Growth in danger zone

After several years of dramatic price rises, Sweden is now one of the countries at risk of a collapse in house prices, resulting in GDP growth slowing down.

House prices have risen, in real terms, by over 30% in Sweden and New Zealand in the past three years, accompanied by rising household debt. Now, according to credit rating institute, Moody’s, the two countries are most exposed to falling house prices.

Jens Magnusson, from SEB, says the warnings are correct but that the conclusions can be qualified. He points out that price increases in Sweden do not mainly come from speculation and that lending is distributed so that those with the highest incomes borrow the most.

Moody’s report also points out that Sweden’s social safety net provides a cushion for households but means greater economic exposure if things begin to get shaky.

“We’re living dangerously”

Governor of the Riksbank, Stefan Ingves, says that Sweden is living dangerously, and he is still concerned about household debt. “Debt has gone up over a long period and great numbers are borrowing with variable rates and little amortisation. These are all the classic signs that it could be really troublesome,” he says.

Measures such as interest rate deductions, the rental system and house construction have so far been focused on new mortgages not the entire lending stock. It is too early to say what the effect of the new amortisation requirement will be but Ingves does not believe it is enough. He also considers there to be risks associated with the European banking system, which is not completely stable after the crisis.

Municipalities turn to Poland

With an overheated market, Swedish municipal housing companies are finding it hard to build apartments at a reasonable price, which is why they are eyeing bids from construction firms in Poland. The idea is that the modular homes are manufactured in Poland, so that the amount of time the construction workers spend in Sweden, with Swedish wages, is kept to a minimum.

SABO – the Swedish Association of Public Housing Companies – says it has plans to widen its reach and meet Baltic and German companies this autumn in order to cut construction costs.

Warning: new risks for new production

The government has gone ahead with a proposal to exempt new builds from tighter mortgage rules as a way of helping the construction industry retain profits and price levels as a way of tackling the housing shortage.

However today, the Swedish Bankers’ Association (Bankföreningen) is issuing a warning against exempting new houses from new, tighter mortgage rules. The association warns that the risks of loans for new productions are just as high as for existing housing, it could lead to a segmented housing market, and the purchase prices for new-builds will not meet the market value of the housing; for example a newly built apartment which cost SKr 5 million could fall by SKr 500,000 once on the market as a used property and when it is no longer exempt.

Riksbank prepared to do more

Sweden’s central bank, the Riksbank, has kept its benchmark interest rate, the repo rate, at a record low of -0.35 per cent, but says it is ready to do more if needed. Market reaction was muted yesterday although the Swedish krona strengthened against the euro.

In a press release, the Riksbank said it had upwardly revised its forecast for GDP growth to 3.7 per cent this year and 3.6 per cent in 2016, as a result of strong economic activity.

However, the housing market is “out of balance” and it is of the utmost importance that the measures are taken to create a better balance between supply and demand, and reduce the incentives for households to take on debt, the bank said (ed.).