‘New era’: Swedish bank warns interest rate could hit five percent

A new property report from Swedish bank Handelsbanken predicts that property prices will continue to fall throughout the spring as the average interest rate on mortgages rises to over five percent.

'New era': Swedish bank warns interest rate could hit five percent
The average interest rate on mortgages could reach 5 percent this year. Photo: Fredrik Sandberg/TT

Increased inflation means the chances of Sweden’s central bank decreasing the key interest rate any time soon is unlikely.

“We don’t see any indications that Swedish inflation is on its way down, rather the opposite, and we believe the risk of financial instability currently weighs heavier for the central bank,” Nyman said.

The bank therefore predict that the central bank will raise key interest rates by 0.75 percentage points in April and 0.5 percentage points in June, to a total of 4.25 percent, and the interest rate for consumers is likely to be higher than that.

“Given our prognosis of the central bank’s key interest rate, the average variable rates offered by banks on mortgages could rise over five percent over the year, later dropping somewhat,” she said.

The majority of Swedish homeowners have variable rate mortgages where the interest rate is updated every three months, and one third of all mortgages are due for a rate renewal within a year, meaning the effect of Sweden’s central bank’s rate increases are quickly felt.

The report describes a “new era for property prices”, with continued drops in property prices as interest rates increase further during the spring.

“Property prices will fall with a total of 20 percent compared to the peak in February last year, and will then only increase slightly as households’ purchasing power remains strained,” Handelsbanken’s head economist, Christina Nyman, said.

The amount which households are able to borrow has also decreased, as lenders’ calculations factor in higher inflation and interest rates.

“For a family with two adults who are on the median salary and two children to have the same space in their budget calculations in 2023 as in last year, the amount they loan needs to decrease by around 14 percent,” she said.

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Sweden experiencing ‘worst property construction crisis since 1990s’

The rate at which new properties in Sweden are being built continues to fall, new figures from Statistics Sweden show.

Sweden experiencing 'worst property construction crisis since 1990s'

The new figures show that the level of new builds in Sweden is at the lowest level in ten years, dropping 50 percent in the first quarter of 2023 compared to the same period a year previously.

Anna Broman, an expert in property policy at the Swedish Construction Federation, Byggföretagen, has called for a crisis commission.

“We are in the worst crisis since the 1990s. Property building rates are going to drop by more than half in the space of two years,” she said.

In 2021, around 70,000 homes were built, with that number expected to drop to 25,000 this year, according to the Swedish Construction Federation.

The Swedish National Board of Housing, Building and Planning, known in Swedish as Boverket, is expecting around 30,000 properties to be built this year. At the same time, 180 of Sweden’s 290 municipalities said in this year’s property market questionnaire that their property markets as a whole are running at a loss.

“It’s very clear that we’re seeing the brakes being slammed on, both regarding the rate at which properties are being built and the sale of new builds,” Boverket property analyst Hans-Åke Palmgren told Swedish news agency TT.

“It could take a worryingly long time before we see the market recovering. The situation affects young people and the level we’re at is much lower than what’s needed.”

“We lost a whole generation of construction workers [in the 90s],” said Anna Broman from Byggföretagen. “We need to learn our lesson so that doesn’t happen again. If the downturn is allowed to go too far, it will take a very long time to get the labour back into the industry.”

This could also affect the green transition, Broman argued.

“Those most affected by this are young adults and other groups who need to get onto the property market. But this also affects all of our new industrialisation – the green transition – in Norrland. How can we get labour onto these sites if there aren’t any homes?”

Sweden’s property minister, Andreas Carlson, claimed that the worsening conditions to a great extent are related to outside factors.

“It’s due in large part to external factors related to rising interest rates, inflation and increased energy prices,” he told TT.

“Then we have structural issues too. These issues have been deprioritised for a long time.”

In the short term, he said, the government can help by lessening the impacts of inflation and the economic effects on Swedish households.

“In the longer term, we want to increase access to ground suitable for building, increase the motivation to build and increase the possibilities of home ownership. There is in general a wide level of agreement on what the issues are, and we have support in parliament for carrying out these measures,” he said.

There have been many proposals for encouraging the building of new property. Removing the amortisation requirement, investment support, free market rents and subsidised housing are some examples mentioned in debate.

Carlson does not believe the latter suggestion would be particularly effective.

“We believe expensive housing subsidies are ineffective and not the way forward. What we need is structural reform.”