Sweden’s bubblicious housing

In conducting research for last night’s post on the German housing market, I came across some interesting information on the housing bubble developing in Sweden. It’s a story worth sharing since it offers important insights and parallels for Australia.

Before I kick-off, first consider the below chart of real house prices since the mid-1980s:

As you can see, Sweden has experienced two housing bubbles over the past 25 years:

  • the late 1980s housing bubble, which came about after its financial system was deregulated in the mid-1980s and resulted in the early 1990s Swedish Banking Crisis after house prices crashed, as well as the bail-out of Sweden’s banks by the government; and
  • the current housing bubble, which has gathered pace over the 2000s and is yet to burst.

Now consider the home ownership rate in Sweden, which appears to be broadly similar to other developed countries (chart courtesy of the IMF):

Like many other countries that have experienced housing bubbles, there appear to be two main causes of Sweden’s house price surge: constraints on housing supply caused largely by government policies; and demand-side drivers such as government stimulus and easy credit.

Supply-side squeeze:

According to the RICS 2011 European Housing Review, Sweden’s rate of new home building is amongst the lowest in Europe. Following the removal of generous subsidies and tax breaks, home building rates in Sweden collapsed from around 65,000 units annually in the early 1990s to around half that level throughout the 2000s (see below chart).

The supply situation in Sweden sounds worryingly similar to the dysfunctional and restrictive UK planning system described in my earlier post. According to RICS:

Housing construction costs are the highest in Europe, according to Eurostat, at around 55% above the EU average. The OECD attributes high house building costs to market structures that evolved in the era of high housing subsidies, limited competition, low levels of construction imports, and heavy regulations – all of which constrain competition and innovation.

Supply responsiveness is affected by land supply constraints. Land shortages occur for NIMBY reasons. Complex and lengthy processes of plan formulation and then appeals procedures generate considerable delay even where residential development is permitted. Furthermore, the structure of local authority finance discourages new development. Until the 2008 reforms, no local taxation was derived from property and municipalities still have large upfront costs, with little prospect of payback for many years to come, so the incentives still do not seem that positive.

Pumping demand:

On their own, Sweden’s supply constraints are bad enough. However, the government has compounded Sweden’s housing woes by operating policies that have stimulated substantial demand, thus guaranteeing strong price appreciation.

First and foremost, the Swedish tax system encourages house purchase over other investment options. In general, owner occupiers can deduct 30% of mortgage interest from their marginal rate of tax. Although there is also a capital gains tax of 30% on two-thirds of any price rises, this can be deferred as long as another owner occupied property is bought, and the rule applies to heirs as well.

A wealth tax was abolished in 2008 as was a national real estate tax, to be replaced by a lower municipal property fee. Overall, recent tax changes have helped to sustain the buoyancy of Swedish house prices.

Second, access to mortgage credit has been particularly loose in Sweden. In the years leading up to the Global Financial Crisis (GFC), loans were typically granted up to 95% of property value, although 100% plus loans were also available. Moreover, loan amortisation periods are particularly long in Sweden – at 100 years for houses and 200 years for tenant-owner apartments. Recently, however, the Government has moved to cap mortgage loan-to-value ratios (LVRs) at 85%, although additional unsecured funding can still be obtained at higher interest rates .

The combination of the above factors has encouraged Swedes to maintain high levels of gearing, as shown by the below IMF chart:

Finally, like in Australia, the Swedish authorities implemented a range of measures to stimulate the housing market and maintain the flow of mortgage credit during the onset of the GFC.

Tax breaks were implemented in 2008 for homeowners wishing to renovate newly purchased properties. The government also stepped-up the provision of liquidity to the banking sector, guaranteeing the funding of the banks and mortgage institutions, as well as establishing a long-term stability fund to deal with any future solvency problems.

The Central Bank also dropped official interest rates, resulting in a sharp fall in mortgage rates (see below RICS chart).

These measures combined ensured that Swedish mortgage growth maintained a solid pace throughout the GFC, thus underpinning home values (see below RICS chart).

Consequences:

As summarised beautifully by RICS, Sweden’s housing policies have had a pernicious effect on the young and disadvantaged:

The distribution of housing opportunities favours incumbent households over newly- or recently-formed ones and others wishing to move particularly into, and within, places where economic growth is strong. In other words, it is a system where lucky ‘insiders’ gain at the considerable expense of ‘outsiders’. This not only creates unintended social consequences but also imposes significant economic costs. Added to the cocktail is a political scene with recent closely fought elections, which have encouraged governments to cut property taxes and to put housing market reforms on the back burner.

Owner occupation has become the sole option for housing aspirations of many in a situation of constrained supply. This has encouraged a long trend of higher prices, which have generated wealth gains for some… and, so, has led to types of inequalities that the original interventions were supposed to smooth out.

The Swedish economy is now at risk of a severe housing downturn. The overwhelming majority of Swedish mortgages are variable rate (see below chart), meaning that home prices would likely come under severe pressure if/when interest rates increase from their current low settings.

Sweden’s National Housing Credit Guarantee Board (BKN) – a government agency responsible for administering government credit guarantee programmes for housing development – earlier this year warned that home prices are severely overvalued and risk correcting once interest rates normalise:

“We have had a bubble for the past two years and it will deepen as the interest rates rise. When we return to normal interest rate levels of around 5.5 percent, it will start to become noticeable,” said Bengt Hansson at BKN told The Local on Wednesday…

“Real house prices are still high in a historical perspective and there is much to indicate that house prices are to a great extent held up by artificial monetary policy-driven low interest rates,” BKN wrote in its report.

Several observers shared BKN’s view that mortgage interest rates will soon climb to 5.5 percent, but despite the interest rate progression BKN is concerned that household debt continues to accumulate at a rapid pace.

“Based on the fundamentals – such as income development and other factors – house prices are at unsustainable levels. We estimate that prices are around 20 percent above what they should be,” Bengt Hansson said…

BKN concludes in its international comparison that in several countries which have suffered dramatic house price falls, invested capital has all but disappeared, removing the scope for loan-fuelled consumption along with it.

According to BKN, Sweden’s situation is similar and the current market conditions fulfil the criteria for rapid growth in debt, arguing that this is in itself is a contributing factor for a crash in the housing market…

The actual amortization periods for new Swedish home loans is now about 100 years for houses and nearly 200 years for tenant-owner apartments.

“This means that we believe that we don’t need to pay off our house purchase. It is naive to believe that house prices can rise indefinitely,” Bengt Hansson concluded.

Looks like another dead bubble walking to me…

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25 Responses to “ “Sweden’s bubblicious housing”

  1. BurbWatcher says:

    Top article, Leith. Thanks.

    I really like how you’re getting a broad international perspective on the issue of real estate bubbles, and sharing it with MB readers.

    Cheers,
    Stewart

  2. Michael says:

    Yes, great article – but just noticed the IMF chart included, the one about lending vs GDP.

    Greece is down the bottom and they are now up sh*t creek.

    We are nearly at 100%! So are we very close to a greek style sh*t creek – on roids?

    Someone please fill me in here. There are other factors too, no?

    • Al says:

      Michael, Greece has a problem servicing public/government debt. Their government has been spending more than they make for a long time. The chart is showing different type of debt – private household debt – and it does not look too bad in Greece.

      In Australia we have public debt under control. Our government was in surplus only a few years back. Many countries, including Greece, haven’t had government surplus in decades. But, as is shown in the chart, our private debt is way too high relative to GDP.

  3. Seanm says:

    Good one Leith. Michael Hudson,economist, has intimated that the Swedish and Scandinavian banks have large exposure to banks and especially real estate in the Baltic nations, among others. He referred to it as financial neo-colonialism.

    Ditto for Austria, which has large exposure to countries in the former Austrian-Hungarian empire.

    To paraphrase Chuck Prince, you gotta dance while the music is playing, just don’t get caught dancing with no underwear on the mirror dance floor.

  4. AlanR says:

    Wonder if there is any significance that the PIIGS are so well represented at the top of the homeownership table fig 3.5 ?

  5. The Prince says:

    Great article Leith.

    Interesting to note, on the back of your German analysis, in that chart above, Germany has less mortgage debt to GDP ratio in 2009 than it does in 1998.

    Everybody else went on a borrowing spree….so much for the Great Moderation

  6. Sam says:

    Great stuff. Norway with its natural resource wealth might be a better reference point for insights relevant to FutureBoom Australia. I’m an Australian living in Norway. Much of what you describe here for Sweden hold true here. Especially the tax deductibility of interest payments, which in a high tax environment provides a strong incentive to gear up into property investment. Much of Norway’s oil wealth is held offshore (a SWF of circa AUD 530 billion) so as to avoid dutch disease. But the long term impact of the oil sector on wages, cost of living and property process is abundantly clear. It would be very interesting to do a more detailed Australia v Norway comparison. This blog is excellent. Keep up the good work, MB. Cheers / Sam

  7. Richard B says:

    Great research. Bubbles are always more easily spotted from the outside — that’s why it’s more important to pay attention to Jeremy Grantham than RBA officials.

    These Scandinavian countries are the favourite example of Luci Ellis of the Financial Stability Department of the RBA. “Everything must be fine here because look over there, their debt is 300% of GDP”. Ah, what will people say when TSHTF?

  8. HousingTroll says:

    Having actually lived in Sweden (Stockholm and Goteborg) I offer this brief perspective.

    Rentals are tightly controlled. Everyone is on waiting lists from birth. Everyone else is sub-letting. The system is difficult to navigate for non residents.

    There is no over-supply. Build quality far exceeds anything you will see here in Oz. Infrastructure and services are well established.

    Detached housing is generally of excellent quality but land size is conservative. Houses are privately owned. Apartment blocks are typically rented out by the body corporates.

    Black market for sub-lets and links to other articles from this one:
    http://www.thelocal.se/28666/20100830/

    also the local has a property section worth checking.
    ….and stop ogling the night club pics ;)

  9. AnonNL says:

    Wow, I thought Sweden had implemented some much needed reforms a couple of years ago (like reforming the tax-deduction on interest). Apparently it was all too little…

    Just in case you ever want to do something on Holland, I just found heaps of data here:
    http://www.huizenzoeker.nl/woningmarkt/

    … including this excel spreadsheet containing data on the housing market from Sep 2008 to May 2011 for each municipality in Holland (halfway down the screen, on the right):
    http://www.huizenzoeker.nl/woningmarkt/download/woningmarkt-gemeenten.xls?d=20110624

    All in Dutch I’m afraid (although mostly datadriven so hopefully still understandable).

    Holland has no alternative but to have restrictive planning policies. On top of that credit was easily available (see chart above, I’m shocked by the amount of debt in the Netherlands).

    However, I have never heard anyone complain about affordability and my own experience has been one of affordability as well. I’m curious what you’ll find.

    • Jani S. says:

      This article so reminds me (yet again) of the situation in dear neighbour country, Finland.
      The situation is quite escalated, especially in Greater Helsinki area. We also get the chants of not having enough building space, which is extremely noticeable when you fly into Helsinki Airport and all you can see is endless wild forests and country-side… :)
      There are English statistics provided at:

      http://www.stat.fi/til/ashi/index_en.html

      It would be great to see a comparison between Scandinavian countries or others where the bubble hasn’t bursted yet! It seems to be a really global phenomenon, and I often wonder how ugly it will end…

  10. Dad says:

    Another key difference from Australia – pretty much all rental property is owned by government institutions or large corporations. Private investment property is non-existent and In the case of apartments generally banned by the body corporate.

    So in the case of Sweden, it appears that the run-up in prices is entirely driven by owner-occupiers rather than Aussie-style Mum & Dad Specufestors.

    By the way – that dip back in the early 90′s may seem trivial, but trust me it was grueling and a lot of people lost a laada money.

  11. Miss P says:

    Nice article. Such an interesting divergence in the cycles between places like Sweden/Australia and Ireland/UK/US.

    I wonder if they also have the same “it’s different here” mantra from property spruikers to justify the divergence and I wonder if/when we will all find out it’s not really different anywhere…

  12. Ben says:

    200 years!!!! Really???
    That’s criminal.

  13. juk says:

    I’d love to see that first chart deflated.

    The way i figure it in 25 years prices have roughly tripled, to give a annual increase of 4.3%. With inflation at around 3% that gives an increase of 36% in 25 years in real terms.

    Hardly what you’d call a bubble.

    • It is deflated JIK. That’s what “real” means – nominal prices deflated by CPI.

      • juk says:

        My bad. I still think that it’s not a bubble.

        If 4% annually is a bubble then we have a cash bubble. If you can get 6.4% from an ING account and the inflation rate is 3% then you’ve almost got yourself a bubble according to your example.

        What is most underestimated amongst you and your peers is the real inflation rate. Everything is a bubble because we lie about inflation and everyone chooses to ignore this fact.

      • legobit says:

        4% is some sort off calculated substainable price raise. If we don’t count the last year when goverment have tried to push back the prices and the GFC the anual raise have been 7-13% and during 2007 you could read houseprices raise this quarter 3% in just about any paper.

        Also it’s worth knowing that the state intrest is planed to double the next 2years.

        The good part in this mess i that the finance minister is the best for decades (possibly the best in europe atm?) and gouverment debt is going down fast (to be gone around 2018 at the current speed)

  14. Cornucopia? says:

    The Swedish economy and the supposed miracle growth in spite of the economic crisis in the EU is simply because the debt bubble didn’t burst in Sweden 2008-2009.

    Instead Swedish private debt has exploded, although the government seems to have falling debt.

    Check graph at
    http://cornucopia.cornubot.se/2011/03/kompletterad-svensk-skuldbubbla.html

    Household discretionary spending has been fueled by increasing debt and one-off tax easing, ie the removal of property- and wealthtaxes. Now this has already started to come to a halt with increasing interest rates, and once the ATM-machine that increasing housingprices has been used as, much as was done in the USA, the economy dries up.

    The Swedish economic miracle will burst faster than you can say “scandinavian tiger economy”. And in 2-3 years the banks will be bailed out and the government debt will double to 80-90% of GDP over night.

  15. MD says:

    Being a property owner in both Sweden and Australia, I think I can shed some light to this discussion.

    There are some HUGE differences between Australia and Sweden.

    First up, interest rates in Sweden have been very low over the past few years. I bought my unit in 2007 and paid about 1.6% in interest for a couple of years. That is CHEAP.

    Australia does not have cheap credit, not even by a long shot, not compared to any other country. The cheapest I can remember is 5.5% in 2009 and that’s way higher than the highest in Sweden for the past 20 years.
    Its also very difficult to get more than 85% loans in Australia and its virtually impossible to borrow more than 4X your income as it becomes too hard to pay off with the high interest rates.

    In Sweden, a friend of mine bought a $4 million house with an income of about $200K per year at 95% leverage. THATS bubble territory.

    Also, in Sweden major cities, rental returns are irrelevant. You simply cannot rent in Stockholm unless you pay $100K in cash for black market rental contract as the rents are capped by the government. So its not like people can sell their units and rent instead. The reason for this is that you are not allowed to rent out a unit that you own, kind of like a Company title. On the other hand, you can join a rental Que. That will take you on average 20 years for a crappy rent controlled one bedder…

    Another difference is that there is less pressure on city dwellings as the Swedish country side is very livable with outstanding infrastructure. Sydney on the other hand has awful infrastructure and anything outside the inner city is quite crappy in many ways, making the inner east for example very desirable.

    So while there may be some similarities there are huge artificial structural differences that will determinne boom and or bust.

    My guess is that my Stockholm unit will loose a lot more value quicker than my Double Bay unit, although both look risky at the moment.