Swedish house prices rising again


Sweden house prices

After declining from Q3 2011 to Q3 2012, the Swedish housing market is now recovering fast, despite a sharp economic slowdown.

Swedish house prices rose by 3.05% during the year to end-Q1 2013, after an annual rise of 2.28% in 2012, and year-on-year declines of 1.28% in Q3, 2.93% in Q2 and 3.49% in Q1, based on figures from Statistics Sweden. When adjusted for inflation, house prices increased 3.11% over the same period.

During the year to Q1 2013:

  • In Greater Stockholm, house prices rose by 2.7% (2.8% inflation-adjusted)
  • In Greater Göteborg, house prices increased 2.9% (3% inflation-adjusted)
  • In Greater Malmö, property prices fell by 0.3% (-0.2% inflation-adjusted), an improvement from year-on-year house price declines of 1.3% in Q4, 2.7% in Q3, 8.3% in Q2 and 7% in Q1 2012

During Sweden’s housing boom, from 2000 to Q2 2008, house prices skyrocketed by 98% (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.

In 2012, the number of dwelling starts in one- or two-dwelling buildings dropped by 45% y-o-y to 4,268 units.  It was a strong year for completions, however, with total number completions of one- or two-dwelling buildings up 18.4% in 2012.

After expanding by 3.7% in 2011, the economy slowed sharply in 2012, with a real GDP growth rate of just 0.8%, mainly due to deterioration in net exports caused by strong krona. The economy is expected to grow by 1.2% in 2013, according to Riksbank, Sweden’s central bank.

Possible bubble?

Sweden’s house price boom started in mid-1990s, after the economy recovered from its financial crisis. 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 over the same period. In five of Sweden’s eight regions, house prices doubled.

Sweden average house prices

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 credit lending rose from 27% of GDP in 2000, to 47% in 2011.

There was a hiccup 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 2011 (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.

The OECD warned of a possible bubble in November 2011. According to the OECD, Swedish house prices were overvalued by 30% in relation to income. US economist Robert Shiller, who early on warned of the US housing bubble, also believes that Sweden may be having a housing market bubble, noting that housing prices have risen in Sweden at least as much as in the countries where prices have crashed.

Shortage in housing supply

Sweden is on a par with Europe’s supply laggards, the Netherlands and the UK, in terms of low building rates. During mid-1990s to early 2000s, there was a notable drop in dwellings built for social renting, because of free-market economic reforms.

  • Around 42,000 dwellings were completed annually from 1980 to 1990.
  • From 1995 to 2001, less than 10,000 dwelling units were completed annually
  • It was only in 2004 that dwelling completions again exceeded 20,000 units.

Sweden dwellings completed

Housing completions increased to 32,021 units in 2008, but this is still way below the levels of the early 1990s. With the world economic crisis, completions dropped 28% to 22,821 units in 2009. In 2010 there were only 19,500 completions; 10,625 (54%) were in multi-dwelling buildings while 8,875 (46%) were in one or two-dwelling buildings.

Housing starts picked up in 2010 with 26,000 units, but then declined to 21,000 units in 2011.

The big mortgage market expansion

Sweden lending to households

hHusing credit institutions’ lending rates fell to historic lows during the latter part of 2009 to early 2010, at around 1.6% to 2%. The lower interest rates stimulated mortgage demand and pushed up house prices. Most borrowers were on variable rate loans, which accounted for 80% of new loans in 2009.

Rates tightened in the latter part of 2010, as the economy recovered. By autumn 2011, only half new loans were variable rate, as expectations of a rate hike grew.

Mortgage lending continues to slow. Housing credit growth in 2011 was 6%, lower than outstanding loan growth of 9% in 2009, and 7.1% in 2010, respectively.

Tax reforms have encouraged home-ownership

Radical reforms in property taxation have recently significantly encouraged house-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 (€481). On the other hand, the capital gains tax was raised from 20% to 30%.

Shrinking rental market?

Homeownership has been growing continuously in Sweden in recent decades, and especially rapidly in the past few years. Rented dwellings are now only 35% of all dwellings, as compared to 42% in 2010.

Owner occupied homes now account for 65% of all dwellings: 43% of those are straightforward owner occupied homes, while 22% are tenant-owned cooperative dwellings. The growth of tenant-owned co-operatives has trimmed the rental sector, as new co-operatives have taken over previously rented property, and built new dwellings. These conversions have been prevalent in major cities.

Currently, around half the rental sector is owned by municipal housing companies (MHC), non-profit companies linked to local authorities, while the other half is privately owned.

Rents in Sweden are largely historic cost-based, and reflect the age composition of the social housing stock. Swedish law requires that rent-setting be negotiated between tenant organizations and municipal housing companies (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. Therefore, the private rental sector has declined significantly over the past two decades. In 2011, rents for MHCs had a 2.6% increase from the previous year, and 2.3% in the private sector.

Easing interest rates

Sweden interest rates and mortgage rates

During the second half of 2010, Swedish interest rates tightened from Europe’s lowest benchmark rate, of 0.25%. With seven rate hikes from July 2010 the benchmark interest rate was tightened to 2% in July 2011, but the Riksbank’s repo rate is down to 1.50% in March 2012, following the ECB’s latest rate cut to 1% last December 2011.

The interest rates for house purchases imposed by housing credit institutions steadily increased from 2.8% in September 2005 to 6.04% in September 2008 (due to a major change in the structure of interest rates in Sept 2005, earlier figures are not available). Housing credit institutions rates then followed the key rate downward to 1.65% in November 2009, and have now come back up to around 3.92%.

Slow and protracted economic recovery

Sweden gdp inflation

Sweden’s economy grew by just 0.8% in 2012, sharply down from 3.7% growth in 2011 and 6.3% growth in 2010, mainly due to the deterioration of net exports. Exports, which account for about 47% of the economy, suffered from the eurozone debt crisis and the impact of the strong Swedish krona. In 2012, the total value of exports dropped by 3.5%.

In an effort to boost the economy, Riksbank cut its main lending rate four times since December 2011, to 1%. “We still have a serious situation with the crisis in Europe. For Sweden, this means a slow and protracted recovery, both during 2013 and 2014,” said Finance Minister Anders Borg.

The Swedish krona has surged by 27% against the euro since the end of 2008, prompting calls for government action. In the past 12 months the krona appreciated by about 6% against the euro.

Due to sluggish economic growth, the country’s budget deficit is expected to reach 1.6% of GDP this year but it is expected to narrow to 1% in 2014. The total debt burden reached 38.2% of GDP in 2012 and is projected to increase to 42% of GDP in 2013, according to the Finance Ministry.

In February 2013, Sweden had an average unemployment rate of 8.5%, up from 8.2% in the same period last year, according to Statistics Sweden. The overall unemployment rate was 7.9% in 2012, down from 8.6% in 2010, according to the IMF.

Inflation remains below the Riksbank’s 2% target. Consumer prices are expected to rise by 0.3% in 2013 and 1.8% in 2014, according to Swedbank AB.