Swedish Prime Minister Stefan Lofven lost a confidence vote in parliament on Monday over plans to ease rent restrictions on new-build houses, leaving the country facing potentially months of uncertainty until a new government can be formed.
The Nordic country's housing market is dysfunctional, but attempts at reform have proven difficult, running into fierce political opposition.
Sweden has not built enough rental accommodation for decades, meaning long queues for rent-controlled housing. The average waiting time was nine years in 2020; 70% of local authorities reported a housing shortage in 2020.
Critics argue that strict rent controls discourage developers from building and individuals from renting out vacant properties. Many tenants are forced to take "black market" contracts at much higher prices and with no legal rights.
Home prices have risen around 18% over the last year alone
Generous mortgage tax breaks encourage households to buy property and the combination has forced up house prices and household borrowing to levels that threaten the economy, according to the central bank, among others. Home prices have risen around 18 per cent over the last year alone, according to Valueguard's HOX real estate index.
The centre-left government had agreed in principle with two small centre-right parties that keep it in power to let property owners negotiate rent directly with individual tenants on new-build apartments, hoping to encourage developers to build more.
Currently, rent increases are set in yearly collective bargaining rounds between property-owners and the Tenant's Association, limiting hikes.
The government says the effects of the proposed reform would be very small and Sweden's 3 million sitting tenants would not see rents rise. It says new-builds make up around 1% of the outstanding rental housing stock.
The Left Party, which triggered the government crisis, says the reform is the thin end of the wedge and would lead to big rent rises for tenants. It says rent controls are key elements in the "Swedish Model" that places equality and social solidarity above private profit.
The Tenants' Association says rents would rise by as much as 50% if they were set by the market.
Would rental reform help meet the housing crisis?
The pace of building has picked up in recent years, but Sweden's National Board of Housing reckons, for example, that the capital Stockholm needs to build 25,000-30,000 new homes a year over the next decade to meet the shortfall.
Analysts believe a range of measures is needed, including freeing up the rental market, phasing out mortgage tax relief, tightening borrowing rules, streamlining planning regulations, reducing building costs and freeing up building land.
Ultra-low interest rates - likely here to stay for the foreseeable future - have added to the problem.
Addressing a dysfunctional housing market will take years and many suggestions would run into political difficulties.
The central bank will have to be careful in raising rates in order not to trigger a housing market crash that would spill over into the wider financial system.
What happens now?
Prime Minister Lofven could survive as PM if the Centre Party agrees to drop rent reform. But it is a key policy in a deal between the Centre and Liberal parties and Lofven's Social Democrats.
Lofven could call a new election, but opinion polls suggest that a national vote might not result in a clear victory for either the centre-left or centre-right blocs.
With politics deadlocked, major reforms of the housing market are unlikely whichever bloc forms the next government. A centre-right majority government, however, would make rent reform more likely as the main parties support the move. - Reuters