue that it is not enough. What is right or wrong is a matter of opinion. If the parties cannot reach an agreement then the rent tribunal has to decide.

One important feature of the Swedish rent law is security of tenure. That means that shortage of housing is not allowed to lead to rents that jeopardize the security of tenure.[2] So when there is increasing shortage due to too low housing construction, the rents in the existing stock do not increase and are held below the so called market level. But newly built rental dwellings have rents which are the highest that the landlords could charge if they will have new tenants in them (market rents). But many households that want housing cannot afford the rents in newly built dwellings or pay the price for owner-occupied housing. According to surveys it is a large shortage of rented dwellings (in 85 percent of all municipalities) that young households[3] and other low-income households including immigrants can afford. So market rents are not a solution.

In spite of that the same report says:

“The growing difference between actual and market rents triggers excessive demand for rental units and creates a lock-in effect. Existing tenants would not want to give up their favourable conditions for renting the apartment below market prices while new entrants cannot access rental apartments. Students, young and low-income households cannot access cheap, entry-level housing thereby negatively affecting labour mobility, as well as having important social implications.”[4]

The conclusion of the report is that higher rents after deregulation would give easier access to cheap rental dwellings! If the rents rise to the market level where could these households find the cheap apartments?

”Reforming the rent price setting procedure in order to allow wider divergence of rental prices, for instance by considering location and rental prices for private and/or newly built apartment rental prices would allow to close somewhat the gap between market prices and existing rental prices in urban areas and/or could allow cheaper rental prices in less attractive areas.”[5]

If it would be possible to raise the rents more in attractive areas why would the rents decrease in other areas? There is a tremendous shortage of rental dwellings in all metropolitan areas in Sweden. Every apartment is already leased. Why should the landlords then lower their rents anywhere? In fact a deregulation would cause increased rents everywhere, force people to move, increase the demand for housing in less attractive areas because many households then have to move out from their present apartments where the rents will be much higher, and cause growing social problems and even homelessness.

Maybe someone might say that market rents would increase the construction of new rental housing. But it has not happened in countries where they have deregulated the rental market.[6] “A well-regulated rental market can promote the goals of protecting tenants, particularly low income, and encouraging rental housing simultaneously. On the other hand, the elimination of rent controls and the easing of eviction procedures have rarely led to more investment in the rental market but have actually skewed the market in the direction of homeownership.”[7]

The Commission cites a report, with a very theoretical approach:

“Inefficient use of the existing rental units also contribute to the supply side constraints of housing and could result in significant welfare loss primarily in the urban areas and an undersupply of 40 000 rental units has been accumulated in the country – out of which 27 000 in Stockholm.”[8]

A recent study of housing conditions in Stockholm based on data from Statistics Sweden[9] shows that the rate of utilization or housing density (number of inhabitants per apartment of a certain size) is higher in rented apartments than in condominiums (tenant-owned apartments).[10] The rental units are more efficiently used than the other form of tenure with market pricing, which contradicts the thesis from the Commission. The study also showed that the incomes of tenants are much lower than for those in all kinds of owned housing in every part of Stockholm even in the most attractive areas. The outcome is also a sign of the positive effect on economical segregation of the Swedish system.

The alleged welfare loss has no empirical evidence. The shortage of rental dwellings is caused by many factors. To use that kind of neo-classical economic theory for analysis of welfare should be outdated.

In economic works the word demand has a special meaning. But I can need and demand (in ordinary language) a decent dwelling without having any money. And even poor people must have somewhere to live. Demand-driven construction of housing on an unregulated market will not create housing for everyone. The willingness to pay of those who have the ability to pay will be focus for the developers. Welfare analysis must be based on a broader and more adequate social theory.

It seems that the Commission’s main objection towards the Swedish model is that most of the rents are determined after negotiations between tenant unions and landlords, almost in the same way as the wages are determined after negotiations between trade unions and employers on the labour market. [11]

It is a typical neo-classical objection that prices/wages/rents should be a result of a free competition even between tenants or workers. Trade or tenant unions that represent collectives and negotiate and reach agreements on wages or rents disturb this ideal. But it is important for the welfare of the people.

In a critical comment to the EU Commission writings about the Swedish system Housing Europe writes:

“Firstly, it does not recognise the specificity of the Swedish housing system, which is rather different to other countries and has shown itself to work well over different economic cycles. The CRS does not justify its belief that getting rid of the rent setting system will solve any issues with the housing supply or prevent significant additional problems for tenants, including evictions and forms of homelessness.”[12]

And the private housing companies do not suffer. According to IPD (Investment Property Databank) is the annual total return of housing the last ten years until December 31, 2014 higher than9 percent  in Sweden.

An interesting work criticizes the neo-classical approach that still is so common among economists today:

“Economists long have recognized that the prerequisites of perfect competition may never be satisfied, and – most important – that when even one of them is missing, the benefits of perfect competition may not be available. The point has been highlighted by an often-cited, masterful article by Lipsey and Lancaster[13]. They posit that the ability of a market to achieve perfect competition is dependent upon its meeting all of the conditions of the Paretian optimum. And they add: ‘It is well known that the attainment of a Paretian optimum requires the simultaneous fulfilment of the optimum conditions.’[14]

Lipsey and Lancaster also indicate that if one of the conditions cannot be met, ‘the other Paretian conditions, although still attainable, are in general, no longer desirable.’ (Ibid.) A different pattern or model is then necessary. It follows that when an economy moves toward perfect competition, say as a result of the deregulation of one industry, one cannot assume that such a step will yield some of the benefits of perfect competition. Competition is either perfect or is not; like pregnancy, it cannot be had in degrees.”[15]

Housing policy in Sweden during the last eight years is extreme in an international comparison. After 2006 the subsidies to owned housing have increased a lot, and completely disappeared for rental housing. Property tax has been reduced even more in metropolitan areas, which in turn has led to significant price increases. These are important reasons (but not the only) that the differences in rents between newly built and older rental dwellings have increased. Other factors are bad competition among developers, a slow planning process, etc.

Is the housing shortage a situation where people cannot obtain housing that responds to their needs? Or is it the demand, how much people are willing to pay, to be the meter, according to some economists, who dislike the concept of need. It is the households overall willingness to pay that expresses demand and therefore the need. The need no one could pay for does not exist, they say. [16] One easy solution then is to raise the prices and the rents to cut the housing shortage. Higher prices mean less demand.

But revenues are distributed unevenly. People may have a need, but lack the money to match other people’s demand. To avoid to enter on this discussion these economists usually assume that the distribution of resources in society is ”the collectively desired” [17] or politically decided.

Of course the price setting on a market depends on demand and supply in economic terms. Welfare analysis on the other hand must be based on the welfare of households. A distribution of housing, which means that households with large economic resources always can trump households with fewer economic resources, cannot provide maximum welfare.

The economic language is full of concepts that could have other meanings in a daily use. Demand is an example. Description of poor or low-income households as “market failures” is another example. But have they really failed? Or is their economic situation due mainly to a failing policy by the government?

Maybe you might regard this text to be extremely exaggerated that argues against a theory that almost nobody uses. But even clever economists still fall back at least partly on this outdated theory when they try to analyze markets which they do not have a deep knowledge of. The European Commission’s Staff’s critique of the rental market in Sweden is an example.

One can sometimes hear that there is a housing market that is working well and that includes owned housing and condominiums. The rental market has rent-regulation with queues as a result. Rent regulation is seen as the main cause why so few rental properties are constructed. But if the market for condominiums and owner-occupied housing works so well, then it should be able to satisfy the need for housing, especially as the prices of owner-occupied homes and condominiums for many years has increased substantially, which should have stimulated a sharp increase in housing construction according to this economic theory. But it did not happen. Then there must be something wrong about the theory.

Housing and housing markets are very complex issues. There is no quick-fix. Both regulatory and market mechanisms are needed.

[1] European Commission:  Commission staff working document: Country Report Sweden 2015 (COM 2015 final) p.21

[2] In many countries there are regulations of the rents for sitting tenants. See for instance Haffner M., Elsinga  M. and Hoekstra  J (2007)

[3] Boverket: Bostadsmarknaden 2013-2014 pp. 20-22

[4] European Commission. p. 21

[5] Ibid. p. 22

[6] Whitehead, C., Monk, S., Markkanen, S. and Scanlon, K. (2012) , Forsberg F, Åsell M (2000)

Nordgren K, Sergo T (2001) , Raquel Rolnick (2013)

[7] Raguel Rolnik (2013). p. 14

[8] European Commission, p.22

[9] Bergenstråhle S., Palmstierna  P. (2014)

[10] Rental and tenant-owned dwellings are found mainly in multifamily housing and owner-occupied dwellings in single-family homes.

[11] de Boer, R. and R. Bitetti (2014),  p. 22

[12] Pittini A, Ghekière L, Dijol J, Kiss I (2015) The  State of Housing in the EU 2015, Housing Europe, Brussels, p. 95

[13] Lipsey R., Lancaster  K.(1956)  ” pp.11-32

[14] These conditions could be described as follows: The largest firm in any given industry is to make no more     than a small fraction of the industry’s sales (or purchases). The firms are to act independently of one another. Actors have complete knowledge of offers to buy or sell. The commodity (sold and bought in the market) is divisible, and the resources are movable among users.

[15] Etzioni, Amitai (1988) pp. 200-201

[16] See for instance Meyersson P-M, Ståhl I, Wickman K (1990)

[17] See for instance. SPK (1987:2) p… 84

An essay about housing policy from a tenant’s point of view

A paper to ENHR 2015 Conference in Lisbon: ”Housing and Cities in a time of change: are we focusing on People? ”

You kan get the full paper on: http://svenbergen.se/Bostadspolitik-och-hyresmarknad/

Here is a summary:

Housing is a human right and a vital part in a well-functioning society. It affects the whole economy and peoples living conditions. Everyone needs safe and decent housing. Housing is not only the dwellings but also the communities around them. So we need a broad approach to housing. Housing is about safety and security, access to services of various kinds, communications, education, jobs, etc.

The housing market differs from any other market. It is extremely sensitive to changes in demand. Prices are rising when the demand increases and price pressure downward becomes strong when demand falls. This is because the supply only could change slowly. On increasing demand, it takes time to build new housing and when demand falls, it is difficult to adjust supply and individual investors and households can make large losses. Many researchers have emphasized the high volatility (strong swings up and down) that characterizes housing prices and believe that housing markets seem to have an inherent tendency to create bubbles, which can become a serious threat to financial stability.

The construction of new housing and other infrastructure investments, maintenance and energy-saving investments in homes and workplaces create jobs. Investing in existing properties to make money on capital appreciation creates in contrast no new jobs. The greater proportion of the total investments in already existing housing the smaller space will be left for investments in productive sectors of the economy.

In some countries it is today fiscally more advantageous to buy a home than to invest in a business. Higher prices and/or the rents mean less money for the households to spend on other commodities. That is why the housing policy has such a great influence on the whole economy.

The housing market has never been and could never become a market with perfect competition. No one of the conditions for perfect competition would be attained. So instead of making illusions and thinking that neo-classical economic theory could give any solutions we have to do empirical research, to look at the facts of the real world.

It seems that the European Commission, at least it’s Staff, have a lot to learn about economy in the real world. The advice which the Commission has given to the Swedish government about the rental market contains inaccurate information and conclusions based on outdated economic theory.

Different kinds of subsidies are necessary to achieve the goal that everyone should have decent and safe housing. Subsidies could have many forms: tax deductions, subsidies to social housing, housing allowance to households, subsidized loans and so on. Subsidies in the form of tax deductions generally benefit already economically well-off households the most.

Every subsidy should be subject to conditions to keep down prices and rents, i.e. not be possible to capitalize. The aim of the subsidy is to lower the prices and not to stimulate higher prices. Subsidies without conditions, e.g. mortgage interest deduction, on a “free” market, dope the market, stimulate speculation, contribute to increased prices on homes and construction, push up rents and decrease housing affordability especially in regions with high migration. The aim for any subsidy should be that prices and rents are lowered in an amount that corresponds to the value of the subsidy.

We have two main forms of tenure: ownership and tenancy. Tenure neutrality (or a tenure neutral policy) is a situation where households can have the opportunity to choose what kind of tenure which suits them best in their present circumstances. For example, many people cannot afford owned housing and may not be able to access a mortgage; many do not want to be confined to a dwelling for a long time due to fluctuations in the labour market; many do not want to have the whole responsibility for maintenance and repairs and students need temporary dwellings during their studies. Clearly the state should not support homeownership above rental housing.

Every country needs a transparent and well-functioning market for rental housing with a balance of interests between landlords and tenants. It also needs a good supply of affordable and decent housing. One of the main means of securing affordability and tenure is rent legislation, regulation and control. Rent regulation varies greatly between regions, but typically includes two main elements: (a) security of tenure, establishing a minimum duration of occupancy as well as limitations on the eviction of tenants; and (b) control on levels of price increase, intended both to preserve affordability and to preclude de facto economic eviction. In fact a well-functioning rental market needs these elements.

The rental sector is vital for the economy and labour market because it facilitates mobility. Wealthy nations as Switzerland, Germany and Austria have a high percentage of rental dwellings. There is a strong positive correlation between the percentage of people living in rented dwellings and gross domestic product per capita in Europe according to data from Eurostat.