Sweden’s banks have drawn criticism from Finance Minister Anders Borg for failing to cut mortgage rates. Their reluctance to do so is about the only thing preventing a full-blown housing bubble.
“What Borg wants is for banks to hand out cheaper loans without that increasing demand for loans,” Par Magnusson, chief analyst for Scandinavian rates at Royal Bank of Scotland Group Plc in Stockholm, said in an interview. “That’s an impossible equation.”
Swedish property prices have already risen too much, according to the National Housing Credit Guarantee Board, or BKN, which advises the government on housing finance. The group said residential properties are 20 percent overvalued after years of crisis policies kept interest rates low. Reducing mortgage rates further would spur credit growth and increase the risk of insolvencies if borrowing costs start to rise, BKN said.
“If banks start lowering the mortgage rates, we face the risk of getting the same low rates we had in 2009 and a very fast rise in household indebtedness,” Bengt Hansson, head of research at BKN, said in a June 18 interview. “They would then become very vulnerable to rate increases.”
Borg, who wants Sweden’s four biggest banks to meet stricter capital requirements than those set elsewhere in Europe, has warned the industry that its failure to pass on lower interest rates to customers may prompt his government to intervene.
Nordea Bank AB, Swedbank AB, Svenska Handelsbanken AB and SEB AB need to boost core Tier 1 capital -- a measure of financial strength -- to 10 percent of their risk-weighted assets by January, and then raise the ratio another 2 percentage points by 2015. The Basel Committee on Banking Supervision has set a target of at least 7 percent by 2019.
The banks’ higher mortgage margins helped them lift their combined first-quarter profit by 2.1 percent to 16.2 billion kronor ($2.31 billion) -- money they can use to help fulfill the higher capital rules. Though Borg opposes a European financial transactions tax, he said in February there may be other “national solutions” that could force banks to lower lending margins.
A continued increase in mortgage lending would follow record credit growth during the financial crisis, helping to push household debt up to 170 percent of disposable incomes in 2010, compared with 90 percent in the mid-1990s, according to the Riksbank. Bank lending to Swedish households jumped 50 percent to 2.65 trillion kronor between 2006 and 2011, driven by an 86 percent increase in mortgage lending to 2.12 trillion kronor, according to Statistics Sweden.
“We have a bubble now, evident in the fact that real prices have increased so much,” Hansson said. Figures compiled by BKN show house prices have risen 75 percent in the past decade, while apartment prices have soared more than 150 percent in the period, adjusting for inflation.
Swedish apartment prices have soared more than 30 percent since early 2007 to an average of 23,757 kronor a square meter in May 2012, according to Svensk Maeklarstatistik AB. The average price for an apartment in Sweden is 1.6 million kronor and the average size is 65 square meters.
A 69-square-meter three-room apartment in Stockholm’s exclusive Oestermalm district was put on sale for 6.95 million kronor, or 100,725 kronor per square meter. The latest bid on the property was 7.22 million kronor as of June 22, according to property broker Alexander White Fastighetsmaekleri.
The average apartment price in central Stockholm is 57,932 kronor a square meter, data from Svensk Maeklarstatistik show, which compiles monthly data on Swedish house prices and tracks 70 percent of all sales brokered through real-estate brokerages. That compares with an average price of 36,452 kronor per square meter in Gothenburg, Sweden’s second-largest city.
Not everyone agrees the housing market is in a bubble. Central bank Deputy Governor Lars E. O. Svensson says the increase in prices was caused by a shortage of homes on the market rather than an increase in mortgage lending.
“Everything indicates that house prices are just a question of supply and demand,” he said in an interview. “A bubble means a price is higher than what’s justified by fundamentals and there are no signs that prices in Sweden aren’t compatible with fundamentals.”
The strength of Sweden’s economy, combined with the European sovereign debt crisis, has caused the krona to gain 4.2 percent against the euro in the past 12 months. The Swedish currency was little changed at 8.8131 krona per euro at 11:48 a.m. in Stockholm.
Swedish banks have widened mortgage margins even as policy rates have declined, the Financial Supervisory Authority said on May 24. The regulator estimates that the difference between customer rates and bank financing costs is now 1.1 percentage points, the same as in 2002 to 2004. The Riksbank’s benchmark rate is 1.5 percent, down from 4.75 percent in September 2008.
“As financing costs fall, mortgage margins also ought to fall and it’s of course worrying that the banks so blatantly prioritize their profitability over taking their societal responsibility to contribute to stability,” Borg said May 24.
Yet Borg has also signaled he doesn’t want house prices to further increase. Property prices remain “relatively high,” he said on June 15. This is “still a risk factor for the Swedish economy so therefore we have reason to try to make sure that we won’t end up with rising house prices going forward,” he said.
“If house prices were to start rising and if debt was also to increase then it all becomes a bit counterproductive from the point of view of the government,” said Robert Bergqvist, chief economist at SEB in Stockholm. “The government has been scared that households would take on too much debt and that there will be a correction on the property market.”
Swedbank rejects Borg’s criticism. Sweden’s largest mortgage lender argues the central bank’s repo rate no longer reflects bank funding costs, which are based on the Stockholm interbank offered rate. Stibor was quoted at 2.138 percent as of June 20.
“The banks can no longer fund themselves at the repo rate level,” Swedbank said on its website. “Increased liquidity costs as a result of new and stricter regulation have led to higher gross margins,” according to the bank. These margins need to cover “costs for administration, liquidity protection, credit losses and the owners’ basic return requirements,” Swedbank said.
Swedbank’s average funding cost for floating three-month mortgages was 3.11 percent in the first quarter, down from 3.26 percent in the fourth quarter of 2011, according to its website. The bank also charges clients an additional 0.76 percent for costs relating to administration, liquidity and credit losses. The lender says it needs a gross margin on a standard mortgage of 0.65 percent to cover all its costs, and 0.75 percent to also meet the return on equity requirement of its shareholders.
Swedbank’s average floating rate for house and villa loans of 4.31 percent in the first quarter of this year compares with its average funding cost of 3.11 percent in the same period, giving the lender an average gross margin of 1.2 percent.
Sweden’s FSA estimates banks on average have a margin of 0.4 percent after deducting administrative expenses, the cost of maintaining a liquidity buffer and taxes. That’s equivalent to a return on own capital of 22 percent.
A burst housing bubble would hit the Swedish economy hard, Magnusson at RBS said.
Prices “have already fallen by about 5 to 6 percent and that they will fall by another 10 to 15 percent is not at all unreasonable,” he said. “That would be enough to cause significant problems.”