By Simon Johnson
STOCKHOLM (Reuters) – For years, Sweden has been warned that its dysfunctional housing market, plagued by under-supply and kept aloft by low rates and generous tax benefits, was a risk to the wider economy.
Now those risks are becoming reality. Households with big mortgages are reining in spending as interest rates rise, and house-builders are pulling the plug on investment, tipping Sweden into recession.
The country is set to be the only EU economy experiencing outright recession this year. The crown is trading at around its weakest level against the euro since the global financial crisis, partly due to housing market worries, making the central bank’s job of curbing inflation more difficult.
“It’s not that no one saw this coming,” Riksbank Governor Erik Thedeen said at the end of February. “The Riksbank has warned about this … for a long time. And now it is clear that it is a problem.”
After years of ultra-low borrowing costs, the pandemic and the Ukraine war have served up a toxic cocktail of high inflation and rapidly rising interest rates to many countries.
But in Sweden, the structural problems rooted in its housing market are magnifying the effects.
House prices in Sweden have almost quadrupled in the last 20 years, easily outstripping wage growth, boosted by generous mortgage tax relief, almost non-existent real estate taxes and a rental market with limited supply because of tight regulations.
Debt levels are among the highest in the European Union at around 200% of disposable incomes, much of which is mortgage debt. And around 60% of Swedes have floating-rate mortgages, meaning rate increases have an immediate impact on the majority of households.
Banking group Nordea expects household consumption to fall around 2% in 2023, while the National Board of Housing expects housing starts to fall around 50% in the coming year compared with 2021.
Many home-owners are already struggling with higher mortgage repayments alongside surging food and energy prices – even though the full effects of interest rate rises over the last year have yet to be felt.
Philippa Logan, a single mother of two, bought her 89 square meter (958 square feet) apartment in Ostberga in the south of Stockholm in 2017 and paid off some of the mortgage after getting divorced in 2020.
“However, in the last few months, the interest rate has almost tripled making it almost unaffordable to survive,” Logan said.
“The stress has been indescribable,” she said, adding she had been forced to take on extra work to make ends meet.
The central bank expects further rate increases in the coming months. Markets expect borrowing costs to peak at 4%, up from 3% currently.
“Our forecast is for the Riksbank to raise rates to 3.75 as a peak,” Gustav Helgesson, economist at Nordea said. “I think at that level we are very near some kind of pain threshold for households.”
HOME TRUTHS
The European Commission expects Sweden’s gross domestic product to contract by around 1% this year – the only country in the 27-member bloc likely to see negative annual growth.
Nordea expects GDP to contract by around 2%.
House prices are down around 15% since their peak in spring last year, a bigger drop than during the global financial crisis. Some regions have experienced a fall of as much as 40%, the real estate division of insurer Lansforsakringar said.
While Sweden is not alone in seeing big house price falls, its households are almost uniquely sensitive to interest rate hikes because more than half have floating rate mortgages.
In Germany, for example, most borrowers have fixed mortgages and rising rates have largely been shrugged off.
“No, we don’t have any fear with the mortgages,” said Hannah, a teacher in the city of Bochum, in the west of the country, whose joint mortgage with her partner is fixed at 0.9%.
“We have 15 years to pay back and it was all planned in a way that we could pay back even if interest rates rose,” she said.
In Canada, while debt levels are high, variable rate mortgages only account for about one-third of total outstanding mortgage debt, according to the Bank of Canada.
While some economists predict a mild recession in Canada, the OECD think tank expects the Canadian economy will grow around 1.3% in 2023.
A FIXER-UPPER?
Sweden’s housing problems date back decades, but have proven hard to fix.
Plans to ease rent controls have been fiercely opposed by the political left which believes introducing market forces would increase social division by pricing many people out of desirable areas of Sweden’s cities.
All the main political parties agree an overhaul of mortgage tax relief is needed, but none are prepared to give their rivals a stick to beat them with when elections come around.
Reintroducing a property tax, abolished in 2008, is seen as another sure-fire vote-loser.
Financial regulators have introduced tougher lending practices and tightened mortgage repayment rules. Sweden’s banks are among the most strongly capitalised in Europe – partly as a result of worries about the housing market.
These should prevent falling real estate prices from triggering a financial meltdown as happened in Sweden in the early 1990s.
But Sweden’s economy is likely to remain a hostage to imbalances in the housing market while its structural problems go unresolved.
“It’s up to the politicians to decide whether they want to deal with these problems and, more than anything, when,” Nordea’s Helgesson said. “In the current situation, it is very hard to tackle them.”
($1 = 10.6895 Swedish crowns)
(Reporting by Simon Johnson, additional reporting by Maiya Keidan and Fergal Smith in Toronto, Anna Koper in Warsaw and Maria Martinez in Berlin. Editing by Jane Merriman)
