Front Page Titles (by Subject) Rent Control in Sweden: Lessons from a Thirty Year Old Socio-economic Experiment, Sven Rydenfelt - Toward Liberty: Essays in Honor of Ludwig von Mises, vol. 1
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Rent Control in Sweden: Lessons from a Thirty Year Old Socio-economic Experiment, Sven Rydenfelt - Friedrich August von Hayek, Toward Liberty: Essays in Honor of Ludwig von Mises, vol. 1 
Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday, September 29, 1971, vol. 1, ed. F.A. Hayek, Henry Hazlitt, Leonrad R. Read, Gustavo Velasco, and F.A. Harper (Menlo Park: Institute for Humane Studies, 1971).
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Rent Control in Sweden: Lessons from a Thirty Year Old Socio-economic Experiment
|Table 1. Rental Costs and Wages 1939—1950|
Sources: “Rental costs” include rents, fuel and light according to the cost of living index of the Board of Social Welfare. “Wages” are wages paid to workers in industry, communications, public services, etc. according to the wage statistics of the Board of Social Welfare.
In spite of all good intentions to abolish rent control soon after the war, we are still living with it in 1971, and it will remain through 1972 when its 30-year anniversary can be celebrated. The moral of this story is that a rent control is easy to introduce but hard to get rid of.
A Housing Shortage Develops
For any person with an education in economics it seems self-evident that a price control like the Swedish rent control must lead to a demand surplus, i.e. a housing shortage. For a long period the general public was more inclined to believe that the shortage was a result of the abnormal situation created by the war, and this even in a non-participating country like Sweden. The defenders of rent control, of course, were quick to adopt this spontaneous opinion of the general public. All attempts from critics to point out the rent control as the villain in the housing drama were firmly rejected.
The foremost defender of rent control in Sweden was for many years Alf Johansson, Director General of the Royal Board of Housing, a man named “the father of the Swedish housing policy.” In an article in 1948 he described the development of the housing shortage as follows: “An acute shortage of dwellings developed already in 1941. In the following year the shortage was general and reached approximately 50,000 dwellings in the urban communities, i.e. somewhat more than the house contruction during a boom year.”2
In a lecture Alf Johansson described the situation in 1948 as follows: “We have the same shortage as at the end of the war, but the situation has not deteriorated in spite of a very great increase in demand.”3
According to Alf Johansson's free-hand drawing the housing shortage in Sweden had already reached its peak in 1942—50,000 dwellings—and remained practically unchanged in following years.
The real development was quite different as exposed in the reports of the public dwelling exchange offices. Only Malmö—the third largest city—had an exchange of this kind during the first war years, and its reports provide a detailed account of the development.
|Table 2. The Development of Housing Shortage in Malmö|
|Apartments to let||Remaining Applicants||Total Without Own Dwellings|
Source: Reports of the Dwelling Exchange Office. In 1946 nontopical applications were cleared away from the records.
Stockholm, the capital city of Sweden, got a Dwelling Exchange Office for the first time in 1947. The reports from this exchange give an illuminating picture of a rapidly deteriorating situation in the housing market. Families with two children which in 1950 obtained a dwelling through the Exchange Office, had had an average waiting period of 9 months. The development during the following years were as follows (in months):
Conclusion: The defenders of the rent control, of course, eagerly added fuel to the popular opinion, according to which the housing shortage was a product of the war. This opinion does not, however, stand a confrontation with reality. The Malmö data clearly indicate that the shortage during the war years was insignificant compared to the shortage that developed after the war. It was only in the postwar years that the housing shortage assumed such proportions that it became the most serious social problem of the country.
Dwellings and Population
The rapid increase of the shortage volume after 1945 soon ripened into a situation which no longer could be attributed to the abnormal conditions during the war years. New explanations were needed. Nearest within reach for the general public was the assumption that the shortage was a consequence of an insufficient construction activity. If population increased at a faster rate than the number of dwellings, and a shortage developed, people thought and assumed that construction—without testing the assumption—was lagging behind. Among the defenders of the rent control this “demographical” explanation for a long time became the most cheered one.
They were anxious to stress that special consideration must be given to the increased frequency of marriages after 1940, since most dwellings are occupied by married couples. The following quotation from an article by Alf Johansson is significant: “During 1945–46 the number of marriages in the cities was 50 percent higher than the average for the 1930's. Under such conditions it is not difficult to explain why the addition of new dwellings, even though large, has been absorbed and the shortage left unaltered.”4
Let us confront this explanatory model with statistical data concerning dwellings and population as shown in table 3.
|Table 3. Dwellings and Population in Sweden|
|Number of Dwellings|
|Number of Dwellings||Total Population||Married Couples||per 100 Inhabitants||per 100 Marr Cpl|
Sources: Number of dwellings in 1940 according to official estimates in SOU 1945: 63, p 226; data for other years according to official censuses.
During the war years housing construction was relatively small, but still large enough to cause an increase in the number of dwellings per 100 inhabitants. The number of dwellings per 100 married couples, however, declined slightly during this period—from 147 to 144—due to the exceptionally high marriage rate during the war years. During the years after 1945, when the great shortage developed, the number of dwellings in Sweden increased at a considerably faster rate than both the total population and the number of married couples.
We have already been forced to write off an explanatory model according to which the housing shortage should have been a crises product from the war years. As we have now found the “demographic” model does not stand the test either.
Model and Forecast
Human life is a walk into a future filled with darkness, dangers and uncertainty. The meaning of knowledge is to illuminate—like a searchlight—the road in front of us.
Therefore, the touchstone of all knowledge is its ability to anticipate the future—the forecast. When our astronomers hundreds of years ahead can forecast the moment for an eclipse of the sun, they prove that their conception of reality, their “model” of the universe is a good one.
The famous sociologist Florian Znaniecki has expressed this thesis in the following way: “Foresight of the future is the most conclusive test of the validity of scientific theories, a test perfected in experimental science. ‘Prediction’ is thus the essential link between theory and practice.”5
For all human work and strivings, forecasts are of fundamental importance. If you hope to achieve the results you want to achieve, you must be able to anticipate the consequences of your actions. In order to be able to do correct forecasts you must possess knowledge. Without knowledge—and without correct forecasts—you will grope in the dark like a blind man.
But the need for knowledge and forecasts about the society must be far greater in a centrally directed “planned” economy than in an economy of liberal type, a market economy. The British economist Roy Harrod has formulated this conclusion in the following words: “Lack of economic comprehension may not matter so much if the system is largely self-working. But when the working of the machine necessitates the constant vigilance of the supervisor, and the supervisor does not understand the mechanism, there is bound to be serious trouble.”6
Judging from different forecasts the decision makers behind the Swedish rent control had a highly imperfect knowledge concerning the structure and function of the housing market. For several years they held the opinion that the housing shortage was a war product, and for a great many years later on, they thought it to be a product of demographical changes. From such models of the housing market they made very optimistic forecasts, according to which the shortage after the end of the war would have quickly disappeared.
The following forecast shows how the foremost Swedish official expert on housing policy judged the future development: “The liquidation of the housing market shortage is a one-time affair, which ought to be accomplished in a relatively short time, however, not over a period of one year.”7
The road of rent control and housing policy in Sweden is strewn with the whitened bones of a series of erroneous forecasts.
A forecast of an entirely different quality was published by Professor Eli F. Heckscher, the Swedish nestor at that time in economic history and economics: “It is probably a general opinion that the housing shortage is due to insufficient construction activity. But this is, by and large, an enormous mistake. In a free housing market no shortage would exist at the present rate of construction. On the other hand no rate of construction activity can eliminate the shortage under the present order. It is like the tub of the Danaids, from which water was constantly flowing out at a faster rate than it could be poured in.”8
A forecast of similar kind had been published by the author of this essay already a few months earlier: “The cause of the housing shortage is to be found entirely on the demand side. As a consequence of the rent control and the relative reduction of the rent—the manipulated low price—the demand has increased to such an extent that an ever widening gap between supply and demand has developed in spite of the high level of construction activity. Our great mistake is that we always seek the cause of a shortage on the supply side, while it as frequently is to be found on the demand side. The housing shortage will be our companion for ever lest we prevent the demand from running ahead of production.”9
It will be convenient to conclude this section with a now classical statement by Frank H. Knight, the “grand old man” of the Chicago economists: “If educated people can't or won't see that fixing a price below the market level inevitably creates a ‘shortage’ (and one above a ‘surplus’) it is hard to believe in the usefulness of telling them anything whatever, in this field of discourse.”10
Single Persons Invade the Housing Market
You need not eat the whole egg to feel it is rotten.
As indicated in table 3 the number of dwellings in Sweden during the period 1940–65 showed a net increase of 915,000, while at the same time the number of married couples increased by only 540,000. Even if every married couple had obtained a dwelling of their own, 375,000 dwellings would have been available for the need of the other groups. Would not this have been sufficient?
Which are those groups in the society that have increased their consumption of dwellings to such an extent that a serious shortage has appeared?
There are three groups of consumers in the housing market: married couples, previously married persons (widows, widowers, and divorced) and unmarried adults (20 years or more). Table 4 shows the size of each group at various years and the percentage in each group which lived in dwellings (homes or apartments) of their own.
|Table 4. Number of Persons by Groups and Percentages Holding Dwellings of Their Own.|
|Married Couples||%||Previously Married||%||Unmarried Adults||%|
Source: The official housing and population censuses.
All housing censuses indicate that married couples with few exceptions always have acquired dwellings of their own. But it happens—also in a free housing market—that, e.g., young married couples live with their parents for a while.
Also the majority of the group of previously married resided in dwellings of their own already in 1940. Their share has increased by only 5% from 75 to 80%.
The largest changes have occurred in the group of unmarried adults, where in 1940 only one in four held a dwelling of his own. A quarter of a century later more than half lived in this way.
Actually the supply of dwellings has been greatly improved for the group of unmarried adults during the period concerned. In table 5 this is clearly evidenced.
|Table 5. Persons Without a Dwelling of Their Own (in absolute and relative numbers).|
|Married Couples||%||Previously Married||%||Unmarried Adults||%|
Sources: The official housing and population censuses.
As regards the distribution of the dwellings the big changes have occurred within the group of unmarried adults. In 1940 and 1945 more than one million of the members in this group lacked dwellings of their own. The reason why the housing shortage—the demand surplus—was relatively small as late as in 1945 in spite of this enormous demand reserve was that only a small part of these persons were actively seeking dwellings of their own. They lived—and were satisfied to live—with their parents, or, they rented furnished rooms.
The explanation of the housing shortage must be sought among the group of unmarried adults, in the fact that the great majority of this group from the beginning passively accepted living without dwellings of their own. This majority later on successively was transformed into active dwelling seekers that invaded the housing market and with great energy and success hunted up and occupied dwellings. As indicated in table 4 the share of residents with their own dwellings in this group has increased from 23 percent in 1940 to 52 percent in 1965. This strongly increased demand for dwellings means that this group in 1965 occupied 311,000 more dwellings than it should have if only 23 percent—as in 1940—had resided in dwellings of their own.
The number of dwellings in Sweden has during the period 1940–1965 increased by a net amount of 915,000. More than a third of the increase has thus been disposed of exclusively for the purpose of satisfying the added demand of the unmarried adults.
Why this violent increase in the appetite of single persons for private dwellings?
Because the normal relation between income and rents has been entirely upset by the rent control. In the period 1942–1970 income doubled many times while rental costs somewhat more than doubled. The distortion is particularly marked as regards income and rents in apartment houses built prior to 1942.
The fact that the share of persons with dwellings of their own in the unmarried adult group increased from 23 percent in 1940 to 52 percent in 1965 by no means implies that the dwelling appetite of this group has been satisfied. By far the longest queue at our housing exchange offices is still made up of unmarried adults. If the supply of dwellings had been sufficient to meet demand the share of residents belonging to this group in 1965 would have increased far above 52 percent.
Single Persons Invade the Housing Market The Price Elasticity of Dwelling Demand
Would not, even in the absence of rent control, a strong reduction in the rent-income ratio have occurred and the demand for dwellings have increased as a consequence?
Certainly. But the demand increase would have been less accentuated and, in particular, it would have been less in the unmarried adult group.
This depends on the price elasticity of demand. According to common experience the price and income elasticity of demand for dwellings is low as is the case for necessities like food and clothing. The supporters of rent control have attempted to build up a defence on this basis. If the demand for dwellings has a low elasticity a relative reduction in the rent level could not have increased the demand to any great extent.
This general reasoning, however, is valid only as regards the married and previously married groups. For members of these groups private dwellings are a necessity and, as a result, the price and income elasticity is low.
The situation is different as regards the group of unmarried adults. For the majority in this group a private dwelling is some-what of a luxury, a non-necessity, which may be desirable but also dispensable without great inconvenience. Young people are often perplexed whether to go on living cheaply and comfortably with their parents or to move out and acquire a dwelling of their own.
The fact that the unmarried adults always to a lesser extent than the married have acquired dwellings of their own is not due to lower income. If a comparison is made with families with support obligations—number of persons which must live on an income—the income of the unmarried has been fully on the level with that of the married. But the unmarried demanded dwellings to a lesser extent because they assigned a higher priority to other things—clothing, amusements, travels, education, etc.
For the majority of the unmarried adults a dwelling is a relatively dispensable commodity and the demand for a commodity of this kind is normally highly sensitive to changes in price or income. The strong relative reduction in rents resulting from the rent control has, for this reason, greatly stimulated the dwelling demand of the unmarried adults.
According to table 5 more than a million unmarried adults lacked dwellings of their own in 1945, a very large potential demand reserve which the rent control has activated into seekers of their own dwellings. It is the invasion of this million in the housing market which has created a demand which, by far, has exceeded supply.
Housing Production Gross and Net
In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing.
It is well known and documented that rent control results in poorer maintenance, less renovations and modernizations and, therefore, in the long run to a serious deterioration in the quality of the dwellings.
In spite of all, rent control in Sweden has been applied with some more moderation than in many other countries—certain clearly motivated rent increases have been permitted. Because of this the defenders of the control have constantly contended that deterioration and slum development have not occurred. This argument is not correct.
As a result of the control and lower rental income the ability of the owners to keep up the apartment houses has declined. Especially, their interest for such upkeep which is motivated from an estetic or comfort point of view has dwindled.
In a free market there is always a surplus of dwellings and flats to let. If the owner in such a market does not keep his property in good condition he runs the risk of losing his tenants and being left with empty flats and losses in rental income.
In a controlled market with severe shortages the owner is not under such compulsion. No matter how badly maintained his property is, there are always long queues of homeless people who are happy to rent his dreary and poor flats.
Since no economic incentives stimulate the owners to repair, even such upkeep is dropped which in the long run is necessary in order to prevent serious quality deterioration—slum development.
A development of this kind is difficult to catch and describe in quantitative terms. However, thanks to the detailed Swedish statistics concerning the number of new dwellings and the periodic housing censuses an important aspect of the development referred to above can be caught in figures and documented. These data can be studied in table 6.
|Table 6. Gross and Net Housing Production|
|New Built Dwellings a||Stock of Dwellings Net Increase b||“Disappeared” Dwellings c||“Loss” c/a|
Sources: Housing Construction (Swedish Official Statistics) and the housing censuses.
What is striking in table 6 is the rapid increase in the “loss.” During the period 1941–45 the net increase in the stock of dwellings was about 80 percent of the new production and the “loss” only 20 percent. During the last period 1961–65 the net addition was hardly 50 percent and the “loss” more than 50 percent.
The “loss” has in recent years assumed such proportions that the authorities have appointed a special committee with instructions to try to explain “the mystery with the disappearred dwellings.”
If the natural and necessary incentives of producing dwelling by private enterprise—the anticipation of profits—are destroyed by regulations, and if it is made more profitable for the owner of apartment houses to let his dwellings for commercial purposes, then it is not possible to prevent—in spite of prohibitions—a conversion of dwellings to offices, stockrooms or shops. If both letting and maintenance become unprofitable, they will disappear.
It is of no avail how much we pour into the dwelling bag if we do not patch up the holes of the bag. It is of no avail that we since 1945 built more dwellings in Sweden than in any other country (according to the Statistical Yearbook of U. N.). It is of no avail that we in later years have built more than 100,000 dwellings per year, when the “loss” at the same time probably has been 60,000. A construction of 60,000 dwellings and a loss of 20,000, would have given us the same net addition. The present system obviously implies an enormous waste of resources.
Questions and Answers about Rent Control
People complain that housing policy has become so complicated that they no longer understand it. But just imagine their complaints if they had understood it.
1. Is it really true that the abolishment of rent control would create a balance on the housing market? Is the problem so simple?
—Yes, certainly. According to a general experience the price in a free market automatically creates a balance between supply and demand. The consumption in Sweden of automobiles, TV-sets, summer houses and foreign trips has increased at a much faster rate than the consumption of dwellings. Yet, no sign of shortage have been noticed on these free markets.
That this fact can perplex even a Swedish Minister of Finance is evidenced by the following question: “How is it possible that we can solve the economic problems when we wish to acquire a car or a TV-set but have such great difficulties with a need which is so morally well founded as that of a dwelling.”12
2. According to the critics rent control creates a shortage and a socially unacceptable distribution of the dwellings. Unmarried persons with small needs for dwellings of their own frequently knock out married couples and families with strong needs. But is not such a distribution even more characteristic for a free market, where wealthy persons with small needs knock out poor people with strong needs?
—This objection can be met with a reference to the housing censuses which were undertaken in 1940 in the five cities of Norrköping, västeras, Gävle, Kalmar and Kristianstad (see Sociala medd 3/1951). These censuses show how the dwellings available at that time—when the market was free—were distributed among the several groups of residents.
At that time only 25 percent of the unmarried adults—with the smallest need—resided in dwellings of their own, while the share for married people—with the strongest need—was 97 percent, and for previously married—with the next strongest need—78 percent.
If omniscient housing distribution councils had handled the distribution with social justice as the criteria, the figures should reasonably have been about the same. The distribution mechanism of the free market is perhaps not so crazy.
3. Would not the people in the old centrally located residential areas be unjustly hit if the rent control were abolished?
—No, these people have been privileged for decades. Abolishment of the privileges means a change but no unjustice. The wasteful disposition of the housing space in these areas is the principle cause of the housing shortage. A better economy with this space would have given room to the homeless as well.
4. Would not rent increases mean a standard reduction by compelling people to crowd up in smaller and cheaper apartments?
—The housing shortage has developed because certain groups, privileged by the rent control, have been able to increase their consumption of dwellings more than permitted by the supply. A return to a free market would compel these privileged to give up some of their “luxury space,” and as a result, dwellings would be made available for the homeless. A free housing market, therefore, would mean a general reduction for those who are now privileged, but at the same time a very great general increase for those who now lack dwellings of their own. The housing shortage is essentially a distribution problem.
5. In a free housing market an available reserve of empty flats always develops—approximately 2 percent of the total number of dwellings. Does not an empty reserve of this magnitude—in Sweden about 40,000 dwellings—mean an enormous waste?
—On the contrary, it is the absence of a reserve of this kind which is wasteful, because it prevents a free mobility and a free choice of the citizens. If we had had the same situation in our shops, their shelves would have been empty. The customers would have had to form a line, note their wishes on lists and then wait for years on delivery.
6. Would not an abolishment of the rent control result in unjustified profits for the property owners?
—The possibility of profits is the driving force behind all private enterprise. Normal development and expansion in the private ownership and free enterprise areas is braked and prevented to the same extent as the possibilities of making profits are curtailed.
The profits are in practice to a great extent reinvested and function as a dynamic force for development and expansion. As a result of the official attempts in Sweden to prevent private profits in the housing area, self-financing in this sector has gradually dwindled. The share of self-financing had in 1960 declined to 25 percent and in 1970 to 10 percent. It has been possible to provide the housing sector with necessary capital only by means of compulsory measures by the Government. The sector has become parasitic and can manage financially only by drawing capital from other sources.
7. Are not all plans of abolishing rent control unrealistic as long as the housing shortage persists? Must not this shortage first be eliminated by means of an increased volume of housing construction?
—This reasoning can in our opinion only be compared with the thought that a robbery epidemic must be fought by all available means. However, with one exception: the thieves must not be searched for or caught!
Rent Control—Dream and Reality
Rent control has in certain western countries constituted, maybe, the worst examples of poor planning by Governments lacking courage and vision.
1. “It is not for single persons that we have created our housing policy but in order to give the families better dwellings.”
The unmarried adults have always been given the opportunity to invade the housing market and occupy a gradually increasing share of the dwellings. At the same time tens of thousands of families with children have not been able to find dwellings of their own.
A free housing market always has a surplus - an available reserve of empty apartments. We call such a market a buyer's market because the buyer has the upper hand. The normal situation in such a market can be said to be that a hundred house owners compete for each tenant. In such a market even a poor family has opportunities of finding and renting a flat. According to a housing census from the free market of 1940 (see above) 97 percent of all married couples had dwellings of their own at that time. In such a market landlords are often put in a choice situation with only two alternatives: to leave apartments empty or to accept poor families with children as tenants. Under such conditions the last is often chosen.
A deficit market, on the other hand, is always a seller's market. The normal situation in the present Swedish housing market is that a hundred homeless potential tenants compete for every vacant dwelling. These hundred include both families with children and single persons. Heavily squeezed between the demands of the tenants for repairs on the one hand and the reduced rental income due to the rent control, it is understandable if the landlords in many cases show a preference for single persons. Wear and tear—and repair costs—will be smaller with single tenants than with families.
2. “The aim of our housing policy is to favour the many poor and small people, not the few rich.”
As wealth and income grow people demand more living space. Therefore, the official housing experts believed that the demand for small apartments with 1–2 rooms would gradually decline. According to one of the several false forecasts a growing surplus of such dwellings would develop. Actually the shortage has always been most pronounced as regards small apartments. The authorities, however, have looked upon small apartments with aversion and contempt as something unworthy of the wealthy Swedish welfare state. They have, therefore, directed the construction towards large apartments. While the share of newly built dwellings with 4 rooms or more was 14 percent in 1941–45, this share had been raised to 37 percent in 1966.
As a consequence of this policy, surpluses of large—and expensive—dwellings are to be found everywhere in Sweden today. Only high income families can afford to rent these dwellings. At the same time there is a crying need for smaller apartments which families with limited income can afford. Judging from the practical results one gets the impression that the policies pursued have had a primary aim to favour the rich and few, not the poor and small people.
3. “In a free housing market the distribution of dwellings is determined by income. Through our ‘social housing policy’ we have attempted to invalidate this rule. Not the volume of the wallet but the strength of the need shall decide the allocation of dwellings.”
Never before have people with lean wallets found themselves in so weak and inferior a position as in the Swedish housing market today. He who can only afford to rent a small dwelling must be prepared to wait for a very long time. The shortage of such dwellings is so crying and the queues so long that the waiting time normally amounts to several years. Even families with children have had to wait for years on dwellings of their own.
Fat wallets have, of course, always given advantages on the Swedish housing market, but never such enormous advantages as today. The rich can practically at once solve his housing problem. He can buy a house of his own. Or he can become part-owner of a cooperatively built and owned property requiring a high investment in cash. Or he can rent a newly built large and expensive flat (available in surplus). And, finally, he has the opportunity of acquiring an apartment in the black market (always possible but very expensive).
Human Action. A Treatise on Economics. Yale Univ. Press. New Haven 1949, p 758.
Svensk sparbankstidskrift 2/1948.
From the minutes kept at the Congress of the Swedish Real Estate Owners' Association in Malmö.
Svensk sparbankstidskrift 2/1948.
American Journal of Sociology, May 1945, p 516.
World Review, Dec. 1951, p 13.
Alf Johansson in the book “Ett genombrott” (a dedication volume in honour of Gustav Möller, Minister of Social Affairs, 1944).
Dagens Nyheter, May 15, 1948.
Handelstidningen, Dec. 16, 1947.
The American Economic Review, Dec 1949, p 1274.
In the book “The Political Economy of the New Left” (1970). Lindbeck, who is professor in economics in Stockholm is—like Oskar Lange and Abba P. Lerner—both socialist and (partly) supporter of a market economy.
Gunnar Strang at the Conference of Riksbyggen (a construction company) in June 1958.
Statement in the 1st Chamber of the Parliament, January 20, 1951. At that time Möller was Minister of Social Affairs and had, within the Government, the principal responsibility for the housing policy.