An analysis of the interaction between new construction and pricing of housing in Sweden 1991-2009

Abstract: This thesis analyses the effect of new construction of housing on housing prices in Sweden from 1991 to 2009. This is done by analyzing the links between house prices, net migration, supply of housing, income, unemployment rate and new construction of houses in 288 Swedish municipalities from 1991 to 2009. A quantitative approach using a Heckman Sample Selection model and panel-data from Statistics Sweden (SCB) and the Swedish public employment agency (AMS) is used to investigate the effect of new construction on house prices in Sweden. Through empirical analysis it is found that the effect of new construction of houses on the price of houses is statistically significant and positive. This surprising result contradicts theory as construction of new housing is generally believed to decrease housing prices. It is therefore suggested that the variable used to measure new construction captures effects other than solely new construction or is correlated with omitted variables explaining increases in housing prices. Nevertheless, the literature review points to some policy implications such that reducing the market imperfections in the Swedish construction industry, loosening the stiff administrative process involved in construction projects and perhaps aiming new construction projects at the lower end of the market. The conclusions drawn are therefore in line with Glaeser, Gyourko and Saks (2005) that regulations and a tedious administrative process may serve to keep new construction of housing at a low level. It is believed that this study sheds some light on an undeveloped aspect in academic literature: the effect of new construction of housing on housing prices.