Statistics Sweden reports that average residential real estate prices have dropped across most of the country, including in Stockholm where prices slipped -6.6% in real terms during 2011. Experts say the decline is likely due to a series of interest rate hikes by Riksbank that culminated in a 2% boost, although rates have since dropped. Bank analysts project prices to fall slightly further or remain flat for the duration of the year as what many see as a long-lasting housing bubble begin to deflate. Low interest rates, lower supply and an expanding mortgage market are thought to have contributed to the boom, but an economic slowdown in 2012 is expected to put an end to soaring home prices. For more on this continue reading the following article from Global Property Guide.
Swedish house prices have fallen slightly since the peak in Q1 2010. During 2011 they fell by 2.7% (4.89% in real terms) to an average price of SEK 1,969,000 (€221,316), according to Statistics Sweden.
- In Greater Stockholm, average house prices fell by 4.4% during 2011 (-6.6% in real terms) to SEK 3,643,000 (€409,473), with a large fall in the last quarter when prices fell 7.9% (-8.6% in real terms).
- Regions with large house price declines included Södermanland, which experienced a 8.94% decline during 2011, followed by Värmland and Östergötland with 8.6% and 7.4% price falls, respectively.
- Västerbotten had the highest house price increase among Swedish regions in 2011, at 4.4%. Gotland (3.5% rise) and Uppsala (2.8% rise) also had decent house price increases.
The drop in house prices was partly influenced by the Riksbank’s seven hikes in the key rate since July 2010, to 2% (the rate prevailing between July 2011 and October 2011). These hikes were in response to strong GDP growth in 2011 (3.9% ), and high lending for house purchases, Since then, because of the slowing economy, the Riksbank’s key rate has been lowered to 1.50%.
It is likely that house prices in Sweden will slide or at best at best be stable in 2012, according to Riksbank Central Bank Governor Stefan Ingves. “The pace of lending is significantly lower now than before and we have a generally weaker economic development,” says Ingves.
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.
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.
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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.
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
Husing 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
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%.
Economic slowdown in 2012
Sweden’s economy grew by 3.9% in 2011, down from 6.1% in 2010. Exports suffered from the unstable international conditions, with only a 0.6% exports increase. Low consumption also contributed to Sweden’s slowdown, with household consumption only rising 0.7% in Q4 2011, while government consumption rose 0.8%.
The government cut its 2012 economic growth forecast to 0.4% due to “problems in the public finances of several euro[zone] countries”, Sweden’s Finance Minister Andres Borg announced. However, growth is expected to pick up the following year, with 3.7% GDP growth in 2013.
Inflation remains below the Riksbank’s 2% target, at 1.9%. Meanwhile, unemployment rose to 7.8% in December 2011. Sweden’s unemployment is likely to peak at 9% next year, according to Danske Bank’s analyst Michael Grahn, paving the way for a Riksbank repo rate reduction to 0.5% this year.
This article was republished with permission from Global Property Guide.
