STOCKHOLM, July 3 (Reuters) – It is one of Swedish centre-left Prime Minister Stefan Lofven’s signature policies – building 700,000 homes in a decade to ease a shortage of dwellings that has business worried about attracting employees and policy makers fearing a property bubble.

But Lofven’s plans may be pie in the sky, industry officials and analysts say.

Decades of weak construction levels combined with a fast growing population has made new homes scarce. Over 80 percent of Sweden’s municipalities are suffering shortages, a 30 percent increase since last year, the National Board of Housing said.

The shortage could be the Achilles heel of one of Europe’s fastest growing economies. It has contributed to house prices clocking up double digit annual growth, sparked fears of losing international business competitiveness and complicated central bank policy in an era of record low rates.

For Lofven’s minority government, which faces an election in 2018, a failure to seriously dent the shortage may become a political handicap, given that housing construction was one of his main campaign promises.

But strict regulations combined with lack of capacity in the construction sector mean Lofven’s plans will likely fall short, according to industry officials and analysts, while political deadlock may mean reforms to encourage building will be on hold.

“Either they don’t understand how the construction market works or they don’t believe in their own target,” said Lennart Weiss, commercial director at construction company Veidekke, adding the shortfall may be as much as 350,000 homes.

The shortage has already seen the founders of music streaming service Spotify – which employs around 1,000 people in Stockholm – send an open letter to politicians in April, telling them to solve the issue or risk losing thousands of jobs.

Stockholm house prices soared 12 percent in the last year and there is a waiting time of around 10 years for rental homes.

“Lofven can decide how many new homes he wants, but he can’t do anything about it,” said Han-Suck Song, assistant professor at Royal Institute of Technology in Stockholm. He said 300,000 homes would be a more realistic target.

Song said strict regulations, including a constitutional law that allows municipalities to veto building plans, tie the government’s hands.

Sweden invested heavily in housing during the 1960s and 1970s, creating 1.7 million new homes. But in the early 1990s, building stalled. From 2010 to 2015 158,549 new homes were created while the population rose by 435,447 people.

POLITICAL DEADLOCK

In January, the government sat down with the centre-right opposition, hoping to reach an agreement on how to increase building. But the centre-left – wanting more state funded rental accommodation – clashed with the centre-right, which wants more deregulatory measures to encourage private construction.

“The problem with the Swedish housing market is that there are no houses and there is no market,” said Emil Kallstrom, a spokesman for the opposition Center Party after the centre-right pulled out of the talks last week.

Housing Minister Peter Eriksson accused the opposition of lacking the political will to deal with housing.

“You can lead a donkey to water, but you can’t force it to drink,” he said. Eriksson said the government will present propositions to parliament to speed up house building and that its target was in reach.

But a lasting political solution is unlikely given an election in two years, making politicians reluctant to take unpopular decisions, such as building on green areas. Even with political will, the target would be hard to achieve.

In June, Daniel Astenius, head of construction at a builder Serneke, got a call from a client asking him to accept a project worth almost 300 million Swedish crowns ($35.2 million). Other companies had already turned him down due to lack of capacity.

“Property developers can’t find builders for their projects, there are no resources,” Astenius said, who eventually accepted the project.

Figures from the National Institute of Economic Research showed that over 40 percent of construction companies said expansion was being held back, mainly due to lack of labour. That was a sharp rise from around 5 percent two years ago.

This year the Swedish construction sector is expected to employ 320,000 people of a total population of 9.9 million. However the Swedish Construction Federation, says many more are needed to even come close to the government’s target.

“We would need another 40,000 people,” federation CEO Ola Mansson said.

Read more on Sweden’s housing crisis at Breitbart London