Stockholm (Ekonamik) – As we look into real assets this week, we would be remiss to not take this opportunity to consider our own local real estate market, here in Sweden. If you have ever lived in Sweden or if you ever happened to speak to a Swede about this topic you will no doubt have encountered an anxious or concerned reaction. Whether it is the opacity of the rental market or the inflation in the ownership market, real estate in Sweden can be said to be one of the country’s Achilles’s heels.
Trends in Real Estate – Limited Stock and Rising Population
While not the only issue, limited supply underlies most of the problems of the real estate market in Sweden, as the figure below shows.
There are at least three reasons for this. Historically, Sweden went through a traumatic real estate crisis in the 1990s. As would be expected, the country’s reaction was to veer from the extreme of euphoria about the real estate market it had experienced towards the opposite extreme of extreme conservativism.
Relatedly, but somewhat independently, there is also an institutional bottleneck regarding the expansion of the stock of real estate in Sweden. While municipalities (stad) are in charge of granting construction licenses, the regional governments (lan) are in charge of the transportation infrastructure(roads and trains). Since, as is the case with most European cities, there is limited scope for expansion of the stock of real estate in the centre of cities, for historical and cultural preservation reasons, expansion tends to be focused on the suburbs, which requires these two levels of government to cooperate and coordinate. It’s hard enough to get one set of politicians to overcome the real estate concerns of their local constituents, so politics being what it is, real estate expansion can be slow for this reason as well.
Finally, real estate costs in Sweden are among the highest in Europe, together with Switzerland and Norway, according to Housing Europe’s 2017 report. This should not be surprising as these 3 countries are among the wealthiest in the region. The high construction costs are simply a reflection of the high costs of living.
On the demand side, Sweden is going through a period of increased population density. According to Eurostat’s NUTS 2 Regional population survey, the region of Stockholm has gone from 296.6 persons per squared kilometre in 2007 to 350.8 persons per squared kilometre in 2017. That’s an 18.3% increase in 10 years.
As noted by Hanna Aspegren from the European Commission, these demand and supply forces conspire to create a large gap between housing needs and availability.
Ultimately, the way that these dynamics echo through the retail and ownership market reflect Swedish idiosyncratic policies and its economic conditions.
An Opaque Rental Market
As a newcomer to a city, almost no one becomes immediately a homeowner. The natural path to follow as one moves into a new country is to begin by renting and only after some years, once one is established professionally and financially, do people begin to consider purchasing a home. Similarly, most people in Sweden traditionally move out of their parent’s home at the age of 18. Consequently, the vast majority of people in Sweden will encounter the rental market at one point or another. This will often be a shock, particularly for immigrants from countries with dynamic rental markets.
According to Samtrygg, a local marketplace for rental housing, finding an apartment is “one of the foremost challenges faced by those who want to call Stockholm their home”. Sweden, a country reputed for its rule of law quickly starts looking like a third world dystopia when considered from the perspective of the rental market. “The rental market here is reputed to be one of the toughest in Europe; one marked by rising rents, tenants forced to ride the merry-go-round of short-term sublets, moving again and again, often within months,” Samtrygg explains, before adding that “bribery to get one’s hands on a legal lease as well as scams of non-existent apartments are common and make for a thriving black market. Foreigners, regrettably, due to their unfamiliarity with the complex web of Swedish rental laws, run the greatest risk”. For this reason, the market is relatively opaque and limited data is available to illustrate the facts.
The underlying facts described earlier combined with generous first-hand rental contracts create a scarce and tiered rental market. “The problem is that there is an acute lack of rent-capped apartments to go around. The situation is much more dire in major cities, especially in Stockholm where two million people are clamoring for some 924,000 housing units,” Samtrygg explains. “In fact, this severe housing shortage has prevailed over the past century, dating all the way back to 1902. In 1917, the government took charge of the provision and building of homes for its citizens. In the 1960s, the national government implemented an official apartment waiting list that is still in use today. In reality, however, only 40 percent of those in line are lucky enough to land one of the few, exclusive, permanent, first-hand rental contracts (‘förstahandskontrakt’). It’s not uncommon to have to wait in line for 20 to 30 years! Consequently, the competition for sublet contracts (‘andrahandskontrakt’) has become fierce.”
The result is the collapse of what is otherwise a perfectly law-abiding, corruption-averse set of values. “Because of this chronic housing shortage, a black market has emerged and has continued to flourish,” Samtrygg explains once again. “Tenants rarely sue or file a report and thus the situation continues. In desperation, tenants are often forced to pay leaseholders large sums of money under the table to skip the long waiting lines.”
Inflated House Prices
As a result of the dynamics in the rental market, and given the present low-interest rate environment, it is not surprising to see people turning towards home ownership as soon as possible. 62% of dwellings are owned, either directly or by tenants, according to data from statistics Sweden reported by Housing Europe.
In this case, the market is not as opaque, so we are able to see prices and the impact of the limited supply on the market directly. As the figure below shows, Swedish housing prices have almost tripled in the last 14 years.
As an aside, the figure shows how sensitive the market is. The price decrease at the end of 2017 appears to have been the result of an adjustment in borrowing conditions requiring a mandatory amortization for new mortgage loans with a loan-to-value ratio above 50%.
The consequences of the dynamics described above are not innocuous. One of the main concerns is that the real estate market and the drive to purchase property has caused Swedes to become some of the most indebted people in Europe, with gross debt-to-income ratios reaching 162.26% in 2018.
This level of indebtedness has been a head-ache to Riksbanken, the Swedish central bank, which admitted just two weeks ago that “high household indebtedness continues to pose the greatest risk in the Swedish economy. To address the fundamental causes of this high indebtedness, it is urgent that measures be taken in housing and tax policy.”
Picture from Pixabay