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Abstract
If housing market rent control is completely eliminated, welfare gains may arise from tenant redistribution. The amount of such welfare gains is estimated at approximately SEK 20 billion (approximately USD 3 billion) for inner Stockholm. In addition, welfare gains may arise from the production of new housing. We demonstrate that total deregulation is preferable to partial deregulation limited to new housing. Furthermore, inefficient overproduction of new housing would follow partial deregulation. Tenants facing rent increases if rent control were phased out would suffer welfare losses, and should be compensated to fulfill the Pareto criterion. Various compensation models could be used, as analyzed here. The amounts necessary to fully compensate tenants in attractive submarkets may be substantial. The Pareto criterion is not necessarily a desirable guideline for politicians if it implies huge wealth redistribution; it is still, however, a natural criterion in connection to all welfare economic analysis.
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In Stockholm, as in other attractive housing submarkets in Sweden, rental housing is in short supply. People wait for decades for an apartment in Stockholm, and for several years in other cities. The most obvious reason for this shortage is rent control, introduced during the Second World War and still in force. A classic analysis of Swedish rent control is found in Bentzel, Lindbeck, and Stähl (1963), and other early examinations include Lindbeck (1967, 1972) and Arvidsson (1968). All these researchers suggested that rent control should be eliminated. Lindbeck (1972) presented several alternative methods for phasing out rent control. Swedish economists have since then continued to propose that rent control should be phased out (Meyersson, Stähl, and Wickman, 1990; Stahl and Wickman, 1992; Lind, 2000), though with little effect on the policies implemented.
Many North American cities have rent control, including New York City, San Francisco, and Toronto. International comparison reveals that Swedish rent control is remarkably extensive and persistent and has remarkable political support, i.e., all residential rental apartments have been continuously subject to rent control since 1942 and no political party represented in parliament supports complete deregulation. An indirect reform of the current Swedish system was introduced in 2011 under a new act that modifies the business conditions for publicly-owned housing companies (i.e., "council housing"). Some housing market actors...