Schoolgirls meet inside the Rosengård housing community in Malmö, Sweden: Housing market reforms would help contain not only housing prices but also unemployment and household debt, says the IMF (photo: Sam Edmonds/Corbis)
Economic Health Check
Speaking to IMF Survey at the launch of the IMF’s regular health check of the Swedish economy, mission chief Craig Beaumont said Sweden needed to address the structural problems in housing and labor markets to help sustain growth and stability. He also highlighted Sweden’s high priority given to further improving gender equity.
IMF Survey: You recently led the IMF delegation that assessed the Swedish economy. What issue stood out while you were in Stockholm?
Beaumont: House prices have been rising very quickly, hitting an annual rate of 18 percent recently, and by over 20 percent in Stockholm and Gothenburg. So, there was a lot of media interest in the range of measures we recommended to help address these surging prices. Sweden needs to increase competition in the construction sector, for example by improving how municipalities sell land and approve construction plans.
There is also a need to use existing dwellings more efficiently. Two factors tend to “lock in” households to their current dwelling even if it is bigger than they need. First, rent controls, as no one wants to leave a rent-controlled apartment. Second, the capital gains tax. Here we suggested raising the amount that can be deferred when households move from one primary residence to another. We also said that now is a good time to phase out the tax deductibility of mortgage interest, which creates an incentive for debt-financed housing ownership.
IMF Survey: Phasing out the mortgage interest deductibility may not be popular among the Swedish population and hard for politicians to move forward. How could this recommendation be made more palatable?
Beaumont: Mortgage interest deductibility is hotly debated in Sweden and was the issue that attracted the most attention. Some countries, such as Ireland and Spain, have already phased out deductibility, and other countries are in the process of reducing it, like Finland, Denmark, and the Netherlands. This is a good time for Sweden to start a phase-out because interest rates are low, so the impact on a household’s pocketbook would be modest. Sweden’s strong fiscal position means that revenue gains from phasing out deductibility can be used for other purposes, such as subsidizing the construction of affordable rental apartments in locations with good job prospects.
Our analysis also finds that phasing out deductibility would lower house prices by only about 4 percent over 8 years, which is almost unnoticeable relative to the broader trend of rising house prices. We made these points to reassure the public and politicians that phasing out deductibility would be manageable.
IMF Survey: There are also issues with unemployment levels and household debt. Are these related to housing?
Beaumont: You’re right, there’s a relationship between unemployment, what’s happening in the housing market, and household debt. If we look at overall unemployment, at 7¼ percent, it’s lower than in many European countries. But when you look more closely you see that low-skilled people have a 19 percent unemployment rate and people born in countries outside Sweden a 16 percent unemployment rate. At the same time, there are shortages of rental housing in the main centers, which forces people to buy, pushing up apartment prices. This low availability and high price of housing in the main centers reduces labor mobility, which in turn contributes to unemployment. And high housing prices contribute to higher debt. So, if you look at the whole picture, reforms of the housing market that cool that market off can also help reduce unemployment and stem household debt.
IMF Survey: Moving to Sweden’s monetary policy, the Central Bank lowered interest rates to negative territory at -.35 percent in July. Is this helping raise inflation from low levels? And is the krona depreciating?
Beaumont: Inflation has been low in Sweden for some time now, with the core rate around 1 percent on average for the past five years compared with a target of 2 percent. Survey measures of inflation expectations fell to low levels in late 2014 and early this year, triggering the Riksbank to move to negative interest rates. It also undertook quantitative easing through government bond purchases, purchasing about 20 percent of the stock of government bonds this year.
These measures have started to have an impact, with core inflation up to about 1.4 percent in recent months. Monetary stimulus has also had an impact on the krona exchange rate, which in November was down by about 5 percent from its average last year. But once inflation is back on target, the monetary expansion can begin to unwind, and the krona will likely appreciate back to a more normal level over time.
IMF Survey: Sweden has a strong fiscal position, a low deficit of about 1 percent of GDP and the public debt is about 44 percent of GDP. Should it offset the cost of migration inflows so as to preserve the country’s strong fiscal position?
Beaumont: Sweden’s migration inflows are likely to be over 1½ percent of the population this year, roughly double the level in recent years. There are upfront costs of helping migrants integrate into the Swedish labor market, to learn Swedish, and become familiar with Swedish society. Over time, these costs decline as a larger share of migrants gain jobs and become taxpayers. Sweden’s strong fiscal position means it has room to meet those upfront costs through a larger fiscal deficit. Over the coming years Sweden can cover ongoing expenses as part of meeting its medium-term fiscal targets.
IMF Survey: What other consequences do you see of the migration, the influx of asylum seekers?
Beaumont: Sweden has long maintained a humanitarian migration policy and has experience in receiving asylum seekers. The introduction program proactively helps asylum seekers make their way in the labor market for up to two years, after which they continue to be assisted by active labor market policies for whole population. Employment rates for migrants do rise over time, yet the process takes some years, so there is a risk that unemployment will increase in coming years.
The labor market could be adapted to speed up integration and reduce the risk of higher unemployment. Entry level wages are high in Sweden, at about three-quarters of the average wage, indicating a need for greater flexibility at the firm level.
Another barrier is the strict employment protection for regular contracts, which creates incentives for companies to hire people with strong general skills in addition to the specific skills needed for a job. Easing that protection could make employers more willing to give job opportunities to migrants.
IMF Survey: Sweden had the smallest gender gap of all the countries measured when the World Economic Forum started that index in 2006. Where do we stand today on gender equality issues?
Beaumont: Sweden is doing very well in terms of the employment rates of women, being near the top and well ahead of European Union averages. The gender wage gap is also narrow in Sweden, at around 5 percent (after adjusting for measured gender differences, e.g., in education). But the authorities still attach a high priority to further improving gender equity. For example, they note that there is more segregation of genders by occupations and sectors in Sweden. Although females are relatively well represented on corporate boards, they’re not so well represented in senior management. So even Sweden has some issues to work on in this area.
