Sweden’s entrepreneurs face an uphill struggle

Entrepreneurship is often seen as a catalyst for economic development. By taking chances, working hard and being innovative successful businesspeople clear a path for social and economic growth. Although Sweden has a strong tradition of entrepreneurship, it has been falling behind in this area for some years now.

Of the 25 members states of the European Union, Sweden only ranks 18th when it comes to the percentage of citizens that run businesses. Between 1995 and 2005 this figure dropped steadily in Sweden.

The current government often speaks about the importance of having a business-friendly environment. It is possible that they will improve the situation for small business owners somewhat compared to the former socialist government, but one should not necessarily be too optimistic.

An important problem is as follows: The economic models that our nation’s decision makers use when looking at the economy are typically so-called neoclassical models. What distinguishes these models is that they often do not include entrepreneurship as a parameter. This is not mainly because neoclassical economists view entrepreneurship as unimportant, but since it is a difficult parameter to measure.

Still, when Anders Borg attempts to assess various possible reforms, the theories that he will most likely rely on often put little emphasis on entrepreneurs.

There is, however, plenty of research which shows the importance of entrepreneurship in economic development. For example, a new research article from Thomas Garrett and Howald Wall (both working with the Federal Reserve Bank of St. Louis) concludes that there is a strong correlation between economic policy and entrepreneurship even within the borders of the US.

By comparing the 15 least entrepreneurial states with the average of all states, the study shows that the policy environment accounts for between 37-95 percent of the difference in entrepreneurship. Private business thrives in states with low income taxes, whereas minimum wages are negative for entrepreneurship.

Old news? Well, perhaps it is a given that high taxes and regulated labour markets have a negative impact for the growth of the private sector. But then again, politicians might not always act on this information. One should remember that Sweden’s finance minister Anders Borg recently claimed that the OECD was exaggerating when they concluded that the regulated working labour market in Sweden was making it difficult to get employed.

Although the Centre party recently has become a staunch defender of small businesses, the current government shows limited interest in decreasing the regulatory burden placed on private companies and no interest in opening up the labour market. Unless reforms are introduced in both areas and unless the level of taxation is dramatically reduced, Sweden will continue to achieve far less than it’s potential when it comes to fostering the new generation of successful businessmen and women.

Readers might object that Sweden is doing well in one area – not having minimum wages. In theory, yes. But in reality, the labour unions’ power to subject companies to blockades gives them the opportunity to force virtually all companies in many low-wage sectors to sign union contracts. Union contracts forced on to companies effectively have the same effects as minimum wages.

Nima Sanandaji

Nima Sanandaji is chief executive of think-tank Captus

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EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

The Swedish financial supervisory authority warned on Wednesday that rising interest rates could lead to house prices falling "quite sharply". How likely is it that this will happen?

EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

What financial circumstances might make it difficult for borrowers to repay loans?

With an increase in the cost of living, including rising interest rates and rising electricity prices, there are plenty of circumstances that may make it difficult for borrowers – especially those holding large debts in relation to their income – to repay their mortgages.

Households with large debts are therefore more sensitive to an increase in interest rates, according to the Swedish financial supervisory authority, known in Swedish as Finansinspektionen (FI).

The agency published its annual Swedish Mortgage Market report on Wednesday.

“Large debts also mean a higher sensitivity if you were to suffer unemployment during an extensive recession,” said Henrik Braconier, the authority’s chief economist.

Other factors that could stretch borrowers’ finances include rising energy prices, higher food prices, and growing inflation.

“Apples, oranges, tomatoes have gone up by 30 percent,” said Américo Fernández, a household economist at SEB. “Wheat is coming from Ukraine and it’s getting harder and harder to get hold of.”


Will homeowners become unable to repay their mortgage loans?

Not according to Fernández.

“One of the last things Swedish households will fail to make their payments on is their mortgage and their houses,” he said. “They would rather decrease their spending on vacations abroad, or restaurants.”

The FI report noted that most new mortgages include margins that allow for fluctuations in the borrower’s finances. This means that mortgage holders have a cushion that allows them to handle financial changes.

“Our stress test shows that they can handle increases in the interest rate and also loss of income,” said Magnus Karlsson, FI’s director of macroanalysis. “New mortgages have margins in them calculating discretionary income, and will be able to absorb increases in interest rates and loss of income.”

SEB foresees an interest rise of up to three percent over the next two years, Fernández said,an increase that can be absorbed by most households.

Both Fernández and Karlsson agreed that if homeowners have to cut back on spending, those cuts will not come from debt repayment, but from their disposable income – the money they might ordinarily spend on entertainment, eating out, or travelling.

So while household spending may have to change, financial stability is not at stake for most households.

What’s going on with the housing market?

Right now, a record number of mortgage-holders have loans that are worth more than 4.5 times their income. This year, more than 14 percent of new mortgagors took on such large loans, compared to 6.3 percent last year.

A “low interest rate, increase in housing prices, increase in disposable real income and a housing market that is not functioning well” are all factors in the large debts that homeowners have incurred today, Karlsson argued.

Fernández noted that there is an imbalance between the low supply of housing and the high demand for housing, which is in part responsible for the high housing prices we see today.

He said a decrease in price of a few percentage points would not be surprising: “We’re coming from two years of exaggerated prices.”

Will housing prices begin to decrease after two years of increasing prices?

Calculations for three different scenarios tested by FI show that housing prices will decrease, Karlsson said.

While the agency does not predict housing prices, its report shows that under three different scenarios – the first an increase in mortgage interest rate, the second an increase in energy prices, and the third a combination of the first two with a reversal to pre-pandemic housing preferences – prices will decrease.

The Local Sweden reported last year about increasing housing costs in Sweden, spurred on in part by a desire for bigger homes further away from urban areas during the COVID-19 pandemic.

Fernández called the two years of increasing housing costs “surprising.”

“10-12 percent two years in a row, that’s historical in these uncertain times,” he said, noting that prices were still increasing in figures for March this year.

What sorts of housing will see the largest price decrease?

The FI report also included various scenarios of how the price of different types of housing may fluctuate based on changes in the interest rate.

One scenario assumed a 1 percent increase in interest rates this year and a 0.5 percent increase next year, and predicted that while the price of apartments owned in a cooperative – called bostadsrätter – would fall only slightly, the price of detached houses would fall by 10 percent.

Another calculation that accounted for rising electricity prices and a decline in new housing purchases found that the price of bostadsrätter and detached houses risked falling by an average of 30 percent.

Is there a plan to let borrowers end their mortgage terms early?

“We believe it needs to be simpler and more inexpensive for households to repay their mortgages early,” FI Director General Erik Thedéen is quoted as saying in a press release published by the agency on Wednesday.

To that end, Thedéen said at a press conference that the agency had sent a request to the government to change the calculation model for how banks are compensated when mortgages are terminated early.

“When you terminate a loan agreement and the bank incurs costs, it must be reimbursed,” Thedéen said. “But at present the banks are overcompensated, that is what our calculations show. If the government follows our line and changes the model and follows our line, then the banks must simply adapt.”

When asked about the likelihood of this request being granted, FI recommended reaching out to the Ministry of Justice for comment.

What does this mean for foreigners in Sweden?

If you’re already a mortgage holder, then as Karlsson and Fernández assured, mortgage calculations include a cushion that allow for changes in your financial circumstances.

If homeownership is in your future, housing prices may begin to decrease in the near future, so it’s worth keeping an eye on your local real estate listings.

By Shandana Mufti