Politics and the Real Estate sector - Where are we heading?After countless talks between the speaker and the party leaders the new yet old government took its place several months after election day. Statements and proposals regarding the political direction of the years to come have been pouring out of Rosenbad ever since. It seems certain that large reforms are going to be included in the next budget but most issues that concern the property market are still somewhat unclear. What has been said of the largest questions for the Real Estate Market so far?
The three most spoken of political issues for the Real Estate market are quite possibly; market rents for new residential units, the design of the government subsidy for residential construction, and the possibility of phasing out the tax deduction for interest payments of private citizens.
One of the centrist liberal Centerpartiet’s demands for supporting a Social Democrat government was the deregulation of the rental system for newly constructed apartments. Our assessment is that the current rental system has resulted in residential rents very close to market levels for new construction, thus a move to a completely free system would have very little practical impact on the rental levels. The Union of Tenants has yet to challenge the current rental levels in court, at least not in any major way. Current legislation does however have the implication that rental levels of many newly constructed residential units risk being overruled, should the Union of Tenants choose to focus their attention on the matter. Our opinion is that most actors in the market pay little attention to the risk of the rental level being challenged by tenants or The Union of Tenants though. Again: we believe that a change of legislation would have very little impact on the market situation. It’s highly probable that the issue is mostly a question of semantics and symbolism for Centerpartiet and the Social Democratic Government might share our analysis regarding the miniscule effects of the proposition.
On the 9th of March, the Minister of Housing announced that the government-funded subsidy of residential construction will be reintroduced in the spring budget, provided that all parties can agree on a specific design. It’s very hard to speculate on how the new iteration of the subsidy will be designed, but a starting point would be to evaluate the effects of the subsidy so far as well as the political intentions of it.
The goal of the subsidy for new construction of residential buildings was to encourage the construction of more affordable rental apartments to satisfy the huge existing demand. The state compensates the developers for an artificially low rental level with a substantial cash grant. It’s reasonable to assume, then, that the subsidy has led to the construction of a large number of affordable apartments in attractive locations. This has not been the case though, much thanks to of the design of the subsidy.
Our view is that the subsidy has mainly been used away from the larger cities in locations where the difference between the capped rental level and the normal rent is low or in some cases non-existent. Several developers have confirmed our analysis of the situation: the subsidy seems to, almost exclusively, have been used for projects that otherwise wouldn’t have been profitable at all or where the normal rental level is no higher than the capped level stated by the subsidy.
The programme might very well have contributed to the total level of new construction on a national scale, but hardly in the most attractive cities where demand, and rental levels, are the highest. The grant is payed directly to developers and the housing being produced are no more affordable than they would have been either way. It seems obvious that either the capped rental level or the size of the grant needs to be quite a bit more flexible for the programme to see any kind of impact in the larger cities.
The tax deduction for interest payments has been a hot-button issue in Swedish politics for a long time now. The vast majority of parliament seems to be in favour of a phase-out of the tax deduction but no one has put forth a concrete proposal to the effect so far. It seems that no one is willing to risk the potential backlash from the voters alone and everyone is waiting for total consensus before speaking up. The Danish model, where the deduction is being removed slowly and gradually over thirty years, is often spoken of as the most reasonable alternative. Some say that the taxdeduction drives a potential housing bubble by subsidising mortgages and artificially increasing purchasing power of the population. The recently appointed Minister of Housing Per Bolund has stated that the costs of keeping the tax deduction in place will soar as the interest rates rises and he believes that a phasing out of the deduction will definitely be initialised during the next term. Harry Flam, chairman of The Fiscal Policy Council, warns that a phase out of the tax deduction further increases thresholds already in place for young people to enter the market as they rely on mortgages to a greater extent than the older generation. Flam also says that a more reasonable and fair way to cool the housing market would be to reform the property tax that was effectively removed in 2008.
An issue that’s not being debated in any greater capacity is the capital gains tax of housing transactions, the “Reavinstskatt”, which many believe breaks the normal migration chains and amplifies the housing shortage through ineffective use of the existing housing stock.
The housing market has been cooling off during the last year or so, maybe more clearly in Stockholm than most other places. The housing shortage is still prevalent though and it will pose a great challenge to the new government to sustain a high rate of new construction in this new market climate.