Developments in Swedish Rental Housing: Unanticipated Consequences of Public Municipal Housing Companies Act 2011.

• Author: Lindbergh, Lars

INTRODUCTION

"When you come to a fork in the road, take it." (1) Sweden has placed a fork in the road travelled by its Municipal Housing Companies. Choices have had to be made and these choices have had consequences--sometimes unanticipated. Previously, we have reported on a number of aspects of public housing in Sweden (Lindbergh et al., 2018, 2017, 2016, 2006, 2004). The relevance of these papers is that the Swedish public housing system is of international interest insofar as it has avoided some of the problems associated with social housing across Europe and the U.S. That is, public housing under Swedish policy is universally accessible and allowances are not made by income level, but rather the need for housing. Nevertheless, in July 2002, the European Property Federation lodged a complaint with the European Commission, objecting to the Swedish practice of allocating state aid to the housing of "well-off people" (cf. Czischke, 2014, pp. 338-339). After a State inquiry and significant debate, the Swedish parliament abolished public service compensation for municipal housing companies in order to maintain the principle of universal access. The Municipal Housing Act, which entered into force on 1 January 2011, liberalized the sector and set out the objectives and ground rules for public housing companies. The State's aim was to promote public benefits and the supply of housing for all kinds of people (still) and/but Municipal Public Housing Companies needed to operate under "business-like principles." Under the new legal framework, public companies should charge market rents, including a certain profit margin. Furthermore, municipalities should require a market rate of return on investment, reflecting industry practice and risk level.

The study has been continued. In the promulgation of PMHCA 2011, it was not explicitly noted, but undoubtedly assumed, by legislators that the municipal sector of housing would proceed much as before. That is, municipalities would continue to promote public benefits and the supply of housing for all kinds of people. The only difference would be the "business-like" addition to activities. To be sure adjustments were, of course, anticipated, but Swedish residents would continue to be largely content with their housing system. The European Property Federation and the European Commission, however, would be off the State's back. As is frequently the case in examples of New Public Management (NPM) applications, however, there can be unexpected results. In the Swedish example, one change had to do with the relationship between public and private housing provision. Until PMHC 2011, rents were negotiated between the local Union of Tenants and MHCs, which were also binding upon the private sector and thus further affected the importance of MHCs. Nevertheless, because of PMHCA 2011, private landlords have been equal parties in negotiations and sign their own agreements with unions--business-like in this context could include price competition, something rather new to this sector. Further, market rents, profit margins, rates of return on investment and levels of risk had companies analyzing and reassessing their operations (cf. Lindbergh & Wilson, 2016). In effect, these companies were pushed into decision making situations that had few, if any, historical precedents (cf. Lindblom, 1959; March et al., 1983) and are likely going through a paradigm shift in their operations (cf. Kuhn, 1996, 1970, 1962).

The purpose of this paper is to reflect on some specific accommodations that have occurred in the Swedish rental sector as a consequence of Municipal Housing Companies (MHCs) complying with the Public Municipal Housing Companies Act of 2011. It is organized around two cases and a quantitative assessment of activities among MHCs. The next section will give some background on Swedish housing and some of the business concepts useful in analyzing the situation at hand. Following that section comes a short description of a case and its analysis, which illustrates in some detail tendencies in the industry. In particular, an assessment is made of the apparent strategies in which a particular MHC made a significant sale of properties to a private company. Although specific in nature, the transaction reflects the general situation in Sweden as companies reflect on their asset portfolios as they deal with PMHCA 2011. Following the case, a quantitative, financial follow-up is made of the qualitative assessment that MHCs intended to comply with the new regulation. Finally, a second case is presented that suggests that not only the municipal sector is being affected, but the independent rental one as well. Results are discussed in terms of unanticipated consequences and a potential shake-out as participants in the rental sector adjust to a changing competitive environment.

BACKGROUND

The Apartment Rental Sector in Sweden

Apartment rentals are important in Sweden. The sector comprises nearly 30 percent (28.6) of all units and is primarily served by three forms of organizations - Public Housing Companies (i.e., MHCs), Independent, Limited Liability Companies and Individual Ownership of Multi-Units (See Appendix 1). Among rentals, MHCs comprise over 50 percent (52) of the sector. Although the holdings of limited liability companies are growing at a rate greater than 10 percent (12.3), the rental sector overall is growing at less than three percent (2.7). In fact, the growth rate of MHCs is presently negative. One reason for this negative rate is that portions of the flats owned by MHCs have been sold to Independent Limited Liability Companies. During the same period, population increased 3.6 percent (Statistics Sweden, 2018) (2). Thus, growth in rentals did not keep up with population growth. Significantly, growth did not match immigration, a segment that tends to be served by rentals.

The Current Status of Swedish Public Housing

Lind (2014) has written a comprehensive description of municipal public housing in Sweden. It was concluded that The debate on housing policy is making it increasingly clear that a new model is needed. There is agreement that MHCs should no longer bear any special social responsibility, even though in practice many still do to a lesser degree. There is no new (little) construction of affordable housing, which makes it more and more difficult for outsiders to rent apartments in metropolitan areas. If housing allowances do not go hand-in-hand with new construction, then helping one household leads to problems for another household just above the support line. As house prices and apartment prices have not fallen, access to owner occupation remains difficult. There are indications of increased overcrowding and illegal subletting. It is becoming more and more obvious that a new program for large-scale production of affordable housing is needed, but how this can be carried out is very much and open question. (Lind, 2014)

The situation continues to evolve. That is, public housing is moving from a prior position that might be characterized as part of a planned economy to one that would be better characterized as a free market economy. Even in the prior situation, problems were recognized. As noted previously, Turner (1999) first noted that a low solidity, in combination with increasing vacancies, had created a negative yield for some companies. Somewhat along the same lines, Nesslein (2002, 1981) was critical of the Swedish planned system. In brief, the very high cost Swedish housing had been made affordable for the general Swedish population through large housing production subsidies and massive income redistribution (Nesslein, 2016). Specifically, it was indicated that Swedish building and operating costs were significantly higher than private rental housing in other countries and it appeared that the supply of housing was not well-matched to the kind of housing that consumers desire.

Presently, as the industry goes further, more difficulties may be encountered. To name a few, new construction has not kept pace with population growth particularly in the larger cities (Ho, 2015); in all three major metropolitan areas, the increase in the number of finished residential properties has only been one-fifth of the population increase (Housing Crisis Committee, 2014). According to the latest survey carried out by the National Board of Housing, Building and Planning, 240 out of 290 local municipalities have a shortage of housing (Swedish Radio-1, 2017). The average wait time for a Stockholm County apartment has grown to 9.1 years. For a contract on a city-center apartment, the wait is 13.5 years (Swedish Radio-2, 2017). Immigration of course has accentuated the capacity problem. A regulation introduced in 2016 meant that municipalities were required to house more than 20,000 immigrants who have been distributed throughout the country (Swedish Radio-1, 2017). Whatever the case, the situation is not the same everywhere; individual companies have entered this period facing different local environments and with different resources. All firms in the industry will not adopt the same strategy, nor should they. Nevertheless, those that possess superior resources and make appropriate decisions in their adaption might be expected to do well. Those that have not and/or do not--not so well (cf. Hunt, 2000, pp. 127-132).

Going forward, Swedish Municipal Public Housing Companies must now operate under "business-like principles"--by law. Czischke (2014, pp. 338-339) has described how this situation arose, citing the circumstances leading to the Public Municipal Housing Companies Act, which entered into force in 2011.

In July 2002, the European Property Federation (EPC) lodged a complaint with the European Commission, objecting to the Swedish practice of allocating state aid to house well-off people. After a state inquiry and much debate, the Swedish parliament abolished public service...