Dealing with the booming Nordic housing markets – Nordic Economic Policy Review 2021

House prices in the Nordic countries continue to reach new heights, creating concerns about affordability and segregation. At the same time, if prices go down, the increasing levels of mortgage debt pose a risk to the individual households and to financial stability. But how do the countries manage this seemingly delicate situation? Launched on 5 May, Nordic Economic Policy Review 2021 is devoted to Nordic housing policies.

Historically high house prices

There is little doubt that housing policies have a profound impact on people’s everyday lives and the distribution of social and economic benefits across society. The total value of the housing stock in the Nordic Region amounts to around 120 to 150 per cent of the annual GDP. An average household spends around 25 per cent of its disposable income on housing every month, and even more in the larger cities.

Higher incomes, lower interest rates and liberalisation of the housing markets are among the key contributing factors to the significant house price increase in recent decades. The historically high prices set the backdrop for Nordic Economic Policy Review (NEPR) 2021.

“Nordic housing markets face more or less the same challenges, but the ways in which policies and regulations deal with them differ,” says Harry Flam, Professor Emeritus at the Institute for International Economic Studies at Stockholm University. He co-edited NEPR 2021 together with Peter Englund, Professor Emeritus at Stockholm School of Economics.

The main topics of this year’s edition are house price developments and the prevalence of house price bubbles; rising construction costs, land scarcity and weak competition in the Swedish construction sector; and the impact of buy-to-let investment on house prices. Furthermore, NEPR 2021 dives into the differences in taxation of owner-occupied and rental housing; as well as policy measures to ensure housing affordability and integration.

House price bubbles are not so common in the Nordics

In House price bubbles in the Nordic countries?, André Kallåk Anundsen of the Housing Lab at Oslo Metropolitan University examines house price developments between 2000 and 2019. His question is if house price developments can be explained by the underlying economic fundamentals – disposable income, changes in the housing stock, and interest rates – or if there were signs of speculation that would indicate house price bubbles.

“Over the past 25 years, prices in Norway and Sweden have continued to rise almost without interruption, while in Denmark, the boom in the years leading up to the financial crisis was broken by a dramatic price fall,” Harry Flam explains. “Anundsen finds that Danish house prices appear to have been strongly overvalued before 2008, or by 57 per cent, which indicates a house price bubble in the Danish market. However, Anundsen finds no other evidence of price bubbles in the Nordic countries in the period.”

Read more about Anundsen’s findings in the article Few examples of house price bubbles in the Nordic countries.

Construction costs, scarcity of land and lack of competition in Sweden

Sten Nyberg and Mats Bergman have studied the impact of land scarcity and weak competition in the construction sector on Swedish house prices, which have risen substantially more than in the neighbouring countries. Their article is called Housing prices, construction costs and competition in the construction sector – a Swedish perspective.

“House prices are determined by supply and demand, and we see that several economic drivers of housing demand have developed positively over time, such as population growth, income growth and falling interest rates,” says Nyberg, Professor of Economics at Stockholm University. “To get the full picture, however, we must also look at factors that may constrain supply, including land scarcity and imperfect competition.”

Bergman and Nyberg find that while land prices have quadrupled over the last 25 years, this explains less than 30 per cent of the house price increase. Construction costs have gone up by 50 per cent relative to consumer prices, and the cost of building materials by 60 percent, while similar countries have seen an increase of around 10 per cent. The two professors find indications of weak competition in the sector, for instance in the wholesale market for professional builders and in public procurement of municipal housing.

Read more here: What explains the extraordinary increase in Swedish house prices?

Owning favoured over renting

In all Nordic countries, owner-occupied housing enjoys a tax-favoured status over rental housing. According to Niku Määttänen, Professor of Macroeconomics, the main reason is that while rental income is subject to capital income taxation, there is no equivalent tax on imputed rent, which is the rental value of an owner-occupied house. Another major tax advantage of owner-occupied housing is that capital gains on principal residencies are usually untaxed.

“The best way to explain the tax asymmetry is to take two households that live in their own apartments,” Määttänen says. “If they decide to switch apartments, so that both become landlords, the tax revenue increases, even though the total wealth of the households remains unaffected and the housing consumption remains the same.”

In Housing taxation in the Nordics: efficiency and equity, Määttänen argues for more symmetric taxation of owner-occupied and rental housing. The paper suggests a tax reform imposing a tax on imputed rent, while allowing homeowners to deduct mortgage payments from the tax. Moreover, Määttänen recommends a gradual increase in property taxes, based mainly on land value, as a means to stabilise house prices in the Nordics.

Buy-to let investments contribute to higher prices

Another issue related to the rental housing market is the impact of investment in housing for profit. In the paper Buy-to-let investors in the Nordic countries, Erlend Eide Bø addresses the question if allowing for such investment contributes to higher house prices.

Bø uses the differences between the Nordic rental housing markets to simulate the impact on house prices with and without a buy-to-let sector. A significant segment of the rental housing markets in Helsinki and Oslo consists of buy-to-let, while the concept is practically non-existent in Stockholm due to rent regulations and restrictions on subletting.

According to the simulations, the increase in house prices in Helsinki and Oslo would have been only 60 per cent of the actual house price increase without the presence of a buy-to-let sector. By adding buy-to-let investments to the mix in Stockholm, the simulations indicate that the price increase would have been 40 per cent higher than it actually is.

Affordability and integration are key concerns

With higher house prices come concerns about affordability and segregation. Essi Eerola, Research Director of VATT Institute for Economic Research in Finland, wrote the NEPR 2021 article Low-income housing policies: affordability and integration. Eerola divides affordable housing policies into two main categories: tenants-based programmes, such as housing benefits and housing allowances, which are transferred directly to certain types of individuals or households, and place-based policies, such as social housing.

“Both types of programmes improve the living standards of the recipients, but they also induce cost on the tax-payers,” Eerola explains. “In the case of housing allowances, these costs often imply direct budgetary costs, which are relatively transparent, while the costs imposed by social housing are to a large extent in the form of foregone revenue.”

Some of the key objectives of affordable housing policies are to reduce residential segregation, especially in the larger cities, and create socially balanced neighbourhoods. According to the paper, research indicates that housing benefits may be more efficient in achieving these aims. Eerola emphasises that the issue of high house prices and the issue of affordable housing for low-income households must be addressed separately.

“These are different types of problems and they call for different solutions. With regards to the overall housing affordability, we’re more likely to achieve that by increasing housing supply rather than subsidising demand,” she concludes.

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