Rapid increase in land costs and building materials an explanation for high prices on housing

In a new SNS report, economists Mats Bergman and Sten Nyberg describe the rapid rise in housing prices in Sweden ever since the 1990s as an aberration, both in comparison to neighboring countries and to previous decades. Rising land prices have contributed to this development, albeit to a lesser extent than in many other countries. On the other hand, the price of building materials seems to increase unusually rapidly in Sweden.

Land prices have risen significantly, especially for tenant-owned housing

In the report, the researchers show how land prices and construction costs affect housing prices. In the long term, the supply of housing is based on the availability of land and the amount of land zoned by municipalities. The price of land varies depending on the location and type of housing to be built. With regard to tenant-owned housing, the land price in metropolitan areas has risen by 479 percent since the 1990s, whereas the prices for rental housing in the same areas have risen by 129 percent. According to the researchers, however, land prices can only explain one-third of these cost increases on average.

“However, we need to keep in mind that land prices and construction costs interact in terms of driving up housing prices. If land is expensive, it makes sense to use less of it and more of other inputs in the production of housing, such as by building taller or more exclusive buildings,” says Sten Nyberg, professor of economics at Stockholm University.

High material costs drive up construction costs

Construction costs have also risen significantly in Sweden since the mid-1990s, definitely more than in the other Nordic countries or in Austria and Germany. According to the statistics presented in the report, the price of certain building materials increased at a much higher rate than the corresponding commodity prices. For example, the price of rebar increased by nearly 400 percent between 1995 and 2019, despite the price of steel only increasing by 60 percent. Similarly, the price of cables and wires increased by 650 percent, even though the price of copper only increased by 170 percent. The price increases of building materials appear to be very high. This may be due to the fact that the statistics fail to take into account the effect of the large purchase discounts in Sweden, up to 80 percent, given to clients in the building sector.

“We would need more insight into the discount systems to understand why the figures look like this,” says Mats Bergman, professor of economics at Södertörn University, who also believes that these kinds of extreme discounts may harm competition.

So-called presumption rents result in limited incentives to build cheaply

An additional problem highlighted by the researchers is the possibility, introduced in 2006, to deviate from the general rent-setting principle when it comes to newly constructed rental apartments. This exemption, so-called presumption rents, was intended to ensure a reasonable return on housing investments based on production costs instead of comparing utility values. According to the authors, however, this exemption means that property owners have limited incentives to build cheaply, which, in turn, can drive up prices.