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Photographer: Johan Jeppsson Photographer: Johan Jeppsson

Half a million people are now in line for apartments in Stockholm. That's a number that's likely to cause nightmares at Sweden's central bank that has been forced to go all out in defending its inflation target.

The worsening housing shortage -- exacerbated by record immigration -- and surging house prices reveal that deeper financial instability risks lie ahead. The combination of already too-high household debt and negative rates ``may ultimately be very costly for the economy,'' the central bank said last week in its monetary policy report.

The nation needs at least 76,500 new homes a year until 2020 to keep up with population growth, a target it will fall behind on starting this year, according to the National Board of Building and Housing.

It doesn't help that rent-control laws make housing an unappealing investment. The urgency is most obvious in Stockholm, where the line for apartment rentals has swollen to more than half a million people, with 30,000 added this year. The waiting time is now an average of about 9 years.

Last year only 12,000 people landed apartment rental contracts in Stockholm. That’s driving people to pay as much as 200,000 kroner ($24,000) per room under the table to cut the line.

It's gotten so bad that it's become deadly -- Stockholm police say they have connected five murders with the illegal trade, which may be tied to organized crime. They fear that population growth and rising apartment prices will fuel illegal activities further.

On top of this the central bank has been forced to add record stimulus to revive inflation. Earlier this year, the central bank lowered its repo rate below zero and began buying government bonds. House prices rose 14 percent annually in July and and household lending grew 7.1 percent. The bank now expects the level of household debt to disposable income to increase to about 190 percent by 2018, from 170 percent today.

((For more economic analysis, see Benchmark.))