New reforms to decrease the risk of a housing asset bubble in ESPN Flash Report 2016/57 JOHAN FRITZELL AND JOAKIM PALME – EUROPEAN SOCIAL POLICY NETWORK JULY 2016

Description these dramatic changes do not imply that relative housing expenditure, as During the 2000s, house prices and Swedish house part of disposable income, has household debts increased dramatically prices and increased. Instead, the opposite tends to in Sweden (in 2015, the ratio of household debts be the case, due to falling interest rates household debts to disposable income have increased and the relative ease with which was 177%; source: Statistics Sweden). households have been able to borrow dramatically over a This evolution has been a serious money without any amortisation long period, concern for a long time, and there is an requirements. increasing the risk obvious risk that the housing asset of producing a bubble may burst. In fact, in 2009 a In the new legislation implemented on 1 housing bubble. European Central Bank working paper June 2016, the Swedish parliament New legislation was already noted that the price boom in decided, in short, that all new mortgage implemented in Sweden beginning in 1997 was the loans must have a mortgage plan and June 2016, making longest constant increase of housing that 2% of the loan should be amortised amortisation prices among 18 OECD countries. Since down to 70% of the housing value, and mandatory for all then the trend has continued at an 1% of the loan amortised down to 50% new mortgage increasing speed. More recently, this has of the value. Households with already loans. Further also been noted at international level by existing loans are not affected. policy reforms, with both the OECD (2016) and the European different Commission (2016). Moreover, the only Outlook & Commentary distributional sharp EU Council of Ministers’ consequences, are recommendation to Sweden in 2016, It is highly uncertain that the new repeated for several years, was that also being legislation will have the stabilising Sweden should take action to address discussed. impact sought by the Swedish the rise in household debt. Structurally, government, the Swedish parliament and Sweden has a severe housing shortage the EU Council of Ministers. First, it has due to underproduction of new dwellings, had unintended negative short-term combined with population growth due to effects, as households have increased net immigration. A recent report from their debts before the entry into force of the National Board of Housing, Building the new legislation. Second, this and Planning estimates that over the discussion has been on-going in Sweden next ten years 88 000 new dwellings will LEGAL NOTICE for more than a year, and an earlier This document has been be needed yearly, whereas actual attempt was stopped because of prepared for the European numbers over the period 2012-2016 uncertainty surrounding the legal Commission. However, it varied between 25,000 and 40,000. reflects the views only of mandate to impose such a rule. Thus, the authors, and the The Figure on the next page shows the this change has been foreseen for a long Commission cannot be marked increase in housing prices, set time, which has meant that households held responsible for any use which may be made of against disposable income. Interestingly and, in particular, banks, have already the information contained enough, and definitely part of the story, started to implement a system with therein. amortisation.

Price changes for condominiums in the three larger Swedish urban areas, 2000-2015, and changes of mean equivalent disposable income (EDI), 2000-2013 (mean EDI 2013: 216 Further reading 800 SEK, around 22 800 EUR). Index 2000=100. Agnello, L. and L. Schuknecht (2009), “Booms and busts in housing markets: determinants and implications”. European Central Bank Working Paper No. 1071. Englund, P (2016), En mer neutral kapitalbeskattning [A more neutral taxation of capital]. Rapport till Finanspolitiska rådet 2016/3. The Swedish Fiscal Policy Council. European Commission (2016), “Country Report Sweden 2016”, Commission Staff Working Document, Brussels 26.2.2016. National Board of Housing, Building and Planning [Boverket] (2016) Reviderad prognos över behovet av nya bostäder.

Source: Statistics Sweden OECD (2016), “Sweden” in OECD Economic Outlook, Issue 1, OECD Publishing, Paris From a social policy perspective, it macroeconomic, but also specific Author is important to stress that the new distributional consequences. legislation has distributional Analyses carried out for the Johan Fritzell, Karolinska Institutet implications. In practice, it means Swedish Fiscal Policy Council and University, and that many households, in have, not surprisingly, found that Joakim Palme, particular younger ones, may find a change in the property tax it even more difficult than system would primarily hit the previously to enter the housing upper income groups (Englund, market. For those on a lower 2016). The distributional income, there are ample consequence of limiting the tax possibilities today to borrow deductibility of mortgage was age money in the less “official” part of dependent: progressive effects for the financial system, but this younger households but not for involves much higher interest older ones. The problem from a rates. The legislation might political perspective is that any therefore, if anything, foster even discussed reform needs to be higher residential segregation and negotiated and agreed upon also have negative distributional by opposition parties since they effects. are likely to be unpopular among voters. Given that many economic policy analysts believe that the new While there appears to have been legislation is “not enough” to some short-term effect of the new stabilise the unbalanced housing legislation on housing prices, it is markets, several additional policy unclear if this is a lasting effect changes are already on the table since the decline was due to a for discussion. Three reforms are strong short-term increase in most often discussed: to increase supply. Much stronger reforms are property taxes; to remove or at needed to increase the stability of least limit the tax deductibility of the housing market. More interest payments; and to fundamentally, to lower the risk of introduce a debt ceiling related to creating a financial bubble and to the disposable income of the reduce negative distributional household. Again, it is important aspects, the supply of housing to stress that each of these must increase. reforms would have not only

The Flash Reports are produced by the European Social Policy Network (ESPN) established in 2014 to provide the European Commission with independent information, analysis and expertise on social policies in 35 European countries. The topics covered are identified by ESPN experts in the light of significant developments in their countries, or in some cases suggested by the Commission or the Flash Reports’ editorial team (Eric Marlier, Slavina Spasova and Bart Vanhercke). The ESPN is managed by LISER (Luxembourg Institute of Socio-Economic Research), APPLICA and the OSE (European Social Observatory). More information on the ESPN: http://ec.europa.eu/social/main.jsp?catId=1135&langId=en .