Governments, both nationally as well as on the local level, around the world are considering introducing rent control – or some, like the city of Berlin, even simply expropriating private property from landowners.

However, these very governments should take a close look at Sweden’s rent control, as Gustav Fritzon writes in a newly published study by the EPICENTER and Timbro. Sweden introduced its rent control system in 1942, initially as a temporary wartime measure. Under this policy, rents have been set in reference to the apartment’s utility value, as prescribed by the Rent Act of 1970. The rent should be “reasonable,” i.e. not significantly higher than rents paid for comparable apartments. The main aim of the rent control system has been that those who do not own property have access to quality affordable housing. Rents are collectively negotiated by representatives of the tenants (the Swedish Union of Tenants) and the landlords.

However, as Fritzon shows, this system is not economically viable and many negative consequences:

Housing Shortages and Queues

Swedish rent controls have caused an excessive demand in the popular housing areas of the country. Indeed, this spike in demand has caused housing shortages and long accommodation queues in the major cities of Sweden. Due to the presence of rent controls, the regulated rents are much lower than the equilibrium rents, i.e. the rents that would have been charged in an unregulated market. In Stockholm, equilibrium rents are estimated to be 70 percent higher than the regulated rents, resulting in a shortfall of 27,000 apartments. The average queue for a rental apartment in the capital is 11.3 years, reaching 30 years for heavily subsidized apartments.

Conversion of Rental Apartments into Co-op Flats

The rent regulation has increased the demand for converting rental apartments into co-op flats where the whole property is owned by a co-operative association, which in its turn is owned by its members. Each member then holds a share in the association that is proportional to the area of his or her apartment. Why has the demand for this concept increased? Because the rental market is price-controlled whereas the owner-occupied market is not.

Subletting

In the secondary market, rents are significantly higher than the primary markets. Due to the rent controls, primary tenants are willing to sublease their apartments in order to earn a profit. This is possible partly due to the 2013 reform which allowed co-op flat owners to cover their cost of capital when subletting.

Black Markets

High demand for rental apartments, especially in urban areas, has given rise to rampant black markets in the rental housing sector. The black market mainly consists of activities like illegal trading and subletting of rental apartments. According to a survey, almost a fifth of young tenants in greater Stockholm admit to having illegally paid for a tenancy contract. The rental black market is supposedly fed by criminal gangs who use this market to channel gains from various criminal activities. These black markets are detrimental to the economy as the tenants end up paying more in order to gain access to housing and knowingly or unknowingly support illegal activities.

Inefficient Utilization of Housing

Rent controls have caused an inefficient use of the existing stock of apartments. This can be attributed to an allocation-related economic inefficiency, i.e. apartments not being distributed according to the renters’ ability and willingness to pay. There is a low residential mobility and lock-in effects within the existing apartment stock, whereby renters (often older and single inhabitants) are effectively subsidized by below-market rents to remain in large apartments in attractive locations. The tenants normally never leave such apartments and the people who are willing to pay more rent are unable to get these apartments. This indeed is an epitome of ineffective utilization of housing leading to major economic losses.

Recruitment Problems

Stockholm is one of the fastest growing European cities and is home to many multinational companies. In a survey of companies operating in Sweden conducted by the Confederation of Swedish Enterprises, one fifth of respondents claimed that housing shortages had made recruitment more difficult during the previous year. Housing being one of the main factors for any worker, a housing shortage not only prevents the recruitment of highly skilled foreign workers but also proves as an obstacle for companies to set up their businesses in the country. All in all, it is a hindrance to Sweden’s growth prospects.

Social Segregation

Rent controls create a divide between the market insiders who are more likely to be highly educated individuals with good connections, and outsiders, often immigrants or young people. As a result, the latter tend to live in unattractive suburbs – areas with extraordinarily high levels of concentrated welfare dependency and unemployment.

Inefficient Instrument for Redistribution

The rent control system was introduced primarily to improve the economic conditions of low-income earners in the country by subsidizing the most attractive houses in pivotal locations. However, the queues for such apartments run up to years and, ironically, the people who are willing and able to queue for, or through other informal means get access to the aforementioned subsidies, tend to have relatively high incomes. This undermines the basic principle of rent control, i.e. to uplift the low earners group in the country and leads to social segregation.

Inefficient Renovation Decisions

Under the rent control system, the landlords can raise rents only if the apartment standard is improved which does not include regular maintenance work. Thus, the landlords have an incentive to undertake only expensive renovations. The market cannot cater to renters who value living in city centers but are unable to afford higher housing standards leading to an increase in the economic segregation.

Conclusion

It can be seen that rent control measures in Sweden have not been successful from an economic point of view. The problem lies in the fact that the rent control system was initialized during the post war period and does not find relevance in today’s economic scenario. Rent controls have not only impaired the basic principle of egalitarianism but also have incurred huge economic costs.

Sweden should be a clear warning for other countries and cities to not go down the path of rent controls.