By Hilary Schmidt, International Banker
It was one of the most buoyant housing markets in the world, witnessing near-continuous price appreciation over many decades. But with a harsh monetary environment unfolding last year, Sweden’s housing bubble has truly burst. And with more rate hikes in the offing later this year, the pain for Swedish property prices may not be over.
Although on a steady rise over the long term, it was the ultra-low interest-rate environment during the latter half of the last decade that sent Sweden’s house prices skyrocketing, continuing during the COVID-19 pandemic as central banks across Europe implemented extreme monetary policies to rejuvenate their respective economies. Demand for property surged as Swedish homebuyers sought to take advantage of the low borrowing costs on offer from banks, and working from home prompted necessary upgrades to personal working spaces. This buoyant housing demand was further supported by Sweden’s central bank’s, Sveriges Riksbank’s (the Riksbank’s), decision to purchase significant quantities of mortgage bonds, which only exerted further downward pressure on rates. The Nasdaq OMX Valueguard-KTH Housing Index, based on housing data for more than 95 percent of the residential transactions that take place through real-estate agents, recorded a 27-percent gain in the two years from April 2020 through March 2022.
But Sweden’s house prices have tumbled considerably since then, losing 16 percent during the three remaining quarters of last year and continuing to fall further in 2023, despite a modicum of renewed optimism early in the year when prices briefly stabilised. This crash can be partly explained by the country’s preference for variable-rate mortgages over fixed-term loans—indeed, around half of all mortgage agreements involve variable rates, while many more use short-term fixed rates—which have exposed borrowers to the harsh rate jumps that the Riksbank has implemented since May 2022, when a 25-basis-point hike lifted the key policy rate from zero.
“The pandemic initially led to uncertainty [in] the housing market, although it quickly recovered. Strong demand, above all for single-family homes and larger apartments, led to significant price increases towards the end of 2020 and throughout 2021,” the Swedish Bankers’ Association noted in “The Swedish Mortgages Market – Report 2022”. “The increasing inflation and in particular the increasing mortgage interest rates during the spring of 2022 have resulted in the mortgage market starting to cool down and in housing prices starting to fall during the second quarter of 2022.”
Indeed, rates are still being raised at the Riksbank’s monetary-policy meetings, with the latest one on June 29 seeing a seventh consecutive increase to 3.75 percent being approved to rein in inflation, which remains well above target levels. Households thus continue to feel the pain of these aggressive rate hikes, not only through their existing mortgages but also shrinking disposable income levels. Apartment owners in Sweden are particularly exposed, given that ownership is often secured through cooperative structures that have their own debt obligations to service, and they invariably pass on their swelling costs to owners.
Rising interest rates have also meant that house-construction activity has been dramatically scaled back, while domestic consumption has fallen significantly and household debt has exploded relative to spending power. “I’ve persistently time and time again said that the debt level in the household sector is just way, way too high, and there will be a day of reckoning and eventually rates will go up, and now rates have gone up,” Stefan Ingves, the head of Sweden’s Riksbank from 2006 to 2022, told CNBC in January. “What you see happening now is almost exactly what you would expect to see happening, and that is that households have to pay more and the interest rate sensitivity…is much higher.”
But while a dangerous combination of rising household and real-estate corporate debt, high exposure to variable mortgage rates and rapid price growth in the previous decade has been instrumental in effecting Sweden’s property crash, deeper problems have underpinned the severity of the collapse vis-à-vis the experiences of its Nordic and European neighbours. “On the one hand, Sweden has continued to substantially subsidise home ownership, pouring unnecessary fuel on the fire of the housing bubble. Most notable here is tax relief on mortgage interest. Decades after such relief was jettisoned elsewhere—even the famously homeowner-friendly UK got rid of it in 2000, Gordon Brown rightly describing it as a middle-class perk—it remains in place, absurdly, in Sweden,” Brett Christophers, a professor in the Institute for Housing and Urban Research (IBF) at Sweden’s Uppsala University and author of Our Lives in Their Portfolios: Why Asset Managers Own the World, explained in a March article in The Guardian. “On the other hand, Sweden has a fundamentally broken rental system, which for a variety of reasons comprehensively fails to make affordable accommodation widely and readily available in the largest cities, especially for those with [the] greatest need and least resources. The effect of this lack of viable rental accommodation has been to further inflate demand for home-ownership, putting additional upwards pressure on house prices and debt burdens.”
The increasingly desperate state of Sweden’s housing market is no more clearly exemplified than by Samhällsbyggnadsbolaget (SBB), a major landlord property group within the country that now faces acute short-term debt and liquidity challenges amidst the economic slowdown. In May, S&P Global Ratings downgraded SBB from a BBB- investment grade rating to BB+ junk level, promptly triggering a massive sell-off in the company’s stock and forcing it to cancel its dividend payment and rights issue. It has since undergone more rating downgrades, the most recent being on July 28 from BB- to CCC+. “The negative outlook reflects high uncertainty regarding SBB’s ability to successfully secure sufficient funding to cover its short-term debt maturities within the next few months,” S&P noted following its latest action. “Securing sufficient funding needs is taking longer than expected, and we believe SBB’s access to capital markets remains remote.”
Additional downgrades could be on the way, as the company faces a fight for survival with 14.6 billion Swedish kronor (US$1.4 billion) of debt scheduled to be repaid within the next 12 months amidst a tougher environment in which to obtain investor support. According to Bloomberg data, moreover, around $10 billion of Swedish property groups’ combined bond debt will mature this year, and approximately $40 billion will mature over the next five years, as the likes of local market competitors Fabege, Fastighets and Corem are also feeling the heat. In response, SBB has replaced its chief executive officer, Ilija Batljan, with Leiv Synnes, the former chief financial officer of rival property firm Akelius Residential Property, while Morgan Stanley recently acquired a 2.36-billion-krona stake in the new subsidiary SBB Residential Property. But given the strong likelihood of further rating cuts, more asset sales could transpire if market confidence is not soon restored.
To compound matters, a further slide in housing-market confidence looks increasingly likely, with Sweden’s second-quarter contraction in gross domestic product (GDP) recorded at 1.5 percent—the biggest negative quarterly change since the second quarter of 2020—fuelling heightened recession risks. As such, Sweden’s economic outlook is weaker than other Nordic nations’ outlooks, with the European Commission (EC) estimating GDP to shrink by 0.5 percent this year before staging a 1.1-percent recovery in 2024. But it will take a while before it can return to the 2.5-percent average annual growth rate (AAGR) it achieved in the 2010-19 pre-pandemic period. Further interest-rate hikes should also stymie any residential property-price recovery and continue to expose households to tighter lending conditions.
According to a late-May forecast from Nordea, the pressure on consumers and the housing market is set to increase throughout this year, and as such, the Nordic bank’s view is that Swedish home prices “will decline by another 6%, thus falling by 20% from the peak”. That said, Nordea also noted that 2023’s strong start pushed risks to its forecast toward the upside. Indeed, Swedish households themselves are also becoming more optimistic about developments in the housing market, with the latest Housing Price Indicator survey from the country’s largest bank, SEB AB (Skandinaviska Enskilda Banken AB), recording a three-point rise to 14 in July, building on an 18-point jump a month earlier, which was the first time in a year that more respondents believed in rising than falling home prices. Whether this brighter mood translates into meaningful price appreciation remains to be seen, however, which makes the latter half of 2023 all the more crucial for Sweden’s housing market.