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ECONOMY

ANALYSIS: What’s in store for your Swedish money and spending power in 2021?

With no expensive international travel for business, family or leisure for a year, fewer visits to restaurants and pubs, and stubbornly low interest rates, many foreigners living in Sweden will be starting the year with more spare cash than usual, bank economists have told The Local. If restrictions are finally lifted after the summer, will it be time for a splurge?

ANALYSIS: What's in store for your Swedish money and spending power in 2021?
Will you have more kronor left in the bank this year? Henrik Montgomery/TT

Flush with cash? 

According to Arturo Arques, private economist with Swedbank, somewhat paradoxically, a year of pandemic has left many people in Sweden better off. 

“In 2020, a lot of people were still employed, and they haven’t spent as much as they normally do, because of all the restrictions. So many people have more money today than a year ago. They have larger savings,” he told The Local. 

This is even before changes to taxes, salaries and prices, which, according to his analysis, will leave most households with higher disposable incomes this year, compared to in 2020. 

According to Swedbank’s 2021 household economy paper, those living in rented accommodation have done better than those who recently bought property, due to the 13 percent appreciation in house prices last year. Changes to the top rate of unemployment benefits has helped middle income people who have lost their jobs, while pensioners and students are less well-off. 

According to the bank’s analysis, a person living alone in a one-bedroom rented apartment, had 200 Swedish kronor more to spend a month in real terms this January than they did in the same month in 2020, a two-child, double-income family in a rented apartment had 150 kronor more to spend. If their children are over 16 that rises to 630 kronor. 

For recent buyers, the picture is less rosy, with the rise in house prices meaning that they will be 1,170 kronor worse off than they would have been in January 2021. 

“We have rapidly increasing house prices, and whether that trend continues or slows down will have a big impact on a lot of people,” Jens Magnusson, private economist at the SEB bank, told The Local. “A huge downside with the housing market that we’ve seen the last few years is that a lot of people are shut out, because they simply can’t afford it.” 

With Sweden’s student loans and housing allowances practically stagnant on last year, students who receive student funding in Sweden will this year have 140 kronor less a month to spend in real terms. A miserly increase in the guaranteed state pension has also left the poorest pensioners 220 kronor worse off a month.   

For the unemployed, the situation has improved somewhat, given the increase in the maximum monthly A-kassa unemployment payment from 20,000 to 26,400 kronor. This will only help those for whom 20,000 represented less than 80 percent of their former salary, however. 

Will salaries rise? 

The pandemic has given employers, both in Sweden and internationally, good reasons to suspend wage increases, and for some time the slow rate of wage increase has been a concern in Sweden.

“The Riksbank [Sweden’s central bank] has repeatedly said that wages need to come up more for us to have a better functioning economy and higher inflation,” Magnusson said. “Obviously, during the pandemic you have negative growth rates in many countries in Europe, and that has not been good for for wages. But when we’re in a recovery, perhaps in the second half of this year and through 2022, that should be a good time for wage increases.” 

What tax changes will benefit people? 

Last year’s tax cuts effectively reduced the top marginal rate of tax in Sweden from 57 percent to about 50 percent, saving those on the highest incomes tens of thousands of kronor. This year, the biggest tax change is on income earned by retirees who take a part-time job. 

“We have seen tax cuts for retirees and certain groups,” Magnusson said. “If you’re a working retiree, which are the those who are benefited the most, it might be a bit more than 1,000  kronor per month. Nowadays, in Sweden, if you are above 66 but continue to work, then you pay very little tax and keep a lot of your income.” 

However, he said that the viewing the economy as a whole, these tax cuts were “too moderate to really matter”. 

READ ALSO: 

What will happen to the Swedish krona? 

Many foreigners living in Sweden have savings or even receive their salary in another currency, meaning their spending power can change dramatically due to currency fluctuations. 

The Swedish krona has depreciated against the pound, dollar and euro since about 2011, thanks in part to the Riksbank’s negative interest rates. But in 2020, that trend reversed, decreasing the spending power of those paid in these currencies. 

Magnusson said he believed that the krona’s rise had further to go. 

“Our view is that even though the krona has appreciated, it still has some way to go,” he said. “Obviously, if we go back into a turmoil situation where vaccination is not going as planned, or we have mutations of the virus, then we know that the Swedish krona and other small currencies are typically abandoned on the FX [currency exchange] market. But if things proceed the way we think, and we have economic recovery this year and next year, we think the krona will appreciate slightly.” 

Arques said that the Swedish government’s successful management of the economy both before and during the pandemic, suggested that the krona would continue to rise in value. 

“Because of the way the government and the central bank has managed the economy here in Sweden, we haven’t been as hurt as many other countries, and that’s one reason why the krona is quite strong compared to where it was a year or two ago. And if you look at how the economy looks in Spain, Italy, France, and England, there’s a good probability that the krona will will stay quite strong.” 

Will inflation return? 

The enormous $1.9 trillion stimulus package recently passed in the US, and similar packages in Europe, have led some to worry that the global economy might once again start to see the inflation that was such a problem in the 1930s, 1970s and 1980s. 

Neither Arques or Magnusson believed that this would affect Sweden in 2021. 

“This is an issue that has come up now for the first time in a long time. We’re talking about inflation risks again,” Magnusson said. “There are some worries that the US stimulus package might be a bit too big, and also maybe a bit too late, so maybe it will kick in when the economy is already recovering and that could in itself cause inflation.” 

But he said that there were sufficient deflationary pressures in Sweden to keep price rises under control in the near term. 

“We don’t see it as an immediate threat, especially not in Europe or in Sweden, because there are so much other things that are working in the opposite direction, so it’s not top of mind,” he said. “I don’t think households need to withdraw their money from the stock markets or try to hedge for inflation.” 

Will we see a spending splurge after the summer? 

Arques believes that the pent-up desire to travel or eat out will see a rise in spending once the pandemic is sufficiently over for restrictions to be lifted around the world. 

“I think that the people that have not lost their jobs and who during the pandemic have not been able to spend as much as they usually do, they will probably increase their spending when the restrictions are lifted,” Arques said. “I think that they will start to travel as soon as they can. And people with modest or good salaries that used to go to restaurants, they will also start to do that as soon as they can.”

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ECONOMY

What will Sweden’s interest rate hikes mean for foreigners in Sweden?

Sweden's Riksbank now expects its base interest rate to be close to two percent in three years' time. What will this mean for foreigners living in Sweden?

What will Sweden's interest rate hikes mean for foreigners in Sweden?

How high could interest rates go? 

The Riksbank on Thursday increased its key interest rate above zero for the first time since the autumn of 2014.

But it isn’t going to stop there, it expects to hike the rate in small increments over the next three years, to 1.18 in the middle of next year, to 1.57 in the middle of 2024, and to 1.81 in the middle of 2024. 

At a press conference on Thursday, the bank’s governor Stefan Ingves said that people should prepare for higher rates, but stressed that there would be “no extreme rate levels”. 

“We’re not slamming on the brakes, more taking our foot off the pedal,” he said. 

It’s worth remembering, though, that in the run-up to the Swedish banking crisis in the early 1990s, the key interest rate moved from 1 percent to 2 percent to as high as 10 percent, before the Riksbank finally upped it to 500 percent in a desperate attempt to defend the krona. 

As recently as February the Riksbank was not expecting to raise rates from zero until 2024, so if inflation proves more stubborn than expected, the key rate could possibly go higher. 

But Robert Boije, chief economist at Swedish state-owned mortgage lender SBAB, said that as inflation today is most likely the result of higher energy prices, and supply-side constraints, rather than because there’s too much money in the system, the risk of seeing higher rates than the Riksbank has outlined is relatively small.  

“There’s a higher probability of a lower repo interest rate [than expected] in 2024 than of a higher interest rate,” he said. 

How will higher interest rates affect mortgage rates? 

According to Claudia Wörmann, SBAB’s housing economist, interest rates on floating mortgages could nearly double over the next year from around 1.8 percent today to about 3 percent in January 2026.

She expects two-year fixed mortgages, which are now at around 2 percent to rise to 3.4 percent in January 2025, while five-year fixed-rate mortgages will rise from 2.5 percent today to 3 percent in 2023 and 4.1 percent in 2026. 

Many mortgage lenders had already anticipated Thursday’s rent rise, with Handelsbanken/Stadshypotek, Skandiabank, and SBAB all upping their mortgage rates by as much as 0.25 percentage points last week. 

Bigger monthly payments for those with loans

According to Wörmann, someone with a million kronor mortgage who currently has a two percent interest rate, would see their monthly payment double from about 1,160 to 2,330 if their mortgage rate rises to four percent. 

As most borrowers pay more than they need to simply to meet their interest payments, however, many have some flexibility, meaning they can slow down their repayments to make it easier to bear the increased cost, she said.  

“One aspect is the interest rate, but you need to bear in mind that a normal household amortises much more than they pay in interest rates,” she said. 

Lower buying power for those without a mortgage

For foreigners in Sweden looking to borrow to buy a house, higher mortgage rates will reduce the amount of money they can borrow to buy a house or apartment.  

Houses and flats in Sweden might get more affordable

Two years of rising house prices showed signs of coming to halt last month. 

The Swedish financial supervisory authority warned earlier this month that in its worst-case scenario, where rising interest rates are compounded by higher power costs for consumers, house prices could fall by as much as 30 percent. 

In its less dramatic scenario, the prices of apartments owned as part of a cooperative – so-called bostadsrätter – would fall only slightly, while the price of detached houses would fall 10 percent. 

“Our prognosis is that housing prices at the end of 2024 will be about ten percent lower than what they were on January 1st this year,” said Boije. 

The decline will start with a 1.3 percent drop this year, followed by a bigger 6.1 percent drop next year, and then a 3.8 percent drop in 2024. 

For most buyers the affordability of housing will not change very much, Boije points out, as higher interest rates will reduce the amount they can borrow. 

“If there’s a one-to-one correlation between the interest rate and housing prices, then the use cost of housing in economic terms will not change very much,” he said. 

Foreigners who are able to buy in Sweden without taking out a loan, will see a benefit, however.

It will also become easier for those taking out a mortgage to gather together the 15 percent of the value of the property they are required, under Swedish law, to pay in cash. 

READ ALSO: Will Swedish housing prices plummet as interest rates rise?

Wörmann said there was little doubt that the increase would start to pull down house prices, particularly when you looked at rising costs and post-pandemic effects. 

“It’s more expensive to buy food, you have to take into account that people are spending much more money on electricity and on fuel,” she said.

“We are leaving a pandemic where we were stuck in our homes, which might have meant that people didn’t mind paying a lot of money for their house as they spent so much time there. Now we are released from our home, and that might change how we look at our homes and our willingness to buy something expensive.” 

For foreigners who have yet to buy a house or flat in Sweden, a 30 percent fall in prices would of course be quite welcome, increasing the affordability of property in the country. 

Foreigners paid in local currency may benefit from a stronger krona

The hike in interest rates saw the value of the Swedish krona rise against both the dollar and the euro on Thursday.

If the Riksbank has now left behind the loose monetary policy which saw it keep the key interest rates negative between February 2015 and December 2019, the krona could strengthen against other currencies. 

“If markets now expect the Riksbank to be more hawkish relative to the Fed in the US and the ECB, this should increase the value of krona,” Boije said. 

This will mean foreigners paid in kronor will earn more once their salary is converted into another currency. Conversely, those paid in euros or dollars, but living in Sweden, could see an effective salary cut. 

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