An analysis of the Swedish property markets and its weaknesses. I researched the structure of the Swedish mortgage market, real estate valuation and household indebtedness and the covered bond market and its connection to the Swedish banking system. Part 1 gives the macroeconomic background and looks at the structure of the local mortgage market.

1. Luca Dal Mas, CFA, CFTe - November 2017 lucadalmas@hotmail.com
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The Swedish property market
Introduction
The European monetary authorities have reacted to the 2008 crisis by introducing a very
expansionary monetary policy, lowering interest rates in the common currency area and
conducting aggressive asset purchases. These actions had significant impact also on other
European countries that have maintained an independent currency like Sweden.
Sweden is a small, open economy that is affected to a large extent by events abroad. The
euro area, which represents about half of their foreign trade, is particularly significant. If
monetary policy abroad becomes more expansionary and Swedish monetary policy is
passive, the exchange rate will strengthen and inflation in Sweden will fall. In order to
counteract that, the Riksbank had to also conduct an expansionary monetary so that
inflation did not become too low. However, a more expansionary monetary policy by
lowering interest rates contributes towards households' debts increasing, and this
increments the risks for the Swedish economy as a whole and in particular for its financial
stability.
As a result of these actions, rates in Sweden have been hovering at or below zero for
years:
Swedish base interest rates
Swedish 5 years government bond rate

2. Luca Dal Mas, CFA, CFTe - November 2017 lucadalmas@hotmail.com
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Structure of the Swedish mortgage market
On 1 June 2016, the FI (Finansinspektionen, Sweden's financial supervisory authority)
introduced an amortisation requirement for new mortgages. Up until the year before, only
67% of all household with mortgages would amortise their debt to some extent. Unlike in
other countries, many Swedes only pay back the interest on their mortgages.
A study done by Sweden central bank in 2014 revealed that the debt of 25% of household
grows every year, while for 15 % their debt stays the same year after year. The remaining
60 % pay back their mortgages at a very slow pace.
The share of new mortgage borrowers with debt-to-income (DTI) ratios above 450%
(600%) was about 37% (17%) in 2015, up from 21% (10%) in 2011. The credit to GDP
gap has declined but it is still positive and credit to households is growing faster than
disposable income.
Swedish regulators calculated in 2013 that the average mortgage term was around 140
years and nearly one-third of mortgages issued in 2014 allowed borrowers to repay only
interest.
Following the new regulation, Swedish lawmakers introduced a law limiting mortgage loans
to 105 years. There had previously been no legal limit on the duration of mortgages, and
in fact many Swedish homeowners have been taking loans which only their grandchildren
would have a chance to pay off. This situation is very similar to what happened in Japan
during the property bubble that peaked in 1989 and whose consequences are still felt there
today.
Under the new regulation new mortgages with a loan-to-value ratio above 70 % must be
amortised by at least 2% of the original loan amount each year. Loans that have a loan-
to-value ratio below 70 % must be amortised by a minimum of 1% annually until the loan-
to-value ratio has reached 50%.
There also some exceptions:
- Mortgage firms may waive the amortisation requirement for a loan collateralised
by a newly produced residential property, although for a maximum of five years.
This option is only available to first-hand buyers.
- Mortgage firms may, for a limited period of time, waive the requirement for
individual households to amortise their loans if special grounds exist. Examples of
such situations could be unemployment, the death of a family member or illness.
So in simple terms, if the home is not revalued, the Finansinspektionen new
amortisation requirements means that households with a loan-to-value ratio of 85%
would need to amortise down to a loan-to-value ratio of 50% within 32 years.
The Swedish Bankers' Association opposed this new regulation even if these
requirements look mild by international standards. In most countries the loan has a
clear maturity date which specifies when the debt is to be repaid, often between 20
and 40 years, and the proportion of interest-only loans is often low.

3. Luca Dal Mas, CFA, CFTe - November 2017 lucadalmas@hotmail.com
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Sources
Governor Stefan Ingves speech, 19/11/2015
The Swedish Mortgage Market Report, 6/4/2017
The Riksbank's Financial Stability Report, May 2017
Nordea housing report, November 2017
SEB Strategy focus, November 2017
UBS Global Real Estate Bubble Index 2017
IMF working papers and country reports, September 2013, November 2016 and December
2015
SEB Strategy Focus, November 2017
Reuters.com:
http://www.reuters.com/article/us-sweden-banks-analysis/swedish-banks-safe-bet-or-
risky-business-idUSKBN1500ZX
https://www.reuters.com/article/sweden-housing-indicator/confidence-in-swedish-
property-market-slumps-seb-indicator-idUSL8N1NJ1SJ
Zerohedge:
http://www.zerohedge.com/news/2016-03-16/sweden-most-risk-asset-bubble-moodys-
warns-after-taking-look-swedish-house-prices
Thelocal.se:
https://www.thelocal.se/20140507/swedes-doomed-to-die-with-mortgages-central-bank
https://www.thelocal.se/20150905/sweden-confirms-plans-for-new-mortgage-rules
https://www.thelocal.se/20160324/sweden-limits-mortgage-loans-to-105-years
Seekingalpha:
https://seekingalpha.com/article/4108265-nordea-move-finland-may-lead-higher-
dividends
Globalpropertyguide
http://www.globalpropertyguide.com/Europe/Sweden/Price-History
Nordea.com
https://e-markets.nordea.com/#!/article/41415/sweden-tumbling-home-prices