A different system: the rental market in Scandinavia

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European rental models are often looked to as ones that New Zealand could learn from. That prompted Auckland Property Investors Association vice-president Peter Lewis to take a close look at Sweden's rental market.

Wednesday, August 22nd 2018, 10:00AM 2 Comments

by The Landlord

APIA vice president Peter Lewis

Read any one of the many surveys that attempt to answer the question: “Which is the best country in the world at . . .” and the inevitable answer is the Nordic countries.

Why should a small group of chilly, sparsely populated and largely irrelevant countries sandwiched uncomfortably between Russia, Germany and the North Sea apparently be the home of the happiest, best educated, most socially aware and progressive people on the earth?

The answer, according to the academics, lies within the Gini Coefficient. To save you looking that up, the Gini Coefficient measures the level of wealth inequality within a country.

Running this mathematical ruler over many countries, it appears that the more equal a society becomes the better the people feel.

Living in an economically unequal country is stressful, both for the wealthy and the poor, whereas it’s unlikely that you will get all bitter and resentful over the lack of a ballpoint pen if no-one else you know has one.

Sweden, Norway, Denmark and Finland are all cohesive societies which historically have had low levels of immigration. Couple that with a strong Lutheran religious tradition that shuns ostentation, dislikes public displays of emotion, values thrift and approves of keeping one’s self to oneself and you have a people that think and act as a group.

Thus the Finns are said to have the best education system in the world, the Danes top the happiness score, Sweden is the best place to live if you are female and the Norwegians (as a nation) are the wealthiest people on the planet.

Another feature of these four countries is their high levels of taxation, usually topping 50% on personal income.

Norway is one of the most heavily taxed countries in the world with a total tax burden of around 45% of GDP.  GST is a whopping 25% and personal income tax rates border 55%. Company profits tax ranges from 28%to as high as 78%.

In Sweden personal income tax can be as little as 29% but most employed people will pay between 49% and 60% through a combination of local government and state income tax.

So why do the people put up with this?

As cohesive and inward-looking societies, the people of these nations feature higher levels of trust in their fellow citizens than anywhere else in the world. This evidence is consistent with the reality that social cohesion is larger in Scandinavian countries than elsewhere.

Thus citizens show a willingness to pay large taxes in belief that the money will be wisely spent on valuable social infrastructure programs – education, health programs, public transport – that benefit all citizens and will not be conspicuously wasted.

So while there are some extremely wealthy families and citizens in these countries – Maersk, ABBA, and Ikea’s Kamprad come to mind – the majority of Scandinavian people live homogenous lives of security, equality and contentment untroubled by any base desires to out-earn their neighbours or indulge in conspicuous displays of wealth and excess.

So how does all this affect their housing market? During a recent trip to Sweden I spoke to a few people to find out.

During the 1960s and early 1970s the Swedish Government promoted an extensive housing construction project called “The Million Homes Programme”, but since then construction has consistently lagged behind demand.

One in five households rents a publicly owned home, and a similar ratio rents in the private market. Rents had been regulated since 1942, but were gradually deregulated between 1957 and 1968, when rent setting according to a utility value system, the “tenant’s value”, was introduced.

This system, determines the rent according to the dwelling’s condition, reflecting its size, quality, year of construction and standard. New rents are set in accordance with comparable rents in the neighbourhood. Private landlording as we know it is almost unheard of. It is considered speculation, profiting from people in a way that is not socially appropriate.

There exists the Rent Negotiation Act, which authorises tenant associations to negotiate with landlords, public or private, to determine fair and proportionate rents. These negotiations generally take place each year, and 90% of rental agreements are determined in this way.

The rationale is that such negotiations are fair to both sides because individual tenants are weak and lack the ability to influence landlords, and because it is easier for large-scale landlords to sign a group agreement than to deal with each tenant separately.

Another Swedish feature is that the rents in the large municipal housing stock served as a norm for all rents, including the private rental sector. A regulated market where rents are decided in negotiations or by courts rather than supply and demand means there is little incentive for construction.

That means the wait in Stockholm’s public queue for a rental in the inner city now averages 13 years!

In theory, Sweden’s rental market is designed to ensure that anyone who doesn’t own their own property has access to an affordable home with rent that’s capped, provided by either a local council or a state-approved private company. Once you get one of these so-called “first-hand” contracts, is usually yours for life.

But far from providing “housing for all”, Swedish municipal landlords actively avoid housing the poorest and most vulnerable households. They prefer those tenants who can supply good references and have no history of rent arrears and bad debts.

A tenant of an apartment has the right to sublet. Would-be renters who cannot find a place have the option of either subletting from someone with a long lease or renting from a private landlord.

However, such arrangements are often for a year or less, since individuals who choose to let out their homes are usually limited to a fixed period agreed by the building’s housing association and only for a valid reason such as travelling abroad or moving in with a partner.

By contrast, subletting contracts can change hands for double that price on the black economy, despite regulations designed to ensure such tenants don’t pay much more than the market rate.

Over time, politicians have tried to make it easier to build new homes, particularly rental accommodation. In 2006, for instance, the utility value system was supplemented with presumptive rents for new-builds in order to increase the incentive for building new rented accommodation.

In practice, this has meant that a property owner has the possibility to charge market rents for newly-produced rental apartments during an initial period. This period was first set at 10 years, but was extended to 15 years in 2011.

In the meantime, low rents in the municipal sector mean many of the properties built during the time of the Million Homes Program are now in a deteriorated state and require extensive and costly renovation and repair.

As many of us so often predict, the long term effects of rent control and the active discouragement of private landlords have led to a shortage of housing, lengthy wait-lists for any tenancies that do become available, a decline in rental quality and a flourishing black market.

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