European Commission urges Sweden to tackle housing crisis

Sweden must tackle persistent growth in house prices and the continuous rise in household debt if it wants to avoid risks to jobs and economic growth, the European Commission (EC) has warned.

European Commission urges Sweden to tackle housing crisis
File photo of apartments in Stockholm. Photo: Anders Wiklund/TT

Every spring the EC publishes its country specific recommendations for EU Member States after reviewing their economies, and this year Sweden has been urged to take action to address household debt and improve the strained housing situation.

The Commission notes that Sweden is experiencing “macroeconomic imbalances” and that in particular “persistent house price growth from already overvalued levels coupled with a continued rise in household debt poses risks of disorderly correction”.

If not dealt with, fallout could spill over to the financial sector as banks have a growing exposure to household mortgages, which could in turn hurt neighbouring countries in the Nordic-Baltic region, where Swedish banks are important.

Concerns over Sweden's housing market at an international level are not new: Swiss investment bank UBS warned last year for example that Swedish capital Stockholm had the third most over-valued property market in the world.

Household debt in Sweden has continued to rise from already high levels, the EC's report details, growing by 7.1 percent in 2016 and approaching 86 percent of GDP, as well as around 180 percent of disposable income. The main driving factor is higher mortgage borrowing as a result of continued house price increases.

The key drivers of the persistent house price growth are, according to the Commission, “generous tax treatment of home ownership and mortgage debt, accommodative credit conditions coupled with relatively low mortgage amortisation rates, and an ongoing housing supply shortage”.

It remains unclear whether a new mortgage amortisation requirement from 2016 will have any sufficient impact, the EU institution warns.

The shortage of available housing meanwhile is linked to “structural inefficiencies in the housing market”, with construction well below the level needed, and competition in the construction sector weak. A tightly regulated rental market hinders the efficient use of existing housing, exacerbating the problem.

Consequences of the lack of affordable housing include limiting labour market mobility, hampering integration of migrants in the labour market, and increasing inequality between generations, the Commission observes.

It is precisely that lack of labour market mobility that the founders of Swedish streaming giants Spotify have complained about in the past, noting that a lack of available housing is making it difficult for them to attract the best talent and may even one day force them to target growing in other countries than Sweden.

READ ALSO: How is Sweden tackling its integration challenge?

In order to combat the household debt situation, the EC recommends that Sweden should “gradually limit the tax deductibility of mortgage interest payments or increase recurrent property taxes while constraining lending at excessive debt-to-income levels” in 2017 and 2018.

To improve the availability of housing meanwhile Sweden should “foster investment and improve the efficiency of the housing market by introducing more flexibility in setting rental prices and revising the design of the capital gains tax”.

Sweden's finance minister Magdalena Andersson agrees that there are problems with the Swedish housing market, but is sceptical about some of the recommendations.

Limiting the generous tax breaks for home owners is not on the table for example.

And while she is more receptive about measures to increase construction as well as a possible debt ceiling limiting the size of mortgages based on the borrower's income, she warned that deregulating the rental market has the potential to go wrong, citing Finland as an example.

“We've seen rents increase by 40 percent there but there haven't been more rental contracts available. That's problematic, no more rental opportunities were created but the cost of living became more expensive,” she told Sveriges Radio.

Sweden's rental market is tightly regulated when it comes to municipal or state-regulated rental companies, who are banned from charging tenants above a certain level, but a shortage of those kinds of properties has created opportunity for private owners, who vary wildly in the prices they set for so-called “second hand” leases.

READ ALSO: Housing crisis forces record number of young Swedes to live at home


These are our readers’ top tips for buying a property in Sweden

Buying an apartment or house in Sweden can be a daunting process, but with rentals so hard to get, many foreigners end up taking the plunge. Here are the top tips from readers who have done it.

These are our readers' top tips for buying a property in Sweden

Get prepared! 

Most of the respondents to our survey stressed the importance of preparation. 

“Spend time on defining your requirements properly, including visits to different locations to narrow down your search,” advised Julian, a Brit living in Malmö. 

As well as working out your requirements, other participants argued, you should also get to grips with the way the bidding system works in Sweden, with one British woman recommending buyers “speak to professionals about the buying procedure”. One respondent went so far as to recommend hiring a buyers’ agent, something international employers sometimes provide for senior executives moving to Sweden. 

Elizabeth, a 26-year-old charity worker from South America, recommended that all buyers “learn to read a bostadsrättsförening årsredovisning”, the finance report for a cooperative housing block. (You can find The Local’s guide here.) 

Get to know the market 

Maja, an anthropologist from Hungary, said it was important to take time to get a feel for the market, suggesting buyers visit different areas to find the one that they like. 

“It will take 6-12 months easily,” she predicts. “Don’t rush. Visit the neighborhoods where you are thinking of buying.”
Others recommended spending time surfing Sweden’s two main housing websites, Hemnet and Booli, to get a better feel for how much different types of housing in different areas typically sell for, before starting to look seriously yourself, with one even recommending going to viewings before you have any intention of buying.  
“Start visiting houses and monitoring bids. That will give you a sense of the process,” recommends Shubham, 31, a software engineer from India.

Think about your expectations
While house prices have soared in Sweden’s cities over the past decade, the same is not the case in all rural areas, something some respondents thought buyers should take advantage of. “To buy a house at a lesser price, look at areas as far from urban areas as is possible for you and your family,” wrote Simon, a 61-year-old living in rural Sweden. 
Julian warned bidders against areas and types of homes that “will attract tens of ‘barnfamiljer’ (families with children), meaning “bidding wars will result”, pushing up the price. 
On the other hand, one respondent warned people to “avoid buying apartments in vulnerable areas, even though prices will be lower there”. 
An Italian buyer recommended looking at newly built apartments coming up for sale. 
Get a mortgage offer before your first serious viewing 
Getting a lånelöfte, literally “loan promise”, can be tricky for foreigners in Sweden, as our recent survey of banks’ policies showed. 
Shubham warned against applying for a loan promise from multiple banks, arguing that this can affect your credit rating if your finances are not otherwise good. He suggested using an umbrella site like Ordna Bolån and Lånekoll, although he warned that the payment they take from the ultimate mortgage provider might ultimately be taken from borrowers.  
Get to know the estate agents, but don’t necessarily trust them 
Gaurav, a sales manager based in Stockholm, recommended getting to know local estate agents in the area where you are planning to buy, as they might be able to direct you towards owners who are in a hurry to sell. “Those can be the best deals as you have greater chances to avoid bidding on such properties,” he argued. 
Maja, from Hungary, warned, however, against believing that the estate agent is on the buyer’s side. 
“You cannot really make friends with them, they work for commission and they will also try to raise the selling price,” she said. “It’s how they present you to the seller that matters. Seem like a serious buyer.” 

Should you try to make an offer before bidding starts? 
Morgan, a 33-year-old marketing manager from France, said it was worth studying the kommande (coming soon) section on Hemnet and Booli to spot houses and flats before they are formally put on the market. “Be alert. Book an appointment asap and get a private visit to reduce competition. If the apartment is what you’re looking for, make a reasonable offer with a condition to sign the contract in the next 24 hours,” he recommends. “You will cut the bidding frenzy and save money.”
Gaurav also recommended getting a private viewing and making an offer while the property was still off the market, as did Julian. 
“If you are lucky, you might find owners who are in a hurry to sell,” Julian said. “Those can be the best deals as you have greater chances to avoid bidding on such properties.” 
But other foreigners warned against bidding before a property is publicly put up for sale on housing websites, arguing that estate agents used this as a way of getting higher prices than they would expect to get at auction.  
“You are essentially negotiating directly with the owner, without finding out the actual market price via bidding,” argued a 31-year-old Indian business analyst. “Usually this will work only for an apartment not in top condition.” 
What to watch out for in the bidding process 
Morgan advised buyers to take what estate agents say about rival bidders with a pinch of salt. 
“Estate agents will play the competition card. Don’t fall for their trick and keep a cool head. Ask yourself if it really worth it before increasing a bid,” he wrote. 
In Sweden, it is possible to make a hidden bid, which is not disclosed to other bidders. One Indian software developer warned that estate agents would often claim that there was such a bid to pressure you. 
“The hidden bids are really confusing as you don’t know the bid placed,” he said. “It’s a trap to get higher bids. “
A 21-year-old Romanian agreed it was important to watch out for estate agents who try to rush or panic you. 
“[Look out for] those that try to rush you into it by saying stuff like ‘this will be gone by Monday, the owner wants to sell fast’, or if they don’t want to include a two-week period to have the property inspected as a clause in the contract,” she said. 
Maja recommended choosing an estate agency that required all bidders to supply their personal number, with all bids made public, “because other agencies might cheat that price rise”. 
“Don’t be the first bidder,” she added. “Keep your cool, and if the agent calls or messages, just hold on. There is no official end to the bidding. Only when you sign the contract. So the best game is to seem very serious but not stupid. You have a budget, and try to sign the contract the same day or the next if you are the highest bidder.” 
Is now a good time to buy? 
The respondents were, predictably, divided. 
“It’s risky for both sellers and buyers,” said Carl, a Swede who recently returned home from China. “The market seems to correlate pretty well with central banks raising interest rates. If that’s the case, then it’s still a sellers’ market since central bank [Riksbank] will continue to increase interest rates until 2024.” 
“It’s difficult to predict anything at the moment,” agreed Gaurav. “Prices should fall a bit but that’s not happening in all the areas. Avoid buying or selling if you can for a few months.” 
“I see there is no difference in buying in total cost. You can get a property at a lower price but end up paying more in interest and the price is the same in five to ten years,” said one Indian software engineer. “Buying is still better than renting.”