Sweden’s housing market, troubled for years by low supply and supported by low interest rates and favorable tax policies, is now weighing heavily on the country’s economy.
Rising interest rates are forcing households with substantial mortgages to cut back on spending, while construction firms are scaling back investments, pushing Sweden into a recession.
Sweden is projected to be the only EU country to face a recession this year, with the Swedish crown hitting its weakest level against the euro since the global financial crisis, partly due to housing concerns.
“It’s not that no one saw this coming,” said Riksbank Governor Erik Thedeen, highlighting that the central bank had warned about the risks for a long time.
Years of low borrowing costs, followed by the COVID-19 pandemic and the Ukraine conflict, have created a challenging environment of high inflation and rising interest rates.
In Sweden, the impact is exacerbated by deep-rooted problems in the housing market, where property prices have surged nearly fourfold in 20 years, far outpacing wage growth.
Mortgage tax relief, minimal real estate taxes, and a tight rental market due to strict regulations have inflated house prices and household debt, which is among the highest in the EU, at about 200% of disposable incomes.
Around 60% of Swedish households have floating-rate mortgages, making them highly sensitive to interest rate hikes, which directly affects their monthly payments.
Nordea Bank forecasts a 2% drop in household consumption for 2023, while the National Board of Housing predicts a 50% decline in new housing starts compared to 2021.
Many homeowners are already struggling with higher mortgage payments alongside rising costs for food and energy, despite the full effects of recent interest rate hikes yet to take hold.
Philippa Logan, a single mother, shared her struggle with rising interest rates, stating, “The interest rate has almost tripled, making it almost unaffordable to survive.”
Further rate hikes are expected, with the central bank forecasting a peak at 4%, while Nordea predicts rates could top out around 3.75%, near a “pain threshold” for many households.
The European Commission anticipates a 1% contraction in Sweden’s GDP this year, making it the only country in the 27-member EU bloc to face negative growth in 2023.
Nordea projects an even steeper GDP decline of 2%, while house prices have already fallen by about 15% since their peak last spring, with some regions seeing declines as steep as 40%.
Unlike countries like Germany, where most mortgages are fixed-rate and less impacted by rate increases, Sweden’s floating-rate mortgages expose households more directly to the effects of rising interest rates.
Sweden’s housing market issues have a long history but remain challenging to solve. Plans to ease rent controls face strong opposition, and changes to mortgage tax relief or reintroducing a property tax are politically sensitive topics.
Regulatory measures, including tighter lending standards and stricter mortgage repayment rules, have made Swedish banks some of the most capitalized in Europe, reducing the risk of a financial crisis.
However, without addressing the underlying issues, Sweden’s economy will continue to be vulnerable to the housing market’s structural problems.
“It’s up to the politicians to decide whether they want to deal with these problems and, more than anything, when,” said Gustav Helgesson of Nordea. “In the current situation, it is very hard to tackle them.”