Nordic Housing Markets – Shared Demand Drivers, Diverse Regulatory Structures and Supply Outcomes

An acute shortage of appropriate and affordable housing for lower, moderate and middle income households is a shared challenge across most developed countries globally. This is most pronounced in urban growth centres. Although the Nordic countries share many socio-economic attributes, they have distinct regulatory and housing market structures. As a result, they create very different opportunity sets for institutional investors in the residential sector, and markedly different profiles of supply and demand (im)balance.

Over the past decade, institutional real estate investors have rapidly accelerated investment across the living sector, with its share of institutional portfolios leaping from 13% at end 2014 to 26% at end 2023[1]. Institutional investors are attracted by the opportunity to secure long-term income investments that are anchored to both underlying structural trends and at the same time, offer an opportunity to align capital with the United Nations Sustainable Development Goals (SDGs).

Institutional activity in the housing sector primarily comprises private rented sector (PRS) housing for middle income households and student accommodation. In some markets investment opportunities have also extended to the delivery of regulated social and affordable housing. Opportunity and risk varies across countries as the evolution of housing market structures and housing policies shape the scale, role and performance of the PRS within the wider housing market.

This paper explores differences in the structure and regulatory frameworks of the Nordic housing markets and their impact on the institutional PRS investment opportunity. First, the scale and role of PRS within the housing market is considered. Second, the demand for PRS is assessed within the context of supply and house price/ rent affordability. Third, the impact of regulation and housing policy on investment risk and opportunity is valuated.

[1] EPRA/ INREV (2024) and (2014) European Real Estate in the Real Economy

The structure of housing markets in the Nordics

The structure of housing markets varies considerably across the Nordics, with marked deviations in the distribution of tenures. Across the region, owner-occupation is most favoured, especially when cooperative ownership structures for privately owned units within multifamily buildings are considered. Finland has the largest PRS sector comprising 24% of all housing units, more than double that of Demark at 10.4% (Figure 1).

There is also strong variation in the delivery of publicly regulated social and affordable housing. In Denmark, non-profit housing associations account for over a fifth of housing units in Denmark. Qualifying criteria determine access to regulated public and affordable housing in Finland and Norway, which in the latter is delivered by municipalities and in Finland through a combination of municipal housing and non-profit housing associations.

In Sweden, access to public housing is universal and provided by municipality owned housing companies that operate on market terms. In all other markets, public and regulated affordable housing providers are supported by some form of public incentive. These policy initiatives and structures vary across countries and type of provider, but can include access to a lower cost of capital, land availability and infrastructure ready sites, as well as grant funding for municipal public housing. Such funding levels helps to level the playing field between providers of regulated housing and market operators, enabling the provision of housing for lower income households at an affordable rent.

Figure 1

Differences in the tenure distribution of housing across the Nordics

Source Housing Europe (2021) (2023), The state of housing

These structural differences may impact on the role of the PRS within the housing market and specifically, whether long-term leased tenure housing options are considered a default option or choice. Such attitudes matter as house price affordability has deteriorated over the past decade and together with tighter lending criteria, many middle income households find themselves locked out of owner occupation. At the same time, there is a scarcity of appropriate regulated and PRS housing to meet demand. Across Europe, many housing markets are in disequilbrium with a general failure of housing policies to predict or plan for housing need in the decade following the global financial crisis (GFC).

In contrast to many European markets, social and affordable housing is open to either all, or a high proportion of citizens in Sweden and Denmark. However, while 3^rd and 4^th quintile income households might qualify for regulated housing, the absence of targeting beyond high priority allocation criteria has resulted in long wait lists for such housing. For example, in Sweden the average wait for a housing unit in Stockholm is 9.4 years and over 17 years in Central Stockholm. Similarly, in Copenhagen, the wait for housing can be in excess of 20 years for high demand locations. Regulated affordable rented housing is more targeted toward lower income households in Norway and Finland.

Across the region, the Nordic’s capital cities have grown at a faster rate than national populations since 2010 (Figure 2). Net migration and accelerating urbanisation has led to strong population growth. Together with changing household size, this has led to a shift in housing demand patterns and a shortfall of appropriate housing by location and quality.

At 21%, Stockholm has experienced the strongest growth absolutely. As the population has expanded social infrastructure – including housing – has not kept pace with either the volume or the requirements of new households, including both knowledge workers and economic migrants. The Helsinki Metropolitan Area (HMA) has also experienced strong relative level of population growth (14%), some three times greater than the national level of growth in Finland. However, until recently new housing supply in HMA has generally tracked demand volume.

Figure 2

Nordic demographic change includes absolute population growth, intensified urbanisation and ageing

Source Eurostat (2024)

Figure 2 also indicates the aged dependent share of the population and shows that the regions capitals have a younger age structure profile than at the national level. However, it is worth noting that the rate of change in the population aged 75 and over has grown at a faster rate than the population overall. Excepting Denmark, this growth in the number of residents over 75 has been strongest in the capital cities. This indicates that although the capital cities have a lower age dependency ratio due to expanding urbanisation as well as net migration, they still have an ageing population that is expanding at a faster rate than total population growth. This creates a specific need and opportunity for senior housing and for healthcare solutions.

Alongside these shifting demographics, household structures and tenure patterns have also changed (Figure 3 and Table 1). Across all Nordic markets, owner occupation is the most common form of tenure and is particularly dominant in Norway (79%) and to a lesser extent in Finland (69%), to Sweden (65%) and Denmark (60%). However, over the past ten years rental housing tenures have increased across all markets. The rate of change is strongest in Norway, albeit from the lowest base (26.1%) while the weighting of tenure in Sweden has been more stable.

Figure 3

The distribution of tenure varies with household type

Figure 3 and Table Source: Eurostat (2024); Genesta (2024)

(the data was analysed to get the percentages)

The growth of single person households

Ranging between 41% and 46%, the share of households with dependent children is similar across markets and this share has been declining over the past ten years. In part, this is due to an ageing society. Coupled with lower fertility rates and high divorce rates, single person households have seen the strongest growth in their share of household tenures and account for a quarter of all households across all markets. With the exception of Denmark, this growth has been strongest in single households under 65. It is even stronger in cities and single households now account for half of all households in Helsinki.

There are differences in tenure preferences across countries with single person households preferring to rent rather than own, with the exception of Sweden. This trend varies by age, with under 65 single households preferring to rent, and the share of this tenure has expanded most sharply in Finland and Norway. Although a majority of single person over 65 households own their homes across all countries, the rented tenure has been expanding sharply in Finland and to a lesser extent, Denmark. These differences indicate that there is variation in housing requirements across the Nordics by tenure and age, leading to variation in the housing solutions needed and opportunities within the PRS.

Tenure choice and income

Tenure preferences also vary by income. Figure 4 compares the breakdown of households renting split by income level and household size between end 2013 and end 2023. It is clear that those with a household income less than 60% of median income are more likely to rent. In Sweden there is a clear demarcation of propensity to rent by income, however over a third of more affluent households in Denmark rent, and over a quarter in Finland and Norway.

Within lower and middle income households, one adult households under 65 are the largest proportion of renters except in Norway. In more affluent households, there is stronger variance. Within PRS there is an opportunity to tailor housing solutions. It is noteworthy that co-living has been expanding in Denmark where renting is popular amongst households without children, especially younger cohorts comprising two or more adults in major cities.

Figure 4

Income remains an important driver of rental tenure

Source Eurostat (2024)

Expanding PRS demand and affordability

There are a number of factors underlying the increasing demand for PRS housing. These include house price developments, stricter lending criteria and the supply of regulated affordable housing. First, house price growth has outstripped earnings growth over the past decade, except in Finland. More recently, interest rate movements - and in Denmark property tax reforms -have led to a moderation in house price developments. However inflation also eroded real income growth. As a result, house price affordability remains elevated relative to long-term price to income ratios (Figure 5).

Figure 5

House price affordability metrics remains above long-term trend, excepting Finland

Source OECD (2024) Affordable Housing Database

The long-term average is 100, and ratio of price to income is expressed relative to the long-term average. House prices are increasing faster than incomes when over 100.

The tax treatment of mortgage interest rate payments also influences house price developments. In Sweden, 30% of interest paid may be treated as a capital loss, while in Denmark interest rate payments can be offset against income at the progressive rate of tax, while in Norway it is awarded at a flat rate of 22%. These tax treatments incentivise borrowing and support house prices. In Finland, this tax incentive was removed in January 2023 and the price to income ratio deteriorated sharply after its introduction. However, prior to its anticipated introduction, the price to income ratio remained around its long-term average and less volatile than across the other Nordic markets.

Elevated house price to income ratios elsewhere, in combination with tighter lending criteria have resulted in many households, especially younger households on modest incomes becoming locked out of the owner occupied housing market. By default, this demand is transferred to the rental market. There is also an increasing cohort of households who prefer the greater flexibility and lower responsibility that renting provides over owning.

Housing supply also impacts on both house price and rental affordability. Until recently, Finland and until 2020, Denmark have been largely successful in delivering supply in line with demand relative to Norway and Sweden, as well as wider European markets. PRS activity in Denmark has also been strong, although the balance of demand and supply varies across major cities. Although Aarhus is absorbing over supply, there is a persistent supply shortfall in Copenhagen, with supply failing to outpace the influx of younger workers.

Across Europe, the HMA is somewhat unique in having a PRS that is over-supplied currently, curtailing its rental growth prospects in the short term. This is in stark contrast to the housing shortage that is impeding the economic sustainability of all other large urban centres across Western economies. However, given continuing population expansion of one of Europe’s fastest growing urban areas and the current limited pipeline of new supply, the market is expected to return to equilibrium in the near term as net absorption erodes the supply overhang.

The scale of activity in Finland and Denmark mirrors their capacity to attract institutional capital. Although the regulatory structure of the markets differ, they both offer market characteristics that align with institutional investor requirements.

With access to regulated affordable housing being allocated according to need, income and wealth, a mature institutional PRS segment has long existed in Finland. As demand for PRS increased in the HMA and Turku areas this market expanded. This growth was assisted by capital inflows attracted to the maturity of the market and investor friendly regulation, including the ability to achieve market rent.

The Danish rental market is more complex. Not-for-profit affordable housing is open to all, although there are criteria for priority allocation. Representing a large segment of rental housing, the sector is mature and largely self-financing and benefits from access to a lower cost of capital. Regulation of the PRS sector varies depending on age. Newly constructed PRS is not subject to rent control and is let at a market rent. Given strong population growth and an urban policy seeking to develop and expand new neighbourhoods across the City and harbourside, investment opportunities for institutional investors expanded.

In Sweden, the demand and supply imbalance is more acute. Despite strong urban population growth, supply was slow to recover after the global financial crisis (GFC) and has not accelerated consistently, or at a rate required to erode a shortfall. As a result, projections suggest that while up to 5,000 to 9,000 housing units are required per annum in Copenhagen to 2035, Stockholm has a housing deficit in excess of 300,000 units[1].

Despite the larger market size and demand fundamentals, international institutional investment in the Swedish residential market has been more muted. Figure 6 shows the sector distribution of real estate investment asset values within the INREV Asset level index and demonstrates that capital allocations to residential in Denmark and Finland have been weighted significantly higher.

[1] Copenhagen Economic (2021); Savills Research (2022) Housing Europe (2023).

Figure 6

Institutional activity is stronger in markets with more aligned regulatory structures

Source: INREV (2025) INREV asset level quarterly index (Q3 2024)

Sweden’s rental market is more heavily regulated and institutional investors cannot not achieve a market rent even at first letting. Rather all rents in existing assets are determined through a utility score which takes into account the prevailing rent of housing of a similar location, size and quality. For newly constructed assets, PRS investors can opt for a presumption rent that is based on the costs of production and a return on capital requirement. As for utility index-based rents, rental uplifts are usually determined by negotiation with a tenants’ union, although recent case law in 2022 has limited the growth of presumption rents to half that of utility rents. Although the Swedish system can offer bond-like income streams, the high level of regulation in the housing market is a deterrent to international capital.

Rental affordability

Yet, in less regulated markets institutional investors are cognisant of rental affordability. In Denmark and Finland, rental contracts are usually linked to an inflation index. As inflationary conditions escalated from 2022, it was recognised that raising rents in line with inflation impacted negatively on rental affordability and increased the risk of non-payment, management costs and tenant churn.

In HMA, the availability of alternative accommodation given a modest supply overhang allowed for market forces to determine a more equitable rental agreement. This is important as it demonstrates that where demand and supply are broadly in balance, the market is capable of delivering rental affordability without regulation. Although investors should anticipate regulatory oversight of housing quality and costs for lower, modest and middle income households - particularly where rents are being driven by scarcity value - rebalancing supply to meet demand is the remedy. Solving Europe’s housing challenge requires policy measures that support the rapid expansion of supply, restoring rental affordability and importantly, delivering appropriate housing and security to households with unmet needs.

In Denmark, the government introduced a two year temporary cap of 4% during 2022 to moderate the impact of high inflation on tenants. The impact of the cap reduced as inflation moderated. Many industry stakeholders raised concerns that regulatory interference might impede future capital flows. However, many institutional investors recognise the importance of balancing rental expectations driven by external shocks or by housing scarcity with rental affordability and income risk. Ultimately underwriting should consider that there is a natural cap to rental growth relative to disposable income development, regardless of rental regulation[1]. Moreover, maintaining rental affordability is a core component of risk management. A dislocation
between rental and income development increases income risk as rent non-payment rates and associated management costs increase.

Figure 7 shows the housing cost over burden rate for low (1^st quintile), modest (2^nd quintile) and middle income (3rd quintile) households. PRS housing generally addresses the needs of middle income households that are either locked out of owner occupied markets, or are choosing to rent. Although Sweden has the lowest housing cost overburden rate for those in this income group that have achieved housing, it may have come at the cost of new supply delivery for those seeking appropriate housing. The rate is also low in Finland and Denmark, and has been achieved without strong rental regulation. This looser regulatory environment has also facilitated institutional investment and supply delivery.

[1]ABRDN (2023) European real estate: can residential rent caps make a difference?

Figure 7

PRS is affordable for its target audience of middle income households

Source OECD (2024) Affordable Housing Database

However, institutional investors must also consider meeting the return requirements of their underlying investors, ultimately pension plan holders and savers. Despite the unmet demand, housing production has stalled across markets since 2022 (Figure 8). The onset of more challenging economic conditions including higher interest rates, borrowing costs and inflationary building costs have impacted on the viability of development, despite the long-term persistence of demand. Inflation and subsequent interest rate movements resulted in a corresponding adjustment to real estate pricing and at the same time, raised the cost of capital. Added to this, supply chain disruption stemming from the pandemic and Ukraine war have escalated building cost inflation to what are proving unstainable levels (Figure 9). The level of rent required to deliver a return on costs is neither achievable or affordable.

Figure 8

Housing activity has slumped despite housing shortfall

Source Eurostat (2024)

Figure 9

Inflationary building costs remain elevated

Source Eurostat (2024)

However, building cost developments do not impede the growth of household demand and may result in deepening the housing challenge in Denmark and Sweden in the near term, and creating one in Finland. As interest rates moderate and building costs subside, activity will resume. However, in the intervening period the supply shortfall will expand rather than erode unless some form of incentive is introduced to support feasibility in the short term. If countries are to solve their individual housing challenge they need to act to reduce the volatility of supply and its stop-start nature of production over the next decade. By restoring market equilibrium, rental affordability can be secured. Finland shows that despite its own accelerating population growth, it is possible to achieve.

However, achieving this requires regulatory structures to be aligned to institutional investment requirements. Institutions are seeking a long-term, predictable and stable income. This is not at the expense of tenant protections, rather it is in addition to tenant needs. Regulatory certainty is central to performance and risk. Institutional investors can price any investment opportunity and regulatory structure, including caps and collars on rental development. Difficulties arise when post investment, significant changes to regulatory structures occur that are detrimental to the income and risk profile of the investment, and ultimately for the future income of their underlying savers and pensioners. Moreover, regulatory shocks post investment heightens the risk and uncertainty associated with a market, deterring institutional capital. In turn, this further exacerbates housing supply shortages, longer term rental affordability and quality of housing stock.

In the Nordics, providing access to appropriate housing for all is considered central to housing policy ambitions. However, housing policies need to strike a better balance between regulating for those in existing housing and ensuring that new housing supply can meet existing and projected unmet demand. Given strong household growth, shifting demographics and household structure and housing affordability pressure, housing policy should aim to provide for a range of tenure options that match the demand volumes, household aspirations as well as finances. Harnessing institutional capital to deliver the option of PRS housing can alleviate public finances and accelerate delivering on housing need. As well as accelerating the expansion of housing options and the scale of PRS, tenants also benefit from the professional management expertise of long-term institutional ownership.