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Apr 13, 2015

Sweden bubbles away: house prices surge


Sweden house pricesHouse prices in Sweden surged by 8.57% during 2014, according to Statistics Sweden, probably due to rock-bottom interest rates and a shortage of housing supply. When adjusted for inflation house prices rose by 8.8% as compared to the previous year.  House price growth this past year was much higher than the 3.90% rises seen in 2013 (3.83% in real terms), or the 2.28% house price rises in 2012 (2.21% in real terms).

During 2014:

  • In Greater Stockholm, house prices rose by 13.07% (13.31% in real terms)
  • In Greater Göteborg, house prices increased by 7.22% (7.45% in real terms)
  • In Greater Malmo, house prices rose by 4.50% (4.72% in real terms)

The highest house price increases in 2014 were in Gotland (33.08%), Västmanland (12.81%), and Kronoberg (11.11%). The lowest price hikes were in Skåne (0.66%) and Kalmar (0.70%).

Sweden average house prices

During Sweden’s current housing boom house prices skyrocketed by 98% from 2000 to Q2 2008 (71% inflation-adjusted). After a short-lived decline from Q3 2008 to Q1 2009 due to the global financial meltdown, property prices started to rise again in Q2 2009. There was a dip from Q4 2011 to Q3 2012 amidst a sharp slowdown in economic growth, but house price growth resumed in Q4 2012 and price rises have been continuous since then.

From one boom to the next

Sweden’s present house price boom actually 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% in real terms). House prices rose 236% (185%) in Greater Malmo, and 202% (156%) 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. Real interest rates dropped from 7% to 2%, partly due to stiff competition between housing credit institutions, banks and other financial institutions. Housing lending rose from 27% of GDP in 2000, to 47% in 2011.

There was a pause in 2008, when the average price of houses in Sweden (one- and two- dwelling buildings) fell 0.9% (-1.7% in real terms) 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% in real terms).

  • Greater Stockholm’s average house price rose 11.4% y-o-y (10.3% in real terms).
  • Average house prices also increased by 12.5% (11.4% real) in Greater Goteborg, and by 14.2% (13% real) in Greater Malmo.

Does Sweden have a house-price bubble?

Noting that Swedish house prices were overvalued by 30% in relation to income, the OECD warned of a possible bubble in November 2011. US economist Robert Shiller, who famously predicted the US housing bubble, has also noted that Swedish housing prices have risen at least as much as in the countries where prices have crashed.

The Sveriges Riksbank, the Swedish central bank, took precautionary action during the second half of 2010, hiking key rates. While average house prices of one- and two-dwelling buildings declined by 1.8% (4% real) in Q4 2011, there was also a negative impact on the economy.

The Riksbank´s action was widely criticized because of its substantial impact on economic growth, not least by US economist Paul Krugman.  Nevertheless the authorities face a dilemma. In early 2014, the same Paul Krugman noted that the surge of house prices in Sweden over the last 13 years suggests that there is a bubble. “Prices have gone up quite a lot and household debt is quite high. Those are normally the symptoms of a bubble,” according to Krugman.

Sveriges Riksbank Deputy Governor Lars Svensson has however defended the central bank´s recent policies, arguing that there is no property bubble. “If you just look at prices and debt, one might think that it´s a bubble. But the Riksbank´s own survey from 2011 and the recent report of evidence both indicate that the rise is explained by fundamental factors,” Svensson explained.

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

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

There was a notable drop in dwellings built for social renting 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.

The national objective of building 250,000 new homes up to 2020, the present mandate of the Swedish Association of Public Housing Companies (SABO), is clearly insufficient to eliminate Sweden´s housing shortage of 436,000 homes.

In order to encourage more construction of rental properties and increase supply, a government incentive of SEK 3.2 billion (€ 345.04 million) per annum will be included in the 2016 Budget to support new rental properties and student housing in places with housing shortages.

Completions had in fact risen to 32,021 units in 2008, but with the economic crisis in 2009 they fell by 28% to 22,821 units, and again in 2010 to 19,500 units. Completions started to pick up in 2011 with 20,064 units, followed in 2012 with 25,993 units, and in 2013 with 29,225 units, and in 2014 with 27,083 units. Of last year´s total, 18,897 (70%) were in multi-dwelling buildings while 8,186 (30%) were in one- or two-dwelling buildings.

Rent controls have damaged housing supply

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 Sweden increased by an average of 1.7% in 2014, slightly less than the 2.2% growth in 2013. An average three-room apartment can be rented for SEK 6,257 (€ 674.66) per month, according to Statistics Sweden - that is if you can get an apartment, given the shortage.

Owner occupied homes currently account for 64.7% of all dwellings in 2013: 41.6% of which are straightforward owner occupied homes, while 23.2% 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 35.2% of all dwellings in 2013 (excluding special housing), compared to 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 measured 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.

For 6 of the 7 decades since the Great Depression, Swedish politics was dominated by the Swedish Social Democratic Party. 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 Göran Persson (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 Stevan Löfven again returned to power in a coalition with the Green Party, albeit in a hung parliament, having won only 31% of the popular vote.

Interest rates are at historic lows

Sweden interest rates and mortgage rates

Sweden’s benchmark interest rate reached 0% in October 2014, after seven rate cuts starting December 2011.   The central bank rate imposed a negative repo rate of -0.1% in February 2015, which was deepened in March to -0.25% as the central bank continued to combat deflation. The central bank also bought SEK 30 billion (€ 3.2 billion) worth of nominal government bonds with maturities of up to 25 years, in order to “support the upturn in inflation and ensure that long-term inflation expectations are in line with the inflation target”.

Interest rates offered by home credit institutions followed central bank rates down, reaching 1.82% in February 2015.

Record low borrowing costs have caused a surge in housing loans to households, which rose 7% in 2014 to SEK 1.9 trillion (€ 209.8 billion), up from SEK 1.8 trillion (€ 196.2 billion) in 2013.  In the past 14 years housing lending to households has soared 219.7%.

Sweden lending to households

As interest rates have fallen, more people have chosen variable rate loans. By Q4 2014 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 economic recovery continues

Sweden gdp inflation

The Swedish economy has slowly but surely recovered from a sharp slowdown in 2012. In 2014, GDP grew by 2.1%, following GDP expansions of 1.6% in 2013, and 0.9% in 2012. Growth was helped by strong domestic demand during the first three quarters and by a significant rise of exports in the fourth quarter.

GDP rose by 2.6% (annualized) in Q4 2014, higher than the 2.3% growth in the previous quarter, according to Statistics Sweden.

In the next two years, exports, which account for about 47% of the economy,  are expected to rise by 5% each year, according to the forecast of the National Institute of Economic Research (NIER). Stronger exports will be aided by the relatively weak krona and the global recovery, leading to GDP growth of more than 3% in 2015 and 2016. However earlier this year Sweden’s Finance Minister Magdalena Andersson forecast only 2.4% growth in 2015 and 2.7% in 2016.

"In the short term we see that growth in Sweden has still not really picked up. The slow recovery around the world is holding back growth in the Swedish economy," according to Andersson.

The country’s budget deficit was around 1.9% of GDP in 2014, according to Statistics Sweden. Central government debt amounted to SEK 1.715 trillion (€ 184.92 billion) in 2014, up from SEK 1.463 trillion (€ 157.69 billion) from the previous year. New reforms are planned to alleviate the situation, but Andersson has stated that introduction of tough austerity measures are currently inappropriate.

In February 2015 unemployment was 8.4%, higher than the 8% unemployment in both in 2013 and in 2014. In 2015 unemployment is expected to remain high at around 7.7%.

Consumer prices in Sweden rose by 0.1% annualized in February 2015, an improvement from -0.2% inflation rate in January.

The Swedish krona fell to a seven-year low against the pound and six-year low against the dollar in February 2015. However it strengthened in March, mainly against euro, due partly to large asset purchases by the ECB. 



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