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Jan 04, 2017

Tough Riksbank mortgage curbs slow Swedish property bubble, despite easy money

by Lalaine C. Delmendo

Sweden house pricesSweden’s house price rises are decelerating, thanks to the introduction of new amortization requirements in June 2016, the result of concerns by the Swedish central bank (the SverigesRiksbank) about Sweden´s property bubble.

The nationwide house price index surged 8.7% (7.55% inflation-adjusted) during the year to end-Q3 2016, a slowdown from annual rises of 8.85% in Q2 2016, 10.47% in Q1 2016, 12.5% in Q4 2015, according to Statistics Sweden. House prices increased 3.42% (3.23% inflation-adjusted) in Q3 2016.

From June 1, 2016, mortgage loans over 50% of the value of the property have had to be amortized (i.e, paid back) at 1% every year, while loans worth 70%+ of the property´s value must be amortized at 2% annually.

During the year to Q3 2016:

  • Greater Stockholm house prices rose by 7.5% (6.3% inflation-adjusted), almost half the 14.9% growth during the year to Q3 2015 and the lowest annual rise since Q4 2013
  • Greater Göteborg house prices increased by 6.3% (5.2% inflation-adjusted), a slowdown from a rise of 12.6% a year earlier
  • Greater Malmo house prices rose by 13.7% (12.5% inflation-adjusted), a upsurge from a rise of 7.2% a year earlier

Of the eight Riksområden (National Areas), RIKS4 South Sweden registered the biggest y-o-y increase of 13% (11.8% inflation-adjusted) during the year to Q3 2016, followed by RIKS3 Småland with the islands (12.6%) and RIKS6 Northern Central Sweden (11.4%). Over the same period, strong house price rises were also seen in RIKS7 Central Norrland (9.6%), RIKS2 Eastern Central Sweden (9%), RIKS1 Stockholm (7.5%), and RIKS5 West Sweden (7.1%). Surprisingly, RIKS8 Upper Norrland registered a house price decline of 1.3% (-2.3% inflation-adjusted) during the year to Q3 2016.

Demand is now falling.

Home sales fell by 14% to 14,645 units during the year to Q3 2016, according to Statistics Sweden. Home sales had increased by 1.17% in 2015, after rises of 6.71% in 2014 and 3.83% in 2013.

Sweden average house prices

Dwelling starts rose by 10.9% to 12,506 units in Q3 2016 from a year earlier while dwelling completions fell by 30.2%, according to Statistics Sweden.

The Swedish economy is expected to grow by 3.4% this year and by 2.4% next year, according to the European Commission.In Q3 2016, the Swedish economy expanded by 2.8% from the same period last year, a slowdown from annual growth rates of 3.6% in Q2 2016, 4.2% in Q1 2016, and 4.7% in Q4 2015 and the slowest growth since Q3 2014.

Housing bubble risks persist, despite deceleration in house price increases

Sweden gdp vs house price growth

According to the 2016 UBS Global Housing Bubble Index, Stockholm is the third most overvalued property market in the world, behind London and Vancouver.  Over the last four quarters Stockholm rose most in the UBS real estate bubble index, in Europe.

“Over the last 12 years, the real house price level in Stockholm has doubled,” said UBS. “The pace of growth accelerated in the last two years as growth rates stood near 15%.”

Riksbank, Sweden’s central bank, takes a similar view: “Valuations on both the asset markets and the housing market in particular are unusually high at present," noted the Riksbank.  "This means that the probability of a fall in prices is elevated. Together with increasing indebtedness in the household sector, this has made households, financial institutions and the financial system as a whole more vulnerable. In the event of a serious economic shock, the consequences for the Swedish economy could be great.”

Agreed HSBC economist James Pomeroy: “The housing market continues to pose significant risks for the Swedish economy.  Should the housing market roll over at any point in 2016 (or 2017) the impact on the economy would be severe.

"Estimates from the National Institute of Economic Research suggest that a 20% fall in house prices would lead to a recession-like impact on consumption and unemployment, with a smaller fall still having severe economic consequences,” said Pomeroy.

Yet despite the worries, the Riksbankcontinues to holdits policy rate at -0.5%, driving up house prices further by making money cheap to borrow.

From one boom to the next

Sweden annual house prices 3 regions

Sweden’s present house price boom started in mid-1990s, after the recovery from a financial crisis caused by a previous housing boom. From 1996 to 2007, the Greater Stockholm house price index soared 217% (119% inflation-adjusted). House prices rose 236% (185% inflation-adjusted) in Greater Malmo, and 202% (156% inflation-adjusted) in Greater Gothenburg. In five of Sweden’s eight regions, house prices doubled.

The boom was set off by low interest rates, rapid economic growth and lack of new supply. With inflation stabilizing after 1995, interest rates for house purchases dropped from more than 10% during the first half of 1996, to less than 5% between 2004 and 2008.

There was a pause in 2008, when the average price of houses in Sweden (one- and two- dwelling buildings) fell 0.9% (-1.7% inflation-adjusted) in the year to end-Q1 2009. In Greater Stockholm, the average price of houses fell by 5.5% (or -6.3% when adjusted for inflation).

Prices regained momentum in 2009, surging 10.3% y-o-y to Q1 2010 (9.2% inflation-adjusted). Greater Stockholm’s average house price rose 11.4% y-o-y (10.3% inflation-adjusted). Average house prices also increased by 12.5% (11.4% inflation-adjusted) in Greater Goteborg, and by 14.2% (13% inflation-adjusted) in Greater Malmo.

After falling by 1.3% (-1.9% inflation-adjusted) from Q3 2011 to Q3 2012, house prices soared again by 26.7% (26.8% inflation-adjusted) from 2012 to 2015. Likewise, after a contraction of 0.3% in 2012, the economy grew continuously from 2013 to 2015 by an average of 2.6% annually.

By reducing housing supply, free-market reforms helped to cause the house price boom

Housing supply in Sweden has been on a par with Europe’s supply laggards, such as the Netherlands and the UK.

Sweden residential construction

There was a notable drop during mid-1990s to early 2000s, because of free-market economic reforms, which strongly reduced total completions:

  • Around 42,000 dwellings were built annually from 1980 to 1990.
  • From 1995 to 2001, less than 10,000 dwellings were completed annually, largely due to the decline in social building.  
  • It was only in 2004 that dwelling completions again exceeded 20,000 units. From 2004 to 2009, more than 27,000 dwellings were completed annually.
  • From 2010 to 2014, there were just less than 25,000 dwellings completed annually.
  • In 2015, dwelling completions increased 18.6% y-o-y to 34,600 units.

“We have built around half of what other countries have over the last 20 years. That shows that we have a long-term problem," said Stefan Attefall, Sweden’s Minister for Public Administration and Housing.

Sweden home sales

“We have a housing crisis, and it needs to be solved,” said Andres Hatzigeorgiou of Stockholm Chamber of Commerce.

In order to increase supply, a government incentive of SEK 3.2 billion (EUR345.04 million) per annum was included in the 2016 Budget to support new rental properties and student housing, i.e., about 15,000 apartments every year, and an additional SEK3.5 billion (EUR380 million) will be allocated to increased housing construction under the Millions Homes Programme.

Dwelling starts rose by 27% y-o-y to 46,529 units in 2015, according to Statistics Sweden. This was far higher than the annual average of 14,400 starts from 1994 to 2002, and 23,800 starts from 2007 to 2012. Dwelling starts increased to 30,714 units in 2013 and to 36,629 units in 2014.

Dwelling starts rose by 10.9% to 12,506 units in Q3 2016 from a year earlier, but completions fell by 30.2%, according to Statistics Sweden.

Rent controls have damaged housing supply

Sweden’s rental market is strictly regulated and rents are set far below reasonable returns-on-investment. The recent surge in house prices is partially to be blamed on the country’s low rents, which discourage builders from building dwellings for lease, recently causing developers, analysts and landlords to call for the government to scrap rent regulations.

Swedish law requires that rent-setting be negotiated between tenant organizations and MHCs or private landlord organizations. Private rents are compared to social housing rents, which leads to rent conformity across tenures. This has led to rental yields that are relatively low and uncompetitive.

This rent-setting structure means that in attractive central urban locations, rents are often well below market levels. This limits the profitability of the private rental market, which has therefore declined significantly over the past two decades.

Rents in newly constructed dwellings in Sweden increased by 3.9% y-o-y to an average of SEK9,200 (€ 961) per month in 2015, up from an increase of 1.7% in 2014 and 2.2% in 2013, according to Statistics Sweden.

In 2015:

  • In Greater Stockholm, the average monthly rent for newly constructed dwellings increased 1.2% y-o-y to SEK 10,282 (€ 1,074)
  • In Greater Göteborg, the average monthly rent for newly constructed dwellings increased 2.3% y-o-y to SEK 9,135 (€ 954)
  • In Greater Malmo, the average monthly rent for newly constructed dwellings rose by 6.6% y-o-y to SEK 8,923 (€ 932)

That is if you can get an apartment, given the shortage. On average, rent makes up about a quarter of people’s income, according to Fastighetsägarna.

“It is almost impossible for immigrants and new arrivals to penetrate this market – it is all about who you know and how much money you have,” says Billy McCormac of Fastighetsägarna property association. Accordingly, there is now a thriving rental black market, with bribes of as much as SEK100,000 per room to get a direct contract.

“Rent controls were supposed to enable people to live in central locations, but now it is having the opposite effect,” adds McCormac.

Every year, rent rises are negotiated between the tenants’ association, representing about 350,000 tenants, and the Stockholm property agency, representing 5,000 private rental companies. Over the past decade, rents have risen by about 19% – not far ahead of inflation, which was about 12%.

Owner occupied homes accounted for 62% of all dwellings in Sweden in 2015. About 39% of these are straightforward owner-occupied homes, while 23% are tenant-owned cooperative dwellings. The growth of tenant-owned cooperatives has trimmed the rental sector, as new cooperatives have taken over previously rented property, and built new dwellings. These conversions have been prevalent in major cities. Rented dwellings comprised only 38% (about 1.8 million units) of all dwellings in 2015, down from 40.5% in 2000.

The debate on the housing market is stuck in a classic left-right divide:

“The regulation creates lock-in effects that make mobility too low and reduce demand for new housing,” says Anders Danielsson, executive vice president at Skanska AB, the country’s largest builder.

In contrast, Marie Linder, head of the tenants union, isn’t convinced that the proposed solution will be an answer to the housing shortfall. Linder believes that there are other measures needed to enhance construction. “We don’t believe changes to the negotiating system like introducing market pricing would increase the number of homes; it would only mean that some people will not be able to stay in their homes,” said Linder.

Tax reforms also have encouraged home-ownership

Recent reforms of property taxation have strongly encouraged home-ownership:

  • In 2006, taxes for owner-occupied housing and tenant-ownership associations and their members were reduced - to about half of what would be required for neutrality, vis-à-vis other capital taxes and interest deductibility.
  • In 2007, the tax on imputed housing rent was abolished, making ownership preferable to renting (imputed rent is assessed on a rent that is deemed whether the owner actually rented the unit out or not).
  • In 2008, the real estate tax was replaced by a municipal fee of SEK4,500 (€485). On the other hand, the capital gains tax was raised from 20% to 30%.

These reforms have been part of a shift to the right in Swedish politics.

Sweden dwelling stock

Swedish politics was dominated by the Swedish Social Democratic Party for 60 years after the Great Depression. It won between 40%-55% of the votes in all elections between 1930 and 1990.

But a centre-right government led by the aristocrat Carl Bildt was elected in 1991-1994, after weak economic growth during the 1970s and 1980s tarnished the image of the Social Democrats.

It was with a changed psychology and a commitment to budget cuts that the Swedish Social Democratic Party returned to power under Ingvar Carlsson (1994-1996) and then under GöranPersson (1996-2006).

In September 2006 the economic pain inflicted by Perrson’s government caused the victory of right-wing Moderate Party. Its leader Fredrik Reinfeldt and the conservatives held power from 2006 to 2014.

In October 2014, the Swedish Social Democratic Party under StevanLöfven again returned to power in coalition with the Green Party, albeit in a hung parliament, having won only 31% of the popular vote. Löfven promised that he would seek wide support for his plans to boost welfare, schools and jobs. The next general elections will be held in 2018.

Interest rates are at historic lows

Sweden interest rates

In December 21, 2016, the Riksbank left its policy rate unchanged at -0.5%, after many previous rate cuts. The central bank also expanded its asset purchases programme by SEK30 billion (€ 3.2 billion) in the first six months of 2017. According to the central bank, monetary policy needs to remain very expansionary for inflation to rise towards the 2% target.

Mortgage interest rates also followed central bank rates down. In October 2016:

  • The average interest rate for housing loans with a maturity of up to 1 year stood at 1.59%, unchanged from a year earlier.
  • For loans with maturity of over 1 year and up to 5 years, the average interest rate fell to 2.11%, from 2.53% a year ago.
  • For loans with maturity of over 5 years, the average interest rate fell to 3.84%, from 4.17% a year ago.

Record low borrowing costs have caused a surge in housing loans to households, which rose 8.32% in 2015 to €2.7 trillion, up from €2.5 trillion in the previous year. In the past 14 years housing lending to households has soared 219.7%.

Sweden housing loans

As interest rates have fallen, more people have chosen variable rate loans. About 68% of new loans were variable rate, while 23.5% were short-term fixed, and only 8.5% medium to long-term fixed.  Of all outstanding loans around 55.6% are now variable rate, up from 45.9% in Q4 2012, according to the European Mortgage Federation (EMF).

Sweden’s economy has somewhat slowed

Sweden gdp inflation

“The picture continues to be that Sweden is in an economic boom, but that growth is slowing down,” said Nordea analyst Andreas Wallstrom. “Private consumption, public consumption and investments surprised us on the downside, so the data was marginally weaker than we’d imagined.”

The Swedish economy expanded strongly by 4.2% in 2015, the highest growth in five years, mainly due to a surge in domestic demand caused by Riksbank’s record stimulus, in an effort to defend its inflation target of 2%. Moreover, the government’s efforts to accommodate the influx of immigrants from war-torn countries like Syria and Iraq are boosting public spending and economic growth. In addition, exports were strengthened by the fact that during the past three years, the Swedish krona (SEK) depreciated against the euro by almost 13%.

Sweden inflation

The economy is expected to grow by 3.4% this year and by 2.4% next year, according to the European Commission.

The country has almost a balanced budget in 2015, from deficits of 1.6% of GDP in 2014, 1.4% of GDP in 2013, 0.9% in 2012, and 0.1% in 2011. Gross public debt stood at 44% of GDP last year, down slightly from 44.9% of GDP in 2014. The gross public debt is expected to fall to 41.6% in 2016 and to 39.9% in 2017, according to the European Commission.

Sweden unemployment

The jobless rate is expected to fall to 6.9% this year, and to 6.5% in 2017, based on government estimates.The country had an average unemployment rate of 7.2% from 2000 to 2015.

From just 0.7% last year, inflation is expected to be 1.1% this year and 1.6% in 2017, according to the European Commission.


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