Swedish house prices continue to surge

February 15, 2018

Sweden house pricesSweden´s nationwide house price index surged 8.15% (5.87% inflation-adjusted) during the year to end-Q3 2017, compared to last year´s rise of 8.55% y-o-y to Q3 2016, according to Statistics Sweden. During the latest quarter house prices 2.22% (1.67% inflation-adjusted) in Q3 2017.

During the year to Q3 2017:

  • Greater Stockholm house prices rose by 5.6% (3.3% inflation-adjusted), compared with last year´s rise of 4.6% y-o-y in Q3 2016. Quarter-on-quarter, house prices increased 0.9% during the latest quarter.
  • Greater Göteborg house prices increased by 10.9% (8.5% inflation-adjusted), an upsurge from a rise of 6.1% a year earlier. House prices rose by 2.2% during the latest quarter.
  • Greater Malmo house prices surged 11.9% (9.5% inflation-adjusted), down from 13.8% y-o-y in Q3 2016. Quarter-on-quarter, house prices increased 4.5% in Q3 2017.

Demand is weakening

However, demand is now falling. The number of home purchases fell by 7.3% to 38,517 units during the first three quarters of 2017 from a year earlier, according to Statistics Sweden. Home sales fell by 6.19% in 2016, after rising by 5.93% in 2015, 6.71% in 2014 and 3.83% in 2013.

Dwelling starts of newly constructed one- or two-dwelling buildings increased only 1.5% y-o-y in the first three quarters of 2017 while completions rose strongly, by 12.6%.

“The Riksbank’s assessment is that housing prices will continue to increase in the next few years, but at a slower rate, as the supply of housing is increasing and mortgage rates are expected to rise,” according Sweden´s Central Bank.

The Swedish economy expanded by 2.9% from a year earlier in Q3 2017, a slight improvement from a 2.8% expansion during the same period last year, according to Statistics Sweden. The Swedish economy is expected to grow by 3.2% this year and by 2.7% next year, after annual growth rates of 3.3% in 2016 and 4.1% in 2015, according to the European Commission.

Housing bubble risks persist

Sweden gdp vs house price growth

Stockholm is the second most overvalued property market in the world, behind Toronto, according to the 2017 UBS Global Housing Bubble Index. “In the last 10 years, real prices have climbed by 60%, more than twice as fast as incomes, chiefly due to favorable financing conditions,” said UBS.

“Price growth sputtered over the last four quarters to 5%, below the national average, yet market imbalances increased further. Rising mortgage debt and building investments confirm overvaluation signals,” added UBS.

Riksbank takes a similar view: “For a long time, Swedish housing prices have risen sharply and are high in a historical perspective. Over the last ten years alone, house prices have doubled and tenant-owned apartment prices have tripled,” 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.”

According to the European Commission, Sweden is currently experiencing structural imbalances. “Persistent house price growth from already overvalued levels coupled with a continued rise in household debt poses risks of a disorderly correction,” noted the Commission. “The already high household indebtedness keeps growing, while housing prices, which appear to be overvalued, continue to rise at an elevated pace.”

The average debt-to-income ratio for households with mortgages stood at 338% in September 2017, up from 326% a year ago.

Based on a study conducted by Goldman Sachs, comparing house prices in G-10 nations (those with the 10 most-traded currencies) based on three metrics: price-to-rent ratio, price-to-income ratio, and inflation-adjusted house prices, Sweden has a probability of a housing bust of above 35%, higher than Canada (30%), Norway, Australia and Switzerland (20% to 25%).

Yet despite the worries, the Riksbank continues to hold its policy rate unchanged at -0.5% in October 2017, feeling that monetary policy is too blunt an instrument for restraining house prices.

The government’s market cooling measures

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, by Riksbank fiat, while loans worth 70%+ of the property’s value must be amortized at 2% annually.

Moreover, new mortgages were capped at 85% loan-to-value (LTV) back in 2010, which did slow the mortgage market down when it was introduced, but it bounced back again mid-2012. For several years, interest-only loans have been curbed by the banks.

The Swedish Financial Services Authority (Finansinspektionen) plans further amortization restraints in 2018.

Local house price variations

In Greater Stockholm, the average house price increased 7.1% y-o-y to SEK 6,171,000 (€624,779) in Q3 2017, according to Statistics Sweden. Greater Malmo saw a spectacular house price increase of 14.8% y-o-y to an average of SEK 3,878,000 (€392,625) while Greater Göteborg’s house prices also rose strongly by 10.5% to SEK 4,636,000 (€469,369).

Sweden average house prices

Of the eight Riksområden (National Areas), RIKS5 West Sweden registered the biggest y-o-y increase of 10.5% (8.17% inflation-adjusted) during the year to Q3 2017, followed by RIKS4 South Sweden (9.45%), RIKS6 Northern Central Sweden (8.85%), and RIKS3 Småland with the islands (8.62%).

Over the same period, strong house price rises were also seen in RIKS2 Eastern Central Sweden (7.8%), RIKS7 Central Norrland (6.33%), RIKS8 Upper Norrland (6.01%), and RIKS1 Stockholm (5.64%).

  • RIKS1 Stockholm has the most expensive housing in Sweden an average dwelling price of SEK 6,171,000 (€624,779) in Q3 2017. 
  • In RIKS2 Eastern Central Sweden, the average dwelling price was SEK 2,525,000 (€255,642).
  • In RIKS3 Småland with the islands, the average dwelling price was SEK 1,975,000 (€199,957).
  • In RIKS4 South Sweden, the average dwelling price was SEK 2,823,000 (€285,813).
  • In RIKS5 West Sweden, the average dwelling price was SEK 3,195,000 (€323,476).
  • In RIKS6 Northern Central Sweden, the average dwelling price was SEK 1,685,000 (€170,597).
  • RIKS7 Central Norrland has the least expensive housing in Sweden, with an average dwelling price of SEK 1,479,000 (€149,740).
  • In RIKS8 Upper Norrland, the average dwelling price was SEK 1,794,000 (€181,632).

Nationwide house prices stood at an average of SEK 2,974,000 (€301,101) in Q3 2017, up 7.4% from a year earlier.

From one boom to the next

Sweden annual house prices 3

Sweden’s present house price boom started in mid-1990s.

From 1996 to 2007, the Greater Stockholm house price index soared 217% (119% inflation-adjusted), 236% in Greater Malmo (185% inflation-adjusted), and 202% in Greater Gothenburg (156% inflation-adjusted).  The boom was set off by low interest rates, rapid economic growth and lack of new supply. Mortgage interest rates fell from 10%+ in 1996, to less than 5% between 2004 and 2008.

There was a pause in 2008.  Prices regained momentum in 2009, surging 10.3% y-o-y to Q1 2010 (9.2% inflation-adjusted). After falling 1.3% from Q3 2011 to Q3 2012 (-1.9% inflation-adjusted), house prices soared again by 34.9% from 2012 to 2016 (33% inflation-adjusted).

Large boost in construction, funded by government

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

“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 Sttefall, Sweden’s former Minister for Public Administration and Housing.

Sweden residential construction

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

Acknowledging the problem, 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. An additional SEK3.5 billion (EUR380 million) was allocated to increase housing construction under the Millions Homes Programme.

Sweden home sales

As a result, dwelling completions rose strongly by 18.6% y-o-y to 34,603 units in 2015 and by another 22.7% to 42,441 units in 2016.

Dwelling starts also rose strongly in the past four years. In 2016, dwelling starts rose by 24.3% y-o-y to 59,650 units in 2016, after strong annual increases of 30.6% in 2015, 19.7% in 2014, and 44.1% in 2013, 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. However dwelling starts of newly constructed one- or two-dwelling buildings increased only 1.5% y-o-y in the first three quarters of 2017, though completions rose strongly by 12.6%, according to Statistics Sweden.

In 2018-2021, the government will provide SEK 25 million (EUR2.53 million) annually to municipalities, as support for their work to combat acute homelessness.

Rent controls have damaged housing supply

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.

The 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.

“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 14%.

In 2017:

  • In Greater Stockholm, the average monthly rent for newly constructed dwellings increased 3.3% y-o-y to SEK6,815 (€690)
  • In Greater Göteborg, the average monthly rent for newly constructed dwellings increased 1.2% y-o-y to SEK6,120 (€620)
  • In Greater Malmo, the average monthly rent for newly constructed dwellings rose by 1.2% y-o-y to SEK6,557 (€664)

Owner occupied homes accounted for 62% of all dwellings in Sweden in 2016. About 39.2% of these are straightforward owner-occupied homes, while 22.8% 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. 

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.

In a 2017 survey conducted by the National Board of Housing, over 80% of Sweden’s municipalities currently suffer housing shortages. The housing shortfall was estimated around 300,000 to 350,000 units.

The tax structure now encourages home-ownership

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.

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.

Sweden dwelling stock

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 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 October 25, 2017 the Riksbank left its policy rate unchanged at -0.5%, unchanged since February 2016, amidst strong economic activity and low inflationary pressures. It is one of the lowest benchmark interest rates in the world.

As a result, mortgage interest rates remained very low. In October 2017:

  • The average interest rate for housing loans with a maturity of up to 1 year stood at 1.61%, slightly up from 1.59% a year earlier.
  • For loans with maturity of over 1 year and up to 5 years, the average interest rate fell to 1.84%, from 2.11% a year ago.
  • For loans with maturity of over 5 years, the average interest rate fell to 3.25%, from 3.84% a year ago.

Mortgage market continues to expand

Record low borrowing costs have caused a surge in housing loans, which grew from just 52.7% of GDP in 2004 to 74.4% of GDP in 2010, and finally to 84.39% of GDP in 2016. In 2016, housing loans outstanding rose by 7.2% y-o-y to SEK 3.69 trillion (€373.8 billion), according to Statistics Sweden. In the past 15 years housing lending to households has soared by almost 230%.

In Q2 2017, housing loans outstanding increased further by 6.9% to SEK 3.82 trillion (€387.16 billion) from the same period last year.

Sweden housing loans

“Several factors explain the increasing residential lending. One important factor is the lack of housing,” said Christian Nilsson of Swedish Bankers’ Association. “The Swedish population is growing in record numbers due to high immigration and relatively high birth rates.”

“Another factor is the dysfunctional rental markets in the growth regions due to a general rent control, which results in many years of queuing to get a rental apartment on the first-hand market,” added Nilsson.

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).

Modest economic growth

Sweden gdp unemployment

The Swedish economy is expected to grow by 3.2% this year and by 2.7% next year, after annual growth rates of 3.3% in 2016 and 4.1% in 2015, according to the European Commission, mainly due to a surge in domestic demand caused by the continued increase in housing construction and the Riksbank’s below-zero interest-rate policy 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 four years, the Swedish krona (SEK) depreciated against the euro by about 12.6% from a monthly average exchange rate of SEK8.6096 = EUR 1 in November 2012 to SEK9.8488 = EUR1 in November 2017.

Sweden exchange rate

The government budget surplus was 1.1% of GDP in 2016, up from 0.2% in 2015 and a deficit of 1.6% in 2014. A surplus of 0.9% of GDP is projected in 2017, according to the European Commission.

In November 2017, unemployment stood at 5.8%, the lowest level in almost nine years. Unemployment averaged 7.9% from 2009 to 2016.

Inflation was 2% in November 2017, up from 1.6% a year earlier, according to Statistics Sweden.

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