Sweden

Country Profile

Swedish housing market today.

Deregulations, low interest rates and innovations on the mortgage market have contributed to price increases and an expanding mortgage market in Sweden.  The house prices in Sweden are still (December 2011) very high and they did not experience any substantial decline in connection with the financial crisis.

 It is difficult for households in growing cities to find a home; the vacancy rates are low. The rental sector covers around 37 % of the housing stock. Rents are regulated and this contributes to a non-flexible market where households with a rental contract seldom move out. International analyses point to a rigid market with low supply, high costs and inhibiting rental regulations: 

It is a system where lucky “insiders” gain at a considerable expense of “outsiders”. This not only creates unintended social consequences but also imposes significant economic costs^₁

 Swedes are highly indebted. Mortgage takers generally choose flexible interest rates. Hence, changes in interest rates quickly influence the economy of many households. Amortization free loans are common and it is also possible to increase borrowing (withdraw equity) when house prices increase. Interest rates are deductable. Apart from the capital gains tax, transactions costs are relatively low.

 As the Swedish households are highly indebted, a limit on LTV ratios was introduced in 2010. Since then, it is no longer possible to take out a mortgage that is higher than 85 % of the house price. However, households may take an ordinary bank loan on the remaining 15 %, without using the home as collateral, but the interest rate is likely to be relatively high. It is interesting to note that the Swedish banking association urges its members, the credit institutions, to decrease the amortization free part of their (mortgage) lending.

 It should be noted that the Swedish mortgage takers carry with them a larger risk than the lending partner compared to e.g. the US. This is likely to reduce the effect of large loans on the financial stability. The households however will keep on repaying their loans if they sell their houses with loss.

 Altogether, the Swedish housing market is characterized by short sighted actors. The market entails several elements that may bring about volatile prices such as amortization free loans, equity withdrawal, flexible interest rates and a regulated rental markets. On the other hand there are also stabilizing factors; there is very little securitization of residential mortgages and LTV ratios have been limited. There are also well functioning societal safety nets and risk adverse households may take out private insurances.