Scandinavian Working Papers in Economics

Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin)

No 14/10: The effect of rent regulations and contract structure on renovation: A theoretical analysis of the Swedish system

Hans Lind ()
Additional contact information
Hans Lind: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Department of Real Estate and Construction Management , Royal Institute of Technology, Brinellvägen 1, 100 44 Stockholm, Sweden

Abstract: The standard view is that rent regulation leads to reduced maintenance as the landlord will be able to find tenants at the regulated rent even if the level of maintenance is low. In this article it is shown that the rent regulation system in Sweden interacts with a contract structure where the rent is allowed to increase only if the standard of the apartment is raised compared to when the apartment was new. Ordinary maintenance is included in the rent, and the rent is therefore not allowed to increase when such maintenance is carried out. It is shown that when there is a housing shortage this system creates economic incentives for increasing the standard of the apartment even if this reduces total welfare. The result can be that quality is increased more than in a market system, and that it can increase gentrification compared to such a system. Policy proposals are also presented.

Keywords: rent regulation; maintenance; renovation; Sweden; gentrification

JEL-codes: O18

18 pages, October 27, 2014

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