Rent ceiling in Sweden: A Case Study

Rent ceiling is the maximum amount of rent that landlords can charge their tenants. It is part of rent control laws enforced by authorities to control demand and supply equilibria. Such limits intend to protect tenants’ rights by ensuring rental houses are affordable, specifically for low-income earners (Keating, 2020). In most cases, government interventions to control market forces result from inefficiencies or political and economic motives.

If the Sweden housing market rent ceiling is at RC, ceteris paribus, the effects would be as follows:

  1. The quantity demanded would increase from the equilibrium quantity point to ND (New Demand). The decline in rent is an incentive that attracts more demand, specifically among the low-income earners in Sweden.
  2. Quantity supplied would decrease from the equilibrium quantity point to the point labeled NS (New Supply). People would be less willing to construct rental houses because of the possible decrease in producer surplus – the difference between the least rent expected by a landlord and the rent they get from the market.
  3. The market would experience excess demand because the quantity of rental houses supplied is less than the demand.

The rent ceiling can generate an unfair outcome in Sweden’s housing market because it does not guarantee the allocation of houses to the less well-off. Landlords may not charge the rent beyond a certain point, but they can manipulate other charges to make them unaffordable to low-income earners. There are several consequences of a rent ceiling imposition. Firstly, it could lead to a decline in house quality because landlords know quality houses may not be profitable (Moon & Stotsky, 1993). Secondly, it could cause a shortage in the supply of, becoming hard to live in certain areas. Thirdly, it could result in additional charges that many cannot afford, as landlords seek to maximize their profits. Finally, it could cause decay in rental housing stock because of the failure to invest in maintenance caused by the inability to raise rents.

The COVID-19 pandemic caused a massive decline in house sales in Calgary. With high unemployment, house affordability became an issue, and others listed their houses for sale. Many real estate investors saw a decline in prices during the pandemic because of job losses and a nationwide recession. The pandemic disrupted the labor force and supply chains, slowed down building approvals, reduced construction activities, and reduced funding to the sector. Other examples of COVID-19 effects in the Calgary housing market include the shift in sales toward lower-priced products. It caused an increase in the supply of rental houses and caused low-income earners to seek cheaper neighborhoods due to unemployment.

References

Keating, W. D. (2020). Rent control: Its origins, history, and controversies. Rent Control, 1-14. https://doi.org/10.4324/9780429338465-1

Moon, C., & Stotsky, J. G. (1993). The effect of rent control on housing quality change: A longitudinal analysis. Journal of Political Economy101(6), 1114-1148. https://doi.org/10.1086/261917