Swedish Credit Drives Frenzy in Dragon Tattoo Quarter

One of Stockholm’s most popular attractions is a guided tour of the Soedermalm district streets featured in Stieg Larsson’s bestselling book “The Girl With The Dragon Tattoo.” Buying a home in the former working-class neighborhood is far less accessible.

A one-bedroom, 55-square meter (592-square feet) apartment in Hoegalidsgatan, in the neighborhood where Larsson’s troubled heroine Lisbeth Salander grew up, sold last month for 3.75 million kronor ($569,000), 17 percent above the listing price, after a bidding war involving nine parties.

That level of demand is typical in the Swedish capital, where a shortage of construction, a population boom and mortgage rates below 3 percent have pushed prices in central Stockholm up 35 percent since early 2009. Borrowing for home purchases has in turn fueled record household debt across the country. That’s sparking concern among policy makers over potential damage to the economy and preventing the central bank from cutting rates, even as Sweden’s exporters say action must be taken to weaken the currency to protect thousands of jobs.

“If you combine low home construction with good access to financing, prices will rise,” Riksbank Governor Stefan Ingves said in an interview in Stockholm on May 27. Sweden needs to “in one way or another increase the supply of homes since we’ve had very low home construction for a very long time,” said Ingves, who’s warned about the risks of rising household debt.

Surging Prices

With the three-month home loan rate at Sweden’s largest mortgage lender Swedbank AB at 2.94 percent, its lowest level since November 2010, apartment prices across the country have jumped 11 percent in the past 12 months. In Stockholm, where more than a fifth of the country’s 9.6 million population live, they jumped 9 percent and in Gothenburg, Sweden’s second-largest city, prices are 13 percent higher, according to data from Svensk Maeklarstatistik.

That’s left the Riksbank struggling to contain the growth in debt, which has reached a record average of 174 percent of disposable incomes. The International Monetary Fund last month recommended Sweden increase mortgage restrictions to prevent a housing bubble and stop consumer debt from spiraling out of control. At the current pace of amortization, Swedish households will need 140 years on average to repay their home loans.

Sweden and Finland are the most likely places in Europe to see a property crash and “we should soon see a correction in prices,” Commerzbank AG said in a May 17 report. Danske Bank A/S, which has endured housing busts in both Denmark and Ireland, said in March that residential properties in Sweden are above their fundamental value by more than 20 percent. It sees a 5 percent decline in prices this year and 2.5 percent in 2014.

Millennium Tours

So far, there are few signs in Stockholm of the market weakening.

The Soedermalm apartment, housed in a grey building from the early 1900s, close to where tourists follow in the footsteps of Salander and financial journalist Mikael Blomkvist from the “Millennium” books and films, sold for $10,341 a square meter. According to Svensk Maeklarstatistik, that’s about 10 percent higher than the average in central Stockholm, which is among the most expensive cities in Europe.

By comparison, in Helsinki it costs 5,340 euros ($7,058) per square meter for three-room apartments in its most central neighborhood last year. In London, the price of a “mainstream apartment” is $12,254 per square meter, while in Paris it’s $7,281, according to data compiled by Knight Frank.

‘No Construction’

“Supply is low, demand is very high, interest rates are low and Stockholm is growing,” Magnus Holmberg, the owner of real estate agent Innerstadsspecialisten, said by telephone. “There is pretty much no construction while demand is just continuing to increase, which makes us different from other countries -- there are no empty apartments in Stockholm.”

When his real estate agency recently sold a studio apartment in the fashionable Oestermalm area, a bidding war pushed the price 23 percent above the accepted selling price. The 36-square-meter apartment in Skeppargatan, located near the Nybroviken harbor in central Stockholm where steam-boats take tourists out into the archipelago, sold for 3.2 million kronor, or 88,888 kronor per square meter.

So much of Stockholm’s rental-housing stock has been transformed into ownership apartments in recent years, there’s also a lack of homes to rent, which is helping to push up prices. Regulation that limits homeowners’ ability to rent out their homes to other people is exacerbating the lack of rentals.

Other Options

A government report published in December last year concluded that Swedish law, including regulation on rent levels that sets similar rents on apartments of similar models with little consideration to their geographical location, has contributed to the lack of rental housing in the country.

“The market conditions that lead to uncertain profitability calculations have inhibited willingness to invest in rental housing even in areas with high demand and have made other investment options more attractive,” it said. “It has only been possible to realize the land-value through conversions from rental accommodation to tenant-owned housing.”

The number of rental apartments in central Stockholm slumped 45 percent to 65,000 between 1990 and 2011, while the number of tenant-owned apartments has more than doubled to 120,000 from 48,000 as rentals were converted, according to the report. Tenant-owned apartments made up 65 percent of all flats in central Stockholm in 2011, compared with 29 percent in 1990.

‘Must Buy’

“In Sweden, you typically have only one apartment and our subletting market is basically closed,” Holmberg said. “There are hardly any rental apartments, which means people in Stockholm must buy their apartments.”

That’s shut many young people and low-income earners out of the city’s property market, including areas like Soedermalm that historically were a cheaper option. Instead they’re forced to live in sublet apartments and often for short periods -- heightening the growing divide between rich and poor.

Last month, riots raged for almost a week in Stockholm’s outer suburbs, where most of the population is made up of immigrants and unemployment is more than twice the national average. Youths burned cars and schools and attacked police and emergency services in a show of anger attributed to social exclusion, joblessness and poverty.

At the Riksbank, soaring debt levels, income inequality and home prices aren’t the only concerns. Sweden’s export-reliant economy is also suffering from slumping demand in the wake of the debt crisis in Europe, to which the country ships about 70 percent of its exports. Exacerbating the problem is the krona, which has soared 26 percent against the euro since March 2009 after Sweden became a haven from Europe’s fiscal woes.

Job Losses

Holmen AB, which exports 90 percent of its output and ships most of it to Europe, is cutting 510 jobs at its mills in Sweden because of weak demand in Europe and the currency level. Jan Johansson, chief executive officer of Europe’s largest paper-tissue maker, Svenska Cellulosa AB, said in March that the currency is forcing the company to cut costs and decrease the number of employees, while Sandvik AB’s CEO Olof Faxander said a month later the krona’s high level may affect where the company makes future investments.

So far, the Riksbank has argued it has little choice but to keep interest rates at 1 percent, given the potential effect a cut would have on household debt and property prices.

While measures such as capping mortgages at 85 percent of a property’s value have helped slow borrowing growth from levels above 10 percent between 2004 and 2008, household lending still expanded by an annual 4.6 percent in April. The Riksbank forecasts that private debt as a percentage of disposable incomes will jump to 177 percent in early 2015.

Property Demand

Swedes aren’t showing much indication they’re losing their appetite for buying property. A survey by SEB on June 10 showed that 55 percent believe house prices will rise in the coming year, while 17 percent said they expect a decline.

“We have strong urbanization in Sweden and we have a rather big lack of homes in the big cities, which pushes prices higher,” Riksbank Deputy Governor Karolina Ekholm said in a May 30 presentation at the National Museum of Economy in Stockholm. “We have had exceptionally low home construction in Sweden and it is still low, which is one factor that pushes prices up.”

The number of new apartments fell an annual 23 percent last year, Statistics Sweden said on April 3.

That’s not necessarily dictating prices, Par Magnusson, chief economist at Royal Bank of Scotland Group Plc in Stockholm, said in a May 15 telephone interview. Instead, it’s about a shortage of housing that people are prepared to pay for, evident in the large number of unsold apartments in parts of Stockholm, he said.

Cutting Prices

Construction company JM AB has been forced to cut prices on some projects by as much as 25 percent, with parts of Stockholm and the southern county of Skaane, home to the city of Malmoe, the worst affected.

NCC AB has cut prices on three projects in Stockholm, Skaane and Vaestra Goetaland county, where Gothenburg is located, by as much as 12 percent, magazine Affaersvaerlden reported on May 17.

A situation with available housing that people aren’t prepared to pay for leads to a paradox because on the one hand the city wants people to move there to sustain growth, and on the other it wants to avoid a price correction on existing housing that is likely to happen if cheaper housing is constructed, Magnusson said.

Discount Effect

Prices have also risen in both high and low density areas in the past decade as the country shifted to cheaper mortgage rates, increasing the amount that people can spend on housing. That discount effect isn’t unique to Sweden, Magnusson said.

The equivalent to the three-month lending rate at Swedbank was 5.95 percent just before Lehman Brothers Holding Inc. filed for bankruptcy in September 2008. It stood at 11.1 percent in July 1995.

The low rate level is sustaining property prices and is one reason why Sweden doesn’t display any visible signs of house price corrections, like the ones experienced by Spain and Denmark, Statistics Sweden said on April 3. Migration to big cities is also helping, the statistics office said.

City Growth

Stockholm will grow by 400,000 to 450,000 people in 15 to 20 years, according to Citycon Oyj Chief executive Officer Marcel Kokkeel, explaining why the Finnish retail property manager and owner of Stockholm’s Kista Galleria shopping mall, is focusing its future growth on Sweden.

“The spending power here is among the highest in Europe,” he said. “It’s only a matter of time before international brands will enter, and should enter, the region.”

Still, solving the housing situation is crucial to sustain growth, Fredrik Johansson, head of analysis and policy at Stockholm’s Chamber of Commerce, said in an interview.

The city should ease building rules for construction companies so that they don’t have to adjust every project to specific municipal regulation, he said. A report by housing companies Riksbyggen and HSB on June 11 said that Stockholm’s gross regional product may be cut by 120 billion kronor between 2010 and 2030 if the lack of housing in the Swedish capital isn’t addressed.

Swedish Finance Minister Anders Borg in March also proposed making it easier and cheaper to build new housing by reducing taxes, cutting planning and construction times and reducing the number of regulatory hurdles.

“Recruiting competent people is the big issue for our member companies and if these people don’t have anywhere to live, it will be devastating for our members and for Stockholm’s economic development,” Johansson said. “The housing situation is Stockholm’s single, biggest issue to worry about.”

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