Swedish Rules Seen Lifting, Not Lowering Home PricesAmanda Billner, Niklas Magnusson and Johan Carlstrom
Sweden’s new rules forcing homeowners to make bigger mortgage payments are meant to cool the market. They could just as easily make home prices rise.
The Swedish Financial Supervisory Authority’s changes, which apply only to new mortgages, will probably keep homeowners from moving to avoid higher loan costs, real estate agents say. That would worsen Sweden’s housing shortage and drive up prices.
“One possible scenario is that increased mortgage expenses will make more people reluctant to move, which would increase the lock-in effects we already see,” said Staffan Tell, a spokesman for Sweden’s largest property website Hemnet. “Supply has a very strong impact on pricing and low supply has contributed to the rising prices we see today.”
The regulator announced on Nov. 11 that it plans to make homebuyers pay down their mortgages to 50 percent of the value of their properties compared with current guidelines from banks of 70 percent. The FSA, which is aiming to constrain record household debt and soaring prices, forecast that the change could cause values to drop by as much as 5 percent.
Sweden suffers from a shortage of housing, particularly in large cities like Stockholm, as the population grows and new construction lags behind demand. There were 6,897 apartments for sale in the week ended Nov. 2, the lowest level since at least 2008. That compares with 8,527 in the same week last year and 11,037 in the same week of 2011, according to data from Hemnet.
“Housing supply is at historically low levels,” Svensk Maeklarstatistik AB, which compiles monthly data on home prices, said in a November report. “The number of apartments and houses for sale are now 19 percent and 27 percent lower than last year, respectively.”
The shortfall is driving up home prices. Swedish apartment values jumped an annual 6 percent last month while house prices rose 8 percent, Maeklarstatistik said. In cities such as Stockholm, Umeaa and Falun, values soared more than 10 percent in the past 12 months, according to Hemnet.
Household borrowing is accelerating along with prices. In September, annual credit growth was a faster-than-expected 5.7 percent, up from 5.1 percent at the beginning of this year. It had averaged more than 10 percent in the decade before the regulator introduced a mortgage cap, limiting loans to 85 percent of property values, in October 2010.
The regulator is preparing to introduce the mortgage changes at a time of low mobility in the housing market. Rules that keep rents low have encouraged Swedes to stay in their apartments and discouraged builders from constructing properties for lease, exacerbating the housing shortage. A 22 percent capital gains tax on housing sales adds to the supply crisis by making households reluctant to move, according to Sweden’s National Board of Housing, Building and Planning.
Ingrid Eiken, chief executive officer of Swedish real estate agent association Maeklarsamfundet, said the mortgage rules will keep more Swedes locked into their homes and widen the gap between supply and demand.
“It’s mainly those who are not in the housing market that will be hurt as it goes without saying that those who have existing loans will become reluctant to get new loans with different terms, meaning that the supply will be reduced further as a result,” Eiken said by e-mail. “Housing expenses will increase.”
Under the new amortization rules, a household with a new mortgage of 2.5 million kronor ($338,000) will see its monthly amortization payment increase to 4,200 kronor from the current 2,900 kronor, according to the regulator. For a homeowner with a five million-krona loan, the payment will rise to 8,300 kronor from 5,900 kronor.
Riksbank Deputy Governor Cecilia Skingsley told reporters on Nov. 17 that the rules are an important step in the right direction. Skingsley dismissed the criticism that the changes would dissuade Swedes from moving.
“The purpose is not to lock customers in but that we should return to a more traditional amortization behavior,” Skingsley said. “I don’t think this proposal is so dramatic that it will have any major effects on housing prices.”
Sweden’s deflationary spiral, which spurred the central bank last month to cut its benchmark rate to zero, has limited policy makers’ attempts to reduce household debt.
Prime Minister Stefan Loefven told Bloomberg News on Nov. 14 that the mortgage changes are “well-balanced.” Ensuring that the country’s economic expansion is on track must take precedence over efforts to reduce household debt, he said.
“There’s a risk with too high indebtedness and we see that household debt is increasing,” he said. “If we want to fix this, we have to be careful so we don’t choke demand in the economy because then you risk making a bad thing even worse.”
Riksbank First Deputy Governor Kerstin af Jochnick said this month that private debt is heading in an “unsustainable” direction and the mortgage rules won’t be enough to avoid that development. The Riksbank forecasts that household debt burdens -- already at a record of more than 170 percent of disposable incomes -- will soar to 227 percent in the coming decade. The figure includes the effects of the new rules.
Bengt Hansson, an analyst at the national housing board, said the changes will have only a minor impact. The effect on households would be similar to an increase in mortgage rates of only 0.9 percentage point, or equivalent to a rate of 3 percent that Swedes were paying about 18 months ago, he said.
“Housing prices are already so inflated and this is not the measure that will trigger the big price correction,” Hansson said.
Stockholm resident Henrik Engstroem, who has no plans to move, said the mortgage rules will only make the housing situation worse.
“It is the wrong thing to do,” said Engstroem, 59, an insurance broker. “It’s craziness. Those who have problems, when you introduce an amortization requirement, will have even less incentive to move. There will be even less rotation in the market.”