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POLITICS

EXPLAINED: What do proposed changes to Sweden’s rental laws mean for tenants?

What do the plans to change Swedish rental laws mean for residents, and could the row over the proposals really bring down the government? The Local explains.

EXPLAINED: What do proposed changes to Sweden's rental laws mean for tenants?
The proposals would only apply to newly built apartments. Photo: Ulf Grünbaum/Imagebank.sweden.se

What’s happening?

The Left Party threatened to topple the government over planned changes to the housing system in Sweden, which would introduce market rents for newbuilds. 

After the government did not respond to the Left’s ultimatum (which gave them 48 hours to either drop the proposals or go back to the drawing board and involve the Swedish Tenants’ Union in negotiations), the party said it would begin preparing a no-confidence motion.

The only snag was that the Left don’t have enough MPs to put such a motion forward. After they said they would not put the motion forward together with the far-right Sweden Democrats, the latter party — which does have the required number of MPs — said it would submit the motion on its own.

So that’s where we stand now, with the government said to face a vote of no confidence next week, unless the parties come to an agreement before then.

What are the rental laws up for debate?

Sweden currently has fairly strict regulations on renting.

One of the rules is that landlords may only charge a “reasonable rent” (skälig hyra) rather than choosing the price they set. This applies both to people who rent directly from property owners on a so-called first-hand contract, and to people who sublet apartments that they rent or own. In the latter case, they may charge a bit more than their own direct costs, but only to cover bills and services or any furniture included in the rental, and in the case of people who own the property, four percent may be added to cover the cost of capital.

What are market rents and how would the government’s plans work?

Market rents are the opposite system to what’s currently in place in Sweden: landlords would be free to choose the price they set based on the market; in other words, based on demand.

The government’s plan would only apply to newbuilds, so previously constructed apartments would not be affected.

One of the planned changes is that location would play a bigger part in setting the price, so that housing in popular areas would go up in price. Rent would also rise each year in line with inflation.

Early in June, the government presented the results from a review into market rents, which had the stated aim of creating “a model that contributes to a long-term well-functioning rental market and efficient utilisation of the current stock”.

Why are market rents on the table?

The proposal is part of the so-called January Agreement between the ruling Social Democrat-Green government and the Centre and Liberal parties. 

After the 2018 election left neither of Sweden’s traditional political blocs with a clear majority, the government was forced to negotiate with its former opposition, and gained “passive support” from the Centre and Liberal parties. This meant that while the latter two parties are not part of the government, they agreed not to vote against the government’s formation, but in exchange they asked for significant influence on policy, resulting in the 72-point deal.

One of the points was that market rents should be introduced for newly built properties.

What are the pros and cons of each system?

The reasoning behind the current system is that it is fairer and keeps housing affordable. But caps on rental prices have also meant fewer new rental properties get built, especially smaller homes, because these are less profitable for owners.

Together with a rising population, especially in Sweden’s larger cities, this has led to a major housing shortage. Queues for first-hand rental contracts are often a decade or more, which means many people, and particularly newer arrivals to the cities, end up on second-hand contracts. In theory, these should not be much more expensive, but the huge demand for housing means people do get over-charged, and other restrictions on subletting mean these contracts can typically not last more than a year or two, creating an insecure situation for second-hand subletters.

Market rents could stimulate the production of more housing, shortening housing queues, but critics such as the Left Party and the Swedish Tenants’ Union (Hyresgästföreningen) say it will make housing more unaffordable, worsen protections for renters, and increase housing segregation.

Another concern, which was even highlighted in the government’s press conference announcing the changes, is that the new system may incentivise landlords to terminate contracts with tenants if they can find someone who will pay more, thus creating more precarious housing situations. That would be possible because rent would be set individually between landlords and tenants. The government said that “complementary proposals” would be put forward to address the concerns with the market rents.

What are the next steps?

The government will now send its proposals out for consultation, which means feedback from affected organisations will be gathered. After that, a final version would be prepared, with the aim of putting the bill to parliament in early 2022. If passed, they would then enter law from July 1st, 2022.

But before that, the government looks likely to face a no-confidence motion next week, so it remains to be seen how the outcome of that affects the planned changes. 

How would a no-confidence motion work?

In order for the vote to go to parliament, it would need at least 35 members of parliament to sign it. The Sweden Democrats said they were willing to join forces with the Left Party (which only has 27 MPs) for a no-confidence vote, but the Left has rejected their help, so the Sweden Democrats said they would submit the motion themselves.

At the time of writing this update on Friday afternoon, a majority of parliamentarians have said they’d support the motion: not just the Sweden Democrats and Left Party, but also the conservative Moderates and Christian Democrats. The latter two parties actually back market rents, but don’t support the government.

If the no-confidence goes to parliament it would need at least 175 members of parliament to vote in favour. The support of those four parties would be enough to achieve that.

Hasn’t the Left threatened to topple the government before?

Yes. The Left party are traditionally allies of the governing centre-left Social Democrats, but they were not happy about the January Agreement and the influence it gave to the two centre-right parties.

Back when the current government was being formed, the Left’s then-leader Jonas Sjöstedt was clear about his party’s new status as “the left-wing opposition”, and said they would not hesitate to bring a no-confidence motion if Löfven went ahead with reforms on for example de-regulating the housing market or workers’ rights.

Last year, the Left Party threatened a no-confidence vote over planned changes to Swedish hiring and firing laws. Ultimately, that didn’t happen because the government renewed talks with unions over the laws, and got them on board with its proposals.

The Left is in a difficult position because it aligns much more closely with the government than with the centre-right parties, but the government has moved further to the right on some of the issues that are core priorities to the Left Party.

Tune in to The Local’s new podcast, Sweden in Focus, on Saturday, as we discuss this article in more detail.

Member comments

  1. It’s strange that the new leader of the Left Party, Nooshi Dadgostar, hasn’t realised that the numbers are stacked against her. She herself has said nix to the Sweden Democrats, and there’s no way that the C, L, M and CD parties will vote with her against the government on this particular issue. So why go ahead with the threat of a no-confidence vote that is doomed from the outset? Really odd. One can understand her wanting to make her mark as the new leader, but she’s a polical featherweight compared to Löfven and Johansson and other prominent Social Democrats. She doesn’t stand a chance. Perhaps there’s an ulterior motive lurking somewhere. Will be interesting to see what happens once the 48 hours expire.

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ECONOMY

Should you get a fixed or variable rate mortgage in Sweden?

Now that inflation is below the central bank's 2 percent target and interest rates are expected to fall, you might be wondering if your Swedish mortgage rate should be fixed or variable. We asked an expert for his advice.

Should you get a fixed or variable rate mortgage in Sweden?

“First and foremost, the decision as to whether you should have a fixed or variable mortgage rate should be based on your own financial situation,” SEB bank’s household economist Américo Fernández told The Local.

Most Swedish households have variable-rate mortgages, but with rates dropping on fixed-rate mortgages, you might be wondering if it’s time to swap.

READ ALSO: Why are variable rate mortgages so popular in Sweden?

“If we look at fixed rates, we’re talking about three, four, five years. Today, those are still cheaper than the variable three-month rates,” he said.

Variable rates haven’t fallen yet, Fernández said, but they probably will if the central bank cuts rates next month.

“If you’re in a situation where you need to take out a mortgage now, you can’t necessarily wait until the variable rate falls. There’s always a risk that there will be setbacks with inflation, leading the Riksbank to perhaps hold back later. You won’t benefit from lower rates just yet.”

“For those with small financial margins who can’t risk the rate changing, it might be a good idea to get a fixed rate,” Fernández advised.

“There are two things to look at here – where the fixed rate is heading and where the variable three-month rate is heading.”

“The variable three-month rate is almost one-to-one linked to the Riksbank’s decisions,” he said. “So if you think the Riksbank is going to cut rates in August, which we do think, then we should see almost the same cut to variable three-month rates.”

“That’s a keyword, three-month rates, because even the variable rates are fixed for three months, so there’s a delayed effect. So this might not be something you notice in your wallet until later in the autumn, and that can be said for the next cut, too.”

The Riksbank is expected to cut rates in August, with another three cuts coming over the next year, he added.

SEE ALSO: What could low inflation mean for foreigners in Sweden?

“So if we look 12-18 months into the future, then that should mean that the variable three-month rate has gone down by around 1.5 percent. That’s a lot of money if you have a relatively large mortgage in the Stockholm area, for example.”

Fixed rate mortgages, however, have less to do with the Swedish Riksbank, and more to do with the global financial situation.

“If you’re waiting for fixed rates on longer-term loans to drop, you should be looking at the US. They’re the world’s largest economy and they still haven’t cut their rates. Once they start to discuss it, if they say ‘we’re getting closer to lowering rates’, then that sends a signal to the whole financial market that the world’s largest economy is about to lower its rates, which in turn means that the expectation is that interest rates will be lower in the future than they are today.”

“That then affects the long-term market rates. They’ll go down.”

READ MORE: Three ways Sweden’s slashed interest rate will boost your finances

“So when the US sends a signal that they’re going to lower their rates, you can expect fixed rates in Sweden to start going down, too. Not a lot, because they’ve already gone down a lot, but a little bit more.”

No matter what kind of rate you choose, it’s important to know that it’s impossible to predict for certain when rates will drop and by how much.

“Of course, none of this is certain. This is all based on the assumption that inflation will keep dropping. Maybe we’ll see an escalation in the war during the winter which could drive energy prices up and then we’ll see an increase in inflation. Then the cut in rates would occur later, and you wouldn’t get a benefit from lower rates. There’s a risk, of course, with variable rates.

They’ll drop at some point, but it could take a while and there’s a risk you won’t see lower rates for a while. But fixed rates are already lower.”

For new arrivals to the country who may not be sure how long they’ll be living in the country, or even in a particular area, it’s important to factor in future plans, too.

“Would you benefit from three- or five-year loans, or are you only going to live in the property for a year? If you leave before your term has ended you’d have to pay a fee, so you should bear that in mind too.”

IN FIGURES: How could lower interest rates affect your Swedish mortgage?

Fernández’ advice to those who aren’t able to wait for rates to drop, is to fix half of their mortgage on a long-term rate and have the other half on a variable rate, for added flexibility.

“You’d cut part of your interest costs on a fixed rate loan for a few years, and then you can hold the rest on a variable rate and wait for rates to drop later.”

When you take out a mortgage in Sweden, the bank will check to make sure your income can handle rates going up to rates as high as six or seven percent, meaning that you should in theory at least have some money left over once you’ve paid for your mortgage and other running costs, like your monthly fee to your housing association, or services like water and electricity.

“The problem for many households is that they spend this money,” Fernández said. 

“You need to renovate, decorate, which is natural, but what you could do is put some of that money into an interest buffer,” he said. “If you’re buying a house, I’d advise you to put as much money aside as you can, partly because interest rates might not go down as much as you maybe hoped, but also because it helps you plan for the future, if there is a cold winter and energy prices go up, for example.”

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