Mortgage Rejections Soar in Sweden as Banks Fear Debt Overload

  • SBAB is turning away up to 25% of initial applications: CEO
  • Banks are tightening standards as mortgage risks persist

Some mortgage banks in Sweden are turning away up to a quarter of customers trying to get home loans amid signs that private debt burdens are becoming unsustainable.

The country’s state-owned mortgage lender, SBAB, is now rejecting as many as 25 percent of initial loan applications, said Klas Danielsson, its chief executive officer. That’s roughly twice as many as it turned away a year ago. SEB AB is also turning its back on borrowers struggling to meet its loan criteria even though the policy means missing out on market share, according to CEO Annika Falkengren.

“Our responsibility is also not to lend,” Danielsson said in an interview at the bank’s headquarters outside Stockholm. “Saying ‘no’ when circumstances are as they are today” may be the more prudent response, he said.

Swedes owed their banks about four times their incomes last year, according to average data measuring households with new loans. That’s a 19 percentage point increase from the previous year, the country’s financial regulator estimates. Average household debt is about 180 percent of disposable incomes across the country, marking a record, Riksbank figures show. The bank predicts that the aggregate figure, which includes households that have no debt, will continue to rise and exceed 190 percent in 2019.

To underscore his concern that parts of Sweden’s property market are overheated, Danielsson is advising his children against buying in the Swedish capital.

“I’m telling my kids ‘you’re not going to buy any flats in Stockholm’ in the next few years,” he said. It’s “also fundamentally wrong for young people to buy,” because “when you’re young you should be mobile and flexible before you settle down. You shouldn’t live in a market where you’re forced to buy to have somewhere to live, it’s just crazy.”

Sweden’s central bank resorted to negative interest rates a little over a year ago following a prolonged period of consumer price deflation. Policy makers at the bank have urged the government and regulator to step up efforts to ensure the lax monetary environment doesn’t fan a credit-driven housing bubble. Given the risks, banks are increasingly taking their own steps to cool the market.

SBAB capped loans at 6.5 times income in the summer of last year and then tightened that rule to six in the autumn. Its rejection rate for initial mortgage applications is now more than double the 10 percent rate of about a year ago. SBAB is ready to tighten its loan rule to five times income if necessary, but so far the latest debt numbers suggest that won’t be necessary, Danielsson said.

Stricter lending criteria and tougher capital requirements mean SBAB expects to see a slowdown in new loans in coming years. The goal is to maintain a market share of about 7.9 percent this year, after expanding at about twice the pace of the market last year, according to Danielsson.

Part of the problem is a lack of housing supply, with SBAB and other banks urging Sweden’s political establishment to come up with longer-lasting solutions to meet demand. Given the unsustainable trajectory the housing market is on, Danielsson says prices are likely to fall at some point. “I’d be surprised if it doesn’t calm down,” he said.

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