Jenny Segerstedt learned about the downside of Sweden’s soaring real-estate market the hard way.
The 39-year-old teacher, who needed to move this year after a divorce, lost out on one property after a bidding war sent the price to 2.2 million kronor ($342,000), 70 percent above the starting bid. She eventually found a 63-square-meter (678-square-foot) apartment in a 1950s building in the western Stockholm suburb of Vaellingby for 1.7 million kronor.
“I’m fascinated by how little I got for my money -- I looked at places that need renovation and really small apartments but they sold for more than 2 million kronor,” she said. “I’ve been to a lot of viewings, even of some pretty shabby places, but prices jumped fast.”
A shortage of new buildings and low borrowing costs are fueling a level of demand for property that’s creating risks for Sweden’s economy. Apartment prices rose 14 percent in the 12 months through August after more than doubling since 2000, sending household debt to record levels and prompting a warning from the International Monetary Fund that the country needs to take measures to prevent consumer debt and housing costs from spiraling out of control.
While the government has introduced measures to curb credit growth, analysts at Danske Bank A/S (DANSKE) and the Swedish National Board of Housing are joining the Washington-based IMF in calling for stronger action: forcing households to pay down debt and changing the rules that allow property owners to deduct a percentage of mortgage interest costs from their tax bills.
“Politicians must make sure that house prices, and most of all credit growth, don’t exceed income growth by for example gradually and carefully reducing tax deductions on mortgage interest payments and introducing a general amortization requirement,” said Roger Josefsson, chief economist at Danske Bank’s Swedish unit in Stockholm.
“That’s of course not all that simple, since none of these measures will win any elections.”
Swedish Finance Minister Anders Borg, whose government alliance is trailing the opposition in opinion polls ahead of elections in September 2014, has rejected the demands.
Borg said Sept. 18 that a mortgage amortization requirement is not high on the agenda for the coming year and there are “more natural” ways to curb household debt. This month he said reducing deductions on mortgages is also not planned.
The government did introduce a mortgage cap in October 2010 that helped slow credit growth to a 20-year low of 4.5 percent last year, from a pace of more than 10 percent in the five years through 2008. Borrowing has since started to accelerate as property demand shows few signs of abating.
The average price of an apartment in central Stockholm rose to 65,259 kronor ($10,126) per square meter in August, according to Svensk Maeklarstatistik data. That compares with prices of a mainstream apartment in London of $12,800 per square meter, according to data compiled by Knight Frank LLP.
For apartments across Sweden, the average is 28,435 kronor per square meter. The average price for a house in Greater Stockholm was 4.04 million kronor in August, compared with 2.3 million in Sweden as a whole.
Rising prices stem partly from a lack of rental properties in big cities such as Stockholm and Gothenburg after about 160,000 properties across the country were converted into owner-occupied apartments since 2000, according to data from Statistics Sweden.
New building is also failing to keep up with population growth. While Greater Stockholm has added 164,400 people in the past five years, housing construction in the area was 4,165 units in the first half of 2013.
The need for more housing has coincided with unprecedented monetary stimulus across the world that’s pushed borrowing costs to record lows. In Sweden, where households typically don’t have to repay mortgages over a fixed period, the 1-year mortgage rate at Swedbank AB (SWEDA) is 2.89 percent. About 52 percent of households have a variable-rate mortgage that makes them more vulnerable to changes in interest rates.
Moody’s Investors Service warned this month that “the accumulation of household debt has generated key vulnerabilities for the Swedish banking system,” including increased exposure to interest-rate rises and asset-quality deterioration.
Standard & Poor’s has said the growth of household debt means it may lower Sweden to “3” from “2” in its banking industry country risk assessment, where a rating of “1” denotes the lowest risk and “10” the highest. Countries at 2 include Australia, Japan, Norway and Canada. The U.S., U.K. and Chile are in the lower tier.
Swedish housing is overvalued by as much as 25 percent after prices accelerated at a faster pace than disposable income, S&P analysts Sean Cotten and Alexander Ekbom said in a Sept. 25 interview. The divergence may either require prices to decline or salaries to rise at a faster pace, they said.
The 14 percent increase in apartment prices and the 4 percent gain in the value of single-family homes compare with an annual increase in base salaries in July of 1.9 percent for blue-collar workers and 1.5 percent for white-collar employees in the private sector, according to a Sept. 30 report from Statistics Sweden.
“It’s unusual that house prices are corrected in any other way than through a big drop when house prices are as overvalued as they are in Sweden,” Danske’s Josefsson said.
Segerstedt is aware she may have overpaid for her new apartment, even as the mother-of-three plans to spend 150,000 to 200,000 kronor on changing the kitchen and painting the walls.
“While I am not worried right now, as I plan to live in my new apartment for some time, I do think we’ll see a correction in the market soon with some kind of housing-bubble problems,” she said.
Danske Bank’s Josefsson estimates that Swedish single-family houses are overvalued by more than 20 percent. He forecasts that prices will rise 2.5 percent this year before falling 5 percent in 2014, according to a Sept. 30 report.
Sweden’s financial regulator said last month that it may start forcing households to make monthly amortization payments on their mortgages to bring down debt levels. A March report by the watchdog showed that it would take Swedish households with mortgages at 75 percent of their properties’ value an average of about 140 years to repay the loans in full at the current rate.
Riksbank Governor Stefan Ingves has called for risk-weights to be raised further after tripling the measure banks must apply to mortgage assets to 15 percent this year. It also requires banks to have core Tier 1 capital ratios more than 12 percent of their risk-weighted assets by 2015 -- some of the world’s strictest capital rules.
The government, which also plans to introduce counter-cyclical buffers for banks, has warned lenders it may raise those requirements further to protect Swedish taxpayers from potential losses in the financial industry.
Sweden “has tools available to it in order to take a long-term approach to curb household debt growth and cool down housing markets, with steady increases in amortization and reconsideration of tax deductions on mortgage interest payments as alternatives to focusing on risk weights and capital requirements,” said S&P analysts Cotten and Ekbom.
“Forced amortization adds costs for households, which gives them less space to borrow money from the bank when buying a home, which also has an effect ultimately on house prices,” Ekbom said. The analyst said a risk weighting of 24 percent to 30 percent would be a more suitable level, taking into account the performance of the economy and housing market developments.
Even as prices keep rising, there is no bubble in Sweden, according to state-owned mortgage lender SBAB.
“I don’t think there is a bubble in Sweden, but I definitely think you should be concerned and that you should follow the development closely and take a very prudent view on the development,” Carl-Viggo Oestlund, SBAB’s chief executive officer, said in an interview on Sept. 24. “If we start seeing mortgage rates rising at a fast pace, we should be concerned.”
Sweden needs to increase housing construction in its large cities “to damp the price development and make it easier for young people to enter” the housing market, Hans Jacobson, head of Nordea’s Swedish banking operations, told reporters in Stockholm yesterday.
Bengt Hansson, an analyst at the Swedish National Board of Housing, Building and Planning, said the government needs to act now to break the trend of rising house prices and debt levels. Allowing debt to climb further increases the risks to the economy, he said. The best measures would be to force households to amortize on their debt and reduce the tax deductions on mortgage payments, he said.
“The Swedish market is substantially overvalued,” Hansson said in an interview at his office in Stockholm on Oct. 2. “People really look for the lowest rates and if they can postpone amortization, they do it. That’s a pattern we have seen in all countries that have eventually ran into problems.”