Sweden's house prices rising again, as market-cooling measures lose power
Lalaine C. Delmendo | May 20, 2020
- Greater Stockholm house price index rose by 5% y-o-y in Q1 2020 (3.9% inflation-adjusted), against a decline of 4.4% the previous year. Quarter-on-quarter, house prices increased 2.9% in Q1 2020 (3.8% inflation-adjusted).
- Greater Göteborg house prices rose by a modest 2.4% (1.4% inflation-adjusted) during the year to Q1 2020, against a rise of 2.6% a year earlier. House prices rose by 0.4% during the latest quarter (1.3% inflation-adjusted).
- Greater Malmo house prices increased strongly by 7.7% (6.6% inflation-adjusted) during the year to Q1 2020, an improvement from a minuscule growth of 1.1% in the prior year. Quarter-on-quarter, house prices rose by 2.3% in Q1 2020 (3.2% inflation-adjusted).
Despite the recovery in house prices there was a sharp decline in construction activity in 2019. Dwelling starts of one- to two-dwelling buildings fell by 14.3% to 9,570 units and starts of multi-dwelling buildings by 8.8% to 37,847 units, according to Statistics Sweden. Dwelling completions of one- to two-dwelling buildings fell 14.4% to 10,300 units, but completions of multi-dwelling buildings increased by 6.9% to 45,800 units.
During Sweden's recent housing boom (2012-2019) house prices surged by more than 48% (38.4% inflation-adjusted). Over the past two decades house prices rose by a whopping 230% (155% inflation-adjusted).
However, the outlook for the housing market is now uncertain, amidst the economic repercussions of the coronavirus outbreak.
Though Sweden did not impose a full lockdown, its economy is expected to be as badly hit as its European neighbors. According to the Riksbank, the country's central bank, the Swedish economy is projected to contract by between 6.9% and 9.7% this year. The Swedish economy expanded by about 1.2% last year, a slowdown from the previous year's 2.2% growth and the slowest expansion since 2013.
Yields are moderate in Stockholm, Sweden
Swedish property yields are moderate. This year, we were unable to get yields figures because rents were hard to get in sufficient quantity to be reliable. When we surveyed them last year, mid-sized central Stockholm apartments (80 to 120 sq. m.) had the most generous gross yields, at 6 to 7%. Other sized properties seemed likely to have lower yields, at around 3 to 4%, and properties in suburban Stockholm also had relatively lower yields, at 3% to 5%, while apartments in the centre of the second-largest city of Gottenburg can yield around 5% to 7%.
Because rents are tied to the age of the property, the higher yields in the city-centre reflect partly the newer housing stock in those areas.
Generally, property prices in Stockholm vary in a range from €6,000 to €7,500 per square metre.
Round trip transaction costs on residential property are quite low in Sweden. See our Sweden residential property transaction costs analysis and Transaction costs in Sweden compared to other countries in Europe
High rental income taxes and CGT
Rental Income: Rental income is generally considered as business income and taxed at progressive rates. Income-generating expenses are deductible when computing the taxable income.
Capital Gains: Capital gains tax is levied at a general rate of 30%. Acquisition costs are deductible when computing the taxable gains.
Inheritance: Inheritance tax in Sweden has been abolished since January 2005.
Residents: Residents are taxed on their worldwide income at progressive rates.
Transaction costs in Sweden are low
Closing costs range from 7.26% to 9.26%. The buyer pays stamp duty (4.25%) and registration fee of SEK825 (€96). The seller pays the real estate agent’s fee (3% - 5%). When the buyer and the seller reach an agreement, the former pays a deposit ranging from 2% to 10% of the purchase price.
Strictly regulated rental market
Sweden’s rental market is strongly pro-tenant. The system is enormously counter-productive. Eight per cent of the Swedish population is queueing for a new apartment, with an average waiting time of 10 years
Rents: Rents are set far below reasonable returns-on-investment. Rents are little influenced by location, so that metropolitan units are especially under priced. The system is enforced by Rent Tribunals.
Tenant Security: Tenants have a right to prolong their contract, essentially for ever. The rule is totally asymmetric; a tenant may at all times give 3 month’s notice, even if the contract is fixed for a given period, to terminate the agreement.
In September 2006 the Alliance for Sweden, a centre-right coalition headed by Moderate Party leader Fredrik Reinfeldt, unseated the Social Democrat Party of Goran Persson. Since then, the housing system has been high on the agenda. An ongoing state review of the system argues for the removal of the current rental ceiling, so that private housing companies and individuals could set market rents.
Economy to contract sharply, unemployment to riseThough Sweden did not impose a full lockdown as seen in most of Europe, the economy is expected to be just as badly hit as its European neighbors.
The Riksbank, Sweden’s central bank, expects the economy to contract by between 6.9% and by 9.7% this year, depending on how long the spread of the virus continues - the worst downturn since 1940.
“In both scenarios, production falls sharply to begin with, and more than during the financial crisis,” said the Riksbank.
The Swedish economy expanded by about 1.2% last year, a slowdown from the prior year’s 2.2% growth and the slowest expansion since 2013.
The Swedish crown continues to fall against the euro. It has fallen about 15.5% over the past four years, reaching SEK 10.8993 = EUR 1 in April 2020. The crown also lost about 15.7% of its value against the US dollar in the past two years.
Inflation slowed sharply to 0.6% in March 2020, the lowest level in more than four years, according to Statistics Sweden. Inflation is likely to drop to zero, far from the Riksbank’s 2% target.
Unemployment stood at 7.1% in March 2020, down from 7.7% in the previous month and 6.1% a year earlier, according to Statistics Sweden. However the jobless rate is projected to rise to between 8.8% and 10.1% for the full year, according to the Riksbank.
The Swedish central government’s finances have remained healthy, recording a budget surplus of SEK 112 billion (€10.5 billion) in 2019, according to the Swedish National Debt Office. The surplus was equivalent to 0.5% of GDP last year, from surpluses of 0.8% in 2018, 1.4% in 2017, 1% in 2016, 0.2% in 2015 and a deficit of 1.6% in 2014.
As percent of GDP, gross public debt was estimated to have fallen to 35.1% in 2019, down from 38.8% in 2018, according to the Eurostat.