|
Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 4 of the Economic survey of Sweden published on 14 February 2007.
See also the excerpt "Fiscal issues related to the housing market".
Contents
Distortions in the housing market exacerbate exclusion
While Sweden has succeeded in deregulating a number of sectors, the housing market remains highly distorted, inter alia hindering the matching of supply and demand and excluding many Swedes from their preferred housing tenure. Regional demand differences for housing are large – as reflected in strongly increasing house and apartment prices in the metropolitan areas, but rents are not allowed to reflect market prices. The rent-setting framework, where private rental contracts are based on the negotiated cost-oriented rent in public housing companies, has led, in metropolitan areas, to large differences between what rents tenants are prepared to pay and the rents actually charged. With extensive queuing, many who might have preferred to rent, are driven into the tenant-ownership and owner-occupied segments. Other consequences of rent regulation are black-market trading of rental contracts, frequent conversion of rental flats to tenant-owned dwellings and low construction activity of rental dwellings. The effects of the changes in rent legislation concerning new rental dwellings implemented in 2006 remain to be seen.
Meanwhile house prices and residential investment are booming
In contrast to consumer prices, house prices have grown on average 8½ per cent a year since the trough ending in 1996. Much of the increase may be explained by lower interest rates and rising incomes, but the recent acceleration, with annual house price increases reaching 13% since early 2006, does raise concerns. OECD calculations indicate a small but growing overvaluation. If interest rates rise from their current low levels, the level of house prices that can be justified by “fundamentals” will decline, magnifying this estimated overvaluation. In this context, it is unfortunate that housing taxes have been cut this year by one quarter of their revenue, as that adds to the risk of overheating in the housing market.
House prices have risen above their fundamental value recently
Indices, Average 1975-2005=100
Note: House prices are shown in real terms, i.e. deflated by consumer prices. See Box 4.1 in the Economic Survey of Sweden for details about the model used to estimate the fundamental price.
Source: Statistics Sweden and OECD calculations.
More market elements in the rental sector should be introduced
Although rent regulations for newly constructed dwellings have been eased somewhat, the rent setting framework still remains rigid and rents do not reflect the demand and supply situation, preventing an efficient allocation. Ideally, rent regulation should be phased out to make the market function better. But reforms can also take place within the system, by introducing rent differentiation across municipalities in the public housing sector, foremost in the Stockholm region where the problems are most acute. In order to achieve this, regulation of rents in municipal housing companies should be reformed, and closer cooperation between concerned parties should be encouraged. Successful examples can be seen in Malmö, where more rent differentiation has been gradually implemented. As the public sector rents serve as the basis for the private sector, such reforms would benefit the whole rental sector.
Housing taxation is moving further away from neutrality
Radical reforms in property taxation and subsidization were enacted with the 1990/91 tax reform, significantly reducing the direct and indirect fiscal costs of housing policies. However, more still needs to be done to make the system less distortionary. With 2006 rules, taxes for owner-occupied housing and tenant-ownership associations and their members were only about half of what would be required for neutrality vis-à-vis other capital taxes and interest deductibility. Yet, from 2007, imputed rent taxation has been abolished, value assessments frozen and taxes on land values capped, thereby cutting total housing tax revenues by almost a quarter. In a next step, it is planned to abolish the real estate tax, partly replacing it with a municipal fee decoupled from real estate prices. The government plans to fully finance the second step within the housing sector.
From an economic perspective, it would be much better to focus tax cuts on where it matters for employment and entrepreneurship. And decoupling housing taxation from value assessments cannot be an appropriate long-term solution, as misalignment from neutrality vis-à-vis other capital taxes and interest deductibility will gradually grow. The best would be to retain housing taxation levied on a recurrent basis. As a minimum, the future reform of housing taxation should fully finance also the cuts made in 2007, while restoring the link to value assessments. Furthermore, the authorities should try to minimize the current problem with horizontal inequity stemming from inaccurate assessments of the market value of properties. Given the overall favourable tax treatment of home ownership, capital gains taxation should be strengthened: an interest could be levied on accrued (but not realised) capital gains, the tax could be based on the full capital gain, rather than two thirds as currently, and capital gains could be considered as realised at death. Similarly, measures to reduce the effective tax deductibility of interest expenses should be undertaken. Regarding direct subsidies, housing benefits should be made independent from the level of housing consumption, for example by introducing a flat rate benefit as in the United Kingdom. The interest grant scheme should be phased out as planned, as well as the state credit guarantee scheme.
Supply could be made more responsive to demand
Construction of new residential housing has grown significantly, but as a share of GDP it still remains well below other OECD countries. To some extent this reflects earlier investment activity which was heavily subsidized by the government. Rent regulation also contributes as construction of rental dwellings is particularly limited. However, low construction is also due to an uncompetitive construction sector with high entry barriers and a strong labour union resulting in construction costs being higher than in most other European countries. In addition, the planning process is cumbersome and municipalities lack incentives to make more land available. Introducing the broad existing proposals for reforming the Planning and Building Act would help to make the planning process more flexible. In addition, introducing a local real estate or land tax would improve the incentives for municipalities, but would have to be linked to property valuations. In addition, legislation should be introduced to allow direct ownership of individual apartments, which would also encourage investment in rental dwellings.
Residential investment activity is lower than in other countries
as percentage of GDP, current prices
1. Excluding Luxembourg, Hungary, Portugal and Slovak Republic. Including Switzerland as from 1990, Poland as from 1991, and Czech Republic as from 1992.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Sweden 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
-
-
OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
-
Additional information
For further information please contact the Sweden Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Jens Lundsgaard and Felix Huefner under the supervision of Andreas Wörgötter.
|
