What goes up, must come down: Sweden's housing market post 2015
Low interest rates and a supply shortage have turned Sweden into one of the hottest housing markets in the world. Swedish house prices have risen faster than almost any other developed country. Prices for flats in Gothenburg, Sweden’s second largest city, have doubled since 2007 and other cities are not far behind. An increasing urban population, high economic growth and accommodative monetary policy have pushed up housing prices and spurred a property boom. However, Sweden may soon become a victim of its own success, as high prices for homes begin to restrain Sweden’s growth potential.
Sources in the media are generally quick to point out two main reasons behind the sky-high increase in housing prices. One involves the Central Bank. Inflation was last at the Riksbank’s 2.0% target in early 2012 and has since fallen to near-zero levels. The Riksbank has attempted to resuscitate inflation with ultra-loose monetary policy, including cutting rates to cub-zero levels and initiating a large scale qualitative easing (QE) style program. While the impact of this tactic on inflation is hard to discern, there is a growing consensus amongst economists that low interest rates have fostered a housing bubble by making mortgages less expensive.
According to a number of media reports, interest rates are not the only reason behind rising house prices. Another reason that is often cited is the unprecedented number of asylum seekers who entered Sweden last year—the country is renowned for its generous state support of migrant integration. As conflict in the Middle East began to force millions of people from their home countries, Sweden received and required housing for over 160,000 asylum seekers in 2015, the most per capita of any European country. However, the influx of recently-arrived migrants is not the only factor at play. Prices begin increasing several years before 2015 when the bulk of migrants arrived. Structural problems in the construction industry as well as inefficient regulations such as rent control and residential taxes created a supply shortage that pushed prices up as early as 2012.
Source: House price index from NASDAQ OMX Valueguard-KTH Housing Index(TM) and plotted on the right scale. Building permits from Statistics Sweden are on the left scale. This shows the flow of new building permits for new residential construction, in thousands for Stockholm, Gothenburg and Malmo summed per quarter.
Source: Population Data and construction data collected by the Riksbank
As house prices ascended and the population increased, construction did not keep up pace. As seen in the dotted trend line for residential building permits issued in Chart 1, the number of housing permits granted has remained more or less unchanged despite the soaring house prices. Chart 2 illustrates a similar picture by showing that the population has increased far beyond the number of new residential units constructed.
Source: Statistics Sweden and Valueguard. Data collected by the Riksbank.
Tightness in the labour market threatens to cause such a disruption. According to some/government/independent sources, 61% of Swedish companies have reported difficulties in hiring new employees, largely because of exorbitant housing costs . When companies are not able to compensate employees for the cost of housing, they are not able to hire new employees and businesses are not able to grow. In April, Swedish online music giant Spotify, declared in an open letter that it could be forced to take jobs outside of Sweden as inflated housing prices make it difficult to attract talent.
Source: House price and debt ratio data collected by the Riksbank.
The Riksbank has repeatedly warned the government over the risks associated with increasing house prices and growing mortgage debt. Debt to income for apartment owners has risen 31% since 2007 and average debt to income levels for Swedish households now exceed 178%, higher than most developed countries. Should growth slow substantially, and drag down incomes with it, this ratio could grow much higher. A heavily-indebted population would make it more costly for the Riksbank to raise the interest rate when the time eventually comes to normalize monetary policy. It also exacerbates imbalances and leaves little buffer for protecting the economy from an adverse economic shock.
Build it and they will come
It is puzzling as to why the construction industry has remained sclerotic during this period of rapid growth in house prices. The tightly regulated housing market may be partly to blame, however another reason could be a labor shortage in the construction industry that has created a bottleneck fort construction. The building industry is tightly controlled by collective agreements that regulate how many workers there are, what they get paid and how many hours they can work. The bottle neck is expected to get worse. Sweden’s building industry is said to require some 100,000 new workers in the coming years, however the Builders Union is reluctant to look to the newly-arrived migrants as a fresh source of labor.
Sweden’s Builders Union is hesitant to hire a mass of un-skilled workers from the pool of migrants despite the stark shortage. Sweden, along with Norway, has the lowest share of low-skilled employment in the EU. Sweden is also one of the most egalitarian countries in European terms of wages, with high minimum wages and relatively little difference between the highest and the lowest paid on the building site. Contractors may start to sidestep collective agreements and pay workers less if more unskilled workers are employed, which could weaken the Union’s bargaining position. The Builder’s Union has also claimed giving asylum seekers access to the industry could compromise Sweden’s highly-educated workforce and the Swedish model of low inequality amongst wage earners.
Many of these fears are unfounded. Filling low-skilled positions with low-skilled workers does not compromise the existing high-skilled jobs, quite the opposite, and although unskilled-workers entering the market could put downward pressure on wages for some workers, there is much more to lose if no action is taken. If the construction industry constrains growth, we could see Sweden’s economy slowing at an alarming rate, and dragging incomes down with it.
Taking additional laborers and engineers from the pool of asylum seekers is not going to rectify the housing shortage entirely—regulations regarding issuing permits as well as rent controls also need to be reformed. However it is a good place to start. Rapid integration into the workforce is key in alleviating the anxieties that come with relocating. Sweden has proved to be one of Europe’s few growth success stories, but it is expected to slow. The panel of 25 analysts we surveyed this month projects GDP to grow 3.4% in 2016, which is 0.1 percentage points lower than last month’s forecast. In 2017, analysts see GDP growth falling to 2.5%, which is a substantial moderation. More residential construction would ease the housing gaps as well as provide a much needed boost to growth.
Date: August 22, 2016
TagsMENA Iran Turkey Mexico Ukraine China Housing Market Euro Area Agricultural Commodities Spain Bitcoin Oil G7 Germany Company News Africa precious metals Eastern Europe Infographic Brexit Forex Portugal Colombia Venezuela Trade Precious Metals Commodities United Kingdom Major Economies USA European Union Energy Commodities Latin America UK Canada IMF Gold oil prices Sub-Saharan Africa Exchange Rate Base Metals Commodities Emerging Markets Nordic Economies Banking Sector Japan Australia South Africa Cryptocurrency Argentina United States Tunisia France Consensus Forecast Brazil Commodities Healthcare Vietnam Unemployment rate OPEC Greece Russia Italy Inflation Asia TPP India Investment Economic Growth (GDP)
Angolan GDP is seen expanding 1.9% in 2018 and 2.3% in 2019. Find out more: https://t.co/E1QrCcf8pe
7 hours ago
Join EPSE, Colbun, HydroChile, Imelsa at Global Hydropower Latin America Congress https://t.co/zZ4Z5RPDHc
12 hours ago
This month, the Sub-Saharan Africa region's two largest economies, Nigeria and South Africa, had their growth forec… https://t.co/TFfy3tyBL8
13 hours ago
16 hours ago
Risks of fiscal slippage in the run-up to India's elections next year and concerns over the banking sector cloud pr… https://t.co/ZBu9mg48oA
19 hours ago
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- 2018 & 2019 Economic Outlook for the Top Oil Producing Countries
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- China’s growing influence on the Latin American economy
- Top Economics & Finance Blogs of 2018
- How Latin America emerged from recession in 2017
- Is this the beginning of the end for Bitcoin?
- Risks and Opportunities for 2018 - Daniel Lacalle
- Emerging Markets 2018 Economic Outlook
- The role of FDI in Vietnam’s socio-economic development
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit