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Explaining Gentrification: Real Estate Bubble Trouble in Stockholm

• April 30, 2014 • 3:00 AM

Stockholm, Sweden. (Photo: Tupungato/Shutterstock)

As the problems in Sweden’s capital demonstrate, the issue of housing supply isn’t nearly as critical as that of housing demand.

An influx of global labor (quality of demand) and a supply shortage of housing (quantity of demand) can cause neighborhood gentrification. A third actor on the stage is the real estate bubble. Policy distorts the demand for housing just as it distorts the supply (e.g. zoning restrictions). Today’s case study, Stockholm gentrification:

Developers have battled a list of objections, including concerns about noise pollution from ferry ships and worries that the development would threaten the sanctity of a nearby national park. The municipal organization overseeing the development has had to take its plans all the way to Sweden’s Supreme Court.

“There is a lot of waiting,” said Staffan Lorentz, the project manager for Stockholm Royal Seaport, the municipal organization running the project. “Everything is rejected by someone.”

Partly because of rules governing development, Sweden’s production costs for new housing are the highest in the European Union—and 72% above the average. The result is that construction projects limp along, and international developers for the most part are staying on the sidelines. Meanwhile, the country’s small industry of developers, builders and investors focus primarily on upscale housing where margins are better, largely ignoring the needs of the middle class.

Emphasis added. The passage (and story) starts out with the usual housing supply constraints. Ease the bureaucracy and Stockholm could build its way out of the crisis. Then the reader learns that there is ample supply, for the highest bidders. According to economic geographer Paul Krugman, the average prospective home buyer in Stockholm is a big roller in real estate:

The Swedish media is awash with different theories as to what Sweden’s ever-rising house prices actually mean. The only thing that people have agreed on is low interest rates and lack of supply have forced prices up, which has driven private debt up to 170 percent of disposable income in 2013. The rest of the debate is wide open.

The loudest voices in that debate so far have been Economics Nobel Prize winner Paul Krugman and former Sveriges Riksbank (Sweden’s Central Bank) Deputy Governor Lars Svensson, who both studied at the Massachusetts Institute of Technology in the mid-’70s and were colleagues at Princeton. Krugman contends that Sweden is showing signs of a bubble because of the huge rise in housing prices over the last 13 years, where prices have risen by as much as 300 percent.

At a recent event in Stockholm, Krugman outlined his reasons why he thought Sweden might have issues. “Prices have gone up quite a lot and household debt is quite high. Those are normally the symptoms of a bubble.” However, Krugman does concedes [sic] that there might be special factors that mitigate what would normally constitute a bubble, but also says that countries that have claimed such mitigating factors in the past and were adamant that there was no bubble have in fact been wrong.

Whether Krugman is right or wrong is hotly contested. The latest has real estate prices getting worse, not better. Experts in Sweden are torn:

The debate over a potential bubble is a vindication for Boverket’s Hansson, a soft-spoken researcher who toils in a tiny office on Norrlandsgatan, a boutique-lined Stockholm street. Hansson became troubled by the rapid increase in house prices in 2007.

“The real value of owner-occupied houses in Sweden had been stagnant for almost 50 years,” he says. Suddenly, prices jumped 80 percent from 2000, with the going rate for apartments rocketing up almost 150 percent. “Something very strange was going on,” he says.

Hansson began publicly warning of danger in 2008. Many bankers disagreed with him then — and still do.

“Our basic view is that there is no bubble,” says Gregori Karamouzis, head of investor relations at Swedbank, Sweden’s largest mortgage lender.

Karamouzis says high prices are due to a lack of supply: Unlike recent housing bubbles in the U.S. and Spain, there has been no speculative construction in Sweden in the past two decades.

Has monetary policy been too loose? Have banks been reckless with mortgage lending? Beyond supply restrictions, both should be on the table regarding gentrification. A final additional consideration is tax reform:

Unlike other European capitals, Stockholm’s real-estate market has seen virtually uninterrupted growth throughout the recession.

Credit the city’s beauty and culture, as well as its low mortgage and crime rates.

But there is another main draw attracting buyers to Stockholm—well timed changes in Sweden’s tax system that benefit the rich.

In 2005 the country abolished inheritance tax. The wealth tax on personal holdings was nixed in 2007. Just this summer, Ingvar Kamprad, the aging billionaire founder of IKEA, announced the decision to return home after living in the tax haven of Switzerland since the 1970s.

Stockholm’s surging real-estate market over the past six years has put the city in Europe’s premier league. Price data from Svensk Mäklarstatistik (SM), which monitors property prices in Sweden, shows consistent price growth since 1996, marred only by a slight slowdown in 2007 and 2008, a period when prices across much of the rest of Europe collapsed.

As in other global capitals, the number of foreign buyers in Stockholm is increasing, albeit from a low base. According to the latest figures, 6.3% of homes in Sweden are foreign-owned, mostly by buyers from neighboring Scandinavian nations rather than Russian and Chinese oligarchs.

Whacking the inheritance and wealth taxes correlates with increased demand for housing. In London, the gentrified blame Russian oligarchs. In New York City, Chinese investors (as opposed to Russian oligarchs) are increasingly scapegoated. Where globalization and residential neighborhoods intersect, home values and rents soar. Echoing the focus on the supply of upscale housing in Stockholm, the allure of Boston:

[Boston Mayor Martin Walsh] said it can be challenging to create the kind of housing he envisions. Two important conditions must be met, he said: Banks have to be comfortable lending the money and developers would need stability in their relationship with the city.

“It’s a very tight margin for developers because the return on investment is not as great” as from high-end waterfront projects, he said.

Same gentrification problem, different continent and policy geography. From evil oligarchs to nouveau riche techies, cities around the world have a demand crisis. The microeconomics of housing supply pale in comparison to the macroeconomics of housing demand.

Jim Russell

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