government 27 December, 2013

Housing policies redistribute wealth to the affluent

Swedish housing policy has made many home owners wealthy at the expense of younger generations who may want to buy their homes. This overlooked transfer of wealth shakes the entire foundation of all other redistribution policies. This demands immediate measures to encourage housing construction.

The lagging pace of housing construction in Sweden is mostly seen as a problem for those looking to rental markets for housing. Less appreciated, and much less understood, is that the housing shortage has also brought a massive redistribution of wealth being transferred to those who already own a home at the expense of those needing to buy housing in future. The Reform Institute recently published a report showing the scope of this wealth transfer varies significantly between municipalities, and between the wealthy and the poor. This has consequences that can decisively restrict social mobility.

Causes behind this feeble pace of housing construction in Sweden are now well-known, historically and in comparison to neighbouring countries. Construction costs have rocketed over many years driven by long planning processes, building regulation, special local municipal requirements, costly appeals, and regulated rent levels. Meanwhile, municipalities have addressed these obstacles differently, with widely varying results.

The Reform Institute study uses Finland as reference since housing construction there has kept pace with population growth as would be normal for a northern European country that neither hinders construction unnecessarily nor has had a building boom or housing bubble.

So how would Sweden have developed if housing construction followed the same pace as in Finland for the last 15 years, even considering the differences in population growth? Total new housing production would have included nearly half a million more units. That would have generated a socio-economic gain of SEK 74 billion (€ 8.3 billion) according to our calculations of how consumers value housing. Moreover, this would have stimulated growth as companies wanting to expand could more easily get new hires to move to where they were needed.

More remarkable, though, are the distribution of wealth effects that have hardly been studied in Sweden previously. Single family housing prices in Sweden have increased 120% since 1997, condominium prices have rocketed even more. However, if construction had matched the pace in Finland, these prices would be over 30% lower. The many obstacles to building more housing in Sweden have therefore given many current homeowners greater wealth. They have practically been paid to live in their homes.

Obstacles to housing construction can seriously impede social mobility. High housing prices of this kind make it difficult for those without capital resources to move away from their current living situation, especially in cases where local high unemployment causes lower housing prices.

Instead, of the young who need to buy into housing markets, only those with parents who own homes (or have other capital resources) can get the funding assistance they need to buy into the housing market. This has consequences far outside the issue of housing. Those who have seen their home values (or their parent’s) increase significantly in value, can more easily seek employment or enter studies in other areas where there is more attractive employment – even when that area has a housing shortage. Moreover, they have greater opportunities to invest in and start their own business, go on to continuing studies, as well as having a wider safety margin to face the many difficulties anyone can encounter.

All told, home owners in Sweden are estimated to have increased their wealth by 972 billion kronor (over € 100 billion) due to the lagging pace of housing construction, as compared to Finland. Of this total, over SEK 865 billion has gone to the wealthier half of the population and as much as 350 billion to the wealthiest 10%. The privately owned housing stock in Stockholm County is valued SEK 375 billion higher due to this limit in supply. For the sake of comparison, revenues from the recently repealed wealth tax were SEK 6 billion annually, and this is possibly less after considering secondary effects.

The wealth effects involved vary significantly at the municipal level. These have been least in rural municipalities experiencing severe depopulation. The greatest plus has been in suburban municipalities, where political pressure has actually thwarted housing construction. Danderyd, a notably wealthy suburb north of Stockholm, is the municipality with the greatest gains in wealth is – where the wealthier half of the population has gained nearly SEK 800,000 (over twice the national median income). In Lidingö (another wealthy suburb of Stockholm), homeowners have gained the next most. Between the rural depopulating localities and wealthy suburbs lie several higher growth areas that have actively promoted housing construction such as Umeå, Halmstad, and Uppsala but these still show a measurable wealth transfer effect.

Among medium-sized municipalities where housing construction has been slowest in relation to population growth, we find Eskilstuna, Gävle and Norrköping. Considering Eskilstuna, we see they would need an additional 8,000 housing units to match housing supply in relation to population growth at the same pace as in Finland. Instead, rising housing prices have helped the wealthiest ten percent in Eskilstuna gain an added SEK 2.8 billion (280,000 per person, or €31,000).

Social mobility can sometimes increase when a portion of society does become wealthier, if this happens because people start a business or have been successful, for example. But when instead, such a large redistribution of wealth occurs due to restrictive regulations, and goes completely unnoticed, this can be harmful to society. Those who cannot board the housing train, for whatever reason, are more likely to feel excluded and alienated, and could therefore have more reason to demand higher taxes and government benefit programmes. This can then lead into a vicious circle where those with fewer assets also have greater difficulty finding employment.

Redistributive policies must therefore be seen in an entirely new light. Public debate cannot reasonably be limited to discussing redistributive policies exclusively in terms of minor relative changes to pension or unemployment benefit levels while similar political decisions result in the surreptitious transfer of such enormous wealth. Public debate requires much more detailed analysis of the redistributive effects at work within the regulatory approach contained in the political policies of all major political parties.

The various reforms of the current centre-right coalition attempting to promote housing construction are important, but mostly involve highly uncertain impact that still has long lead times before results will first be noticed. The 2010 changes to the Planning and Building Act (2010:900) (PBL) passed by the current government where intended to facilitate housing construction, but likely have not had any impact at all so far. Recent proposals to restrict municipalities from imposing special local requirements for new construction and to transfer some decision-making powers from the local to the regional level are promising, but still too little and too slow in having any impact. Meanwhile, housing prices continue to increase at the same excessive pace.

We therefore see good reason for more pervasive measures with greater, more immediate impact. Several countries, including Great Britain, have occasionally opened for ‘New cities’ built under exception from large portions of the existing regulatory frameworks. Finland, our mirror for comparison, simply repealed their rental regulations entirely in 1995 – which led to their faster pace of housing construction. Germany has eliminated requirements for detailed building planning in many cases.

The dysfunctional housing policies in Sweden, backed by both blocs, to the right and left, have over decades and with no public debate, resulted in a huge redistribution of wealth to homeowners throughout the country. The parties opposing swift action and stronger measures for more housing construction have already taken Sweden a long way towards becoming an entirely different society than they expect.

Stefan Fölster, Managing Director for the Reform Institute in Stockholm
Daniel Jahnson, Economist, Stockholm University
Jacob Lundberg, Doctoral candidate department of Economics Uppsala University
Author of the report ‘Fördelningseffekter av utbudsrestriktioner på bostadsmark’ (in Swedish only ‘Redistribution effects of supply constraints on housing property’)

Published 2013-09-20