Stefan Löfven may be Europe’s first prime minister brought down by a housing crisis, but he is unlikely to be the last.

Löfven, a social democrat, lost the support of the far left over a proposal to allow landlords to freely set rents for newly-built apartments.

Rents in Sweden are usually negotiated between landlords and tenants’ associations.

Other countries struggle to find the right balance between public and private in housing too. Berlin instituted a citywide rent freeze last year, but it was struck down as unconstitutional by Germany’s highest court. Spain’s central government is challenging a Catalan rent cap. Authorities in Barcelona want to extend a moratorium on evictions that has been in place since the beginning of the COVID-19 pandemic.

But perhaps the best comparison is with the Netherlands, which organizes public housing in much the same way as Sweden.

Liberalization?

The Swedish left argues “liberalization” in housing has gone too far, but from a pro-market perspective Sweden’s “liberal” reforms are underwhelming.

The last major change was in the 1990s, when Carl Bildt, the first center-right prime minister in sixty years, and later foreign minister, pulled government subsidies from municipal housing associations, which still own half of all rental apartments in Sweden, or one-fifth of the total housing stock.

Bildt didn’t lift rent controls, which could have encouraged more construction of rental apartments. Rents must match those of comparable apartments nationwide, so landlords can’t ask a premium for a flat in downtown Gothenburg or Stockholm. Deposits are illegal. Tenants can renew their contracts indefinitely. The European University Institute has calculated that rents would need to rise 70 percent to give developers a 5 percent return on their investment.

Little wonder more homes are built for buyers, who enjoy tax breaks. Houses are taxed at a lower rate than other property and homeowners can deduct the interest they pay on their mortgage from their taxes.

This is also why middle- and high-income renters jump at the opportunity to buy their flat if they can. Evictions are almost unheard of. The result: average waiting times for rent-controlled apartments in Swedish cities exceed ten years.

Imbalance

It’s a similar situation in Dutch cities, for many of the same reasons.

One in three homes in the Netherlands is owned by a housing association. In Amsterdam, the share is one in two. Private rental apartments comprise less than 10 percent of the market.

The imbalance used to be worse. Dutch housing associations have sold about 34,000 properties since 2010, when the center-right liberal party came to power. Almost 600,000 homes have been built in the same period.

As in Sweden, the argument that “liberalization” has caused a housing shortage in the Netherlands — currently 300,000 and estimated to rise to one million over the decade — is unconvincing. Dutch landlords can ask deposits and they have more leeway to set rents. (Although tenants can appeal rent increases they deem unreasonable.) But evictions are rare, and not enough private rental apartments are being added in the Netherlands either.

That in turn makes it difficult to reform public housing. Unlike in Sweden, where everyone can apply for municipal housing, Dutch housing associations maintain an income limit of just over €44,000 per household. But it is only used to keep higher earners out, not to evict tenants once they start making more money. As a result, much of the demand in the private market comes from high earners and expats, so new apartments tend to be luxury apartments.

The liberals favor stricter enforcement of the income ceiling in public housing, to free up apartments for those making less money, but this is resisted by centrist and left-wing parties, which control the government of Amsterdam.

Not enough space

Finally, there’s just not enough space in either country.

The Netherlands is one of the most densely populated countries in the world, preceded only by Bangladesh, Lebanon, South Korea, Taiwan and several island- and microstates.

Sweden is one of the least densely populated nations, but 87 percent of its people live in cities, which cover just 1.5 percent of the land.

There are only so many homes Amsterdam and Stockholm can build within their city limits. Ideally, surrounding municipalities would build more, and public transport links with city centers would be added or expanded, but it is usually in such leafy suburbs that NIMBYism reigns.

No easy solution

The solution is not to get government out of housing altogether. But it should be clear from the above that blaming “the market” isn’t right either. We need to understand how existing policies have distorted the housing market before introducing yet more policies to solve the problems of today.

National governments should:

• Pressure municipalities, especially those of suburbs, to build more;
• Harmonize tax rules for homeowners and renters; and, in Sweden’s case
• Relax rent controls.

The latter will drive up rents in major cities, but that’s the point: not everyone can live in downtown Stockholm. Higher rents would encourage more construction in the city (or conversion to rental apartments) and force some residents out.

We need regional planning to:

• Balance the demand for housing, and the transportation that comes with it, against the need to preserve biodiversity and reduce pollution.

Housing associations, in the Netherlands, should:

• Enforce their own income rules; and
• Sell off more of their apartments.

That would create both more demand and supply in the middle segment of the private rental market.