Swedish housing policy is a case study in how to increase inequality
I’ve written a fair bit about monetary policy on the blog, and I’ve made my opposition to Quantitative Easing (QE) clear on the grounds that it increases inequality, misallocates resources, and can potentially threaten financial stability with the sheer volume of cheap credit it enables and the way it affects the real estate market. This week I want to focus on a case study in how my native Sweden has tried to limit the risks to financial stability and inadvertently exacerbated wealth inequality and made upward social mobility less accessible.
As we collectively bitterly experienced in 2008 a bubble in the housing market can cause serious trouble. As interests fell and QE became widespread the risk of a bubble in housing resurfaced and policymakers had to find a way to stop another housing crash. This was especially important in Sweden where there was a catastrophic real estate crash in the early 90’s which had left deep scars. The solutions was a two-pronged effort to limit excessive borrowing to buy a home. Firstly, a maximum limit on borrowing relative to the price of the home was imposed, making it mandatory for the buyer to have a 15% of the home’s price in cash. Secondly, amortisation became mandatory with a set percentage which needed to be amortised depending on the price of the home and the size of the mortgage compared to the home’s price. If you borrow more than 4,5 times your annual gross income and you borrow 85% of the home’s price you are required to amortise 3% of the home’s value on top of paying interest which makes buying a home an expensive proposition.
The problem with this housing policy is that it makes it incredibly difficult for someone in their early twenties to afford to own a home both in terms of high costs of living and the hurdle of saving up hundreds of thousands of SEK for a down payment. This greatly advantages those who have families who can help with a down payment, and in some ways it subsidises housing for the rich as the less advantaged cannot enter the housing market driving down demand and thus prices. Another problem is that housing is only expensive in the large cities, especially Stockholm, and big cities skews younger and more ethnically diverse than the rest of the country which makes home ownership much more accessible to the old and the white than the rest.
Policymaking is fiendishly difficult as one has to not only figure out what to prioritise but also how one designs effective policy, so while this is certainly meant as a critique of contemporary Swedish housing policy I don’t blame those responsible for their choices, I just lament the regressive wealth distribution profile our social democrat government have chosen. It’s a shame that our politicians have used housing policy to exacerbate wealth inequality instead of combating it.
If you liked this post please share it with a friend or coworker, and consider reading my last post about housing or my predictions for 2020. I'd love to hear your thoughts on the subject, is increased wealth inequality an acceptable price for financial stability? You can reach me on Twitter @ipolecoblog. Also come back next week for a new post.
Written by Karl Johansson
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