House prices in Scandinavia’s biggest economy jumped 17% in March 2021. A record number of homes were sold in Sweden in the first quarter. Interestingly housing prices in Sweden are not rising despite COVID-19; they are rising because of it. Here is a look at how coronavirus created the Swedish housing market boom.
What makes housing suddenly so attractive?
The property market is being driven by banks. Bjorn Wellhagen is the chief executive of Maklarsamfundet, a Swedish lobby group that focuses on the property market. Wellhagen explains that the housing market is being driven by expectations of low interest rates for a long time to come. Riksbank (The Central Bank of Sweden) and other Swedish banks have had to commit to super low interest rates. This became necessary to drive the economy through the pandemic. The interest rate on housing loans is currently at 0.00%. Riksbank has held its interest rates at zero throughout the pandemic. Lower interest rates were adopted to stimulate more spending, higher levels of investment, and more borrowing. As a result consumer borrowing in Sweden reached 190% of gross disposable incomes at the end of 2020.
The Swedish Financial Supervisory Authority introduced exceptions at the beginning of the pandemic. A general exception from the current amortization rules was introduced in the spring of 2020. Before COVID-19 borrowers could apply for an interest-only period. It is a situation wherein customers only pay interest on loan, and need not repay the principal. Previously this type of loan was only offered for specific situations, for example if someone became unemployed. During the coronavirus crisis this type of loan was made universally available. One can apply without having to state a specific reason. These exceptions have contributed to the housing market boom.
According to Open Insights by Nordea, Riksbank expanded its asset purchase program to include mortgage bonds in 2020. These purchases have contributed to driving down interest rates on home loans. They will remain in place throughout 2021 (and possibly longer). Riksbank purchased the assets that pay for home loans. These assets now make up the lion’s share of its SEK 700 billion quantitative easing program. Quantitative easing was created to support credit supply and liquidity in the banking system.
Another reason why more money is being diverted toward the property market is that there are fewer investment alternatives.
Smaller cities like Västerås, Örebro, and Linköping have become more popular for housing investments than predicted. This is partly due to the growing trend of working from home. Workers need to commute to offices less frequently. This is allowing them to live further from major cities. Regional cities are a good alternative to big cities because of lower prices for the same quality of life. Sweden is home to vast numbers of migrants. These expat professionals regularly send remittances back to their home countries via the Ria Money Transfer App and other reliable channels. Lower costs of living increase the disposable income and remittances. They also make the prospect of owning a home more realistic. The price of single-family homes in Sweden rocketed 17% in the first 3 months of 2021. The Nordics are seen to have coped better financially with the crisis than many other countries. The interest of foreign investors in the housing market has never been greater.
Long term outcomes
There are mixed opinions on the current housing market situation in Sweden. Deputy Governor of Riksbank Anna Breman feels that, “As long as the demand for housing is higher than the supply, prices and indebtedness are likely to continue to rise.” Hans Flink is the head of sales at Maklarstatistik, an association of real estate agents. Flink believes that, “Big price rises are usually followed by a recoil.” The Commentary Box Sports publication said in April 2021 that “steps are now needed to ensure the housing market does not overheat.” Finance Minister Magdalena Andersson said in March 2021 that rising home prices are things to keep an eye on.
There are other concerns as well. Low interest rates have created unprecedented demand. This is creating a shortage of houses for sale, which pushes prices higher still. Some feel that infrastructure investments to build new homes are urgently needed to increase the housing supply. Bloomberg said in April 2021 that financial imbalances stemming from the housing market will be owed to Sweden’s Financial Supervisory Authority and the government which has the power to initiate structural reform. Reuters predicted in April 2021 that the ultra-low mortgage rates may start to rise. The Swedish Financial Supervisory Authority has said that it will restore stricter mortgage repayment rules (which it suspended at the start of COVID-19 in 2020). It also plans to reinstate an amortization requirement on mortgages from Aug 31.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.