This document is an excerpt from the EUR-Lex website
Document 52013SC0124
COMMISSION STAFF WORKING DOCUMENT In-depth review for SWEDEN in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
COMMISSION STAFF WORKING DOCUMENT In-depth review for SWEDEN in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
COMMISSION STAFF WORKING DOCUMENT In-depth review for SWEDEN in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
/* SWD/2013/0124 final */
COMMISSION STAFF WORKING DOCUMENT In-depth review for SWEDEN in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances /* SWD/2013/0124 final */
Contents ............. Executive summary and conclusions................................................................... 3 1........... Introduction........................................................................................................ 5 2........... Macroeconomic
situation and potential imbalances.................. 5 2.1........ Macroeconomic scene
setter........................................................................................... 5 2.2........ Sustainability of
external positions.................................................................................... 6 2.3........ Competitiveness and
trade performance.......................................................................... 9 2.4........ Private sector
indebtedness........................................................................................... 13 2.5........ Housing market
development........................................................................................ 17 3........... In-depth
analysis of selected topics..................................................... 19 3.1........ Housing market and
household sector indebtedness....................................................... 19 3.1.1. Swedish housing market overview.............................................................. 22 3.1.2. Challenges linked to the
construction sector............................................... 26 3.1.3. A squeezed residential rental
market........................................................... 30 3.1.4. Household indebtedness............................................................................... 36 3.2........ Indebtedness
of the non-financial corporate sector......................................................... 43 3.2.1. Recent developments in
non-financial corporate debt................................ 43 3.2.2. Factors behind Swedish
corporate indebtedness......................................... 48 3.3........ Linkages from
private debt to the real economy, the financial sector and public finances.. 49 3.3.1. Risks for the real
economy........................................................................... 50 3.3.2. Risks for the
financial sector....................................................................... 51 3.3.3. Risks for public
finances.............................................................................. 52 4........... Policy
challenges............................................................................................ 53 References.......................................................................................................................... 57 Executive summary and conclusions In May 2012,
the Commission concluded that Sweden was experiencing macroeconomic imbalances,
in particular as regards developments related to private sector debt and the
housing market. In the Alert Mechanism Report (AMR) published on 28 November
2012, the Commission found it useful, also taking into account the
identification of an imbalance in May, to examine further the persistence of
imbalances or their unwinding. To this end, this In-Depth Review (IDR) takes a
broad view of the Swedish economy in line with the scope of the surveillance
under the Macroeconomic Imbalance Procedure (MIP). The main observations and
findings from this analysis are: ·
The
Swedish current account surplus is large, but it does not seem to
point to an underlying imbalance in the economy. The current account surpluses
have not resulted in an accumulation of net external wealth, but have rather
corrected large current account deficits from the past. They reflect primarily
prudent fiscal policy and high pension savings by households, and to a minor
extent also lower construction investment. Apart from bottlenecks in the
housing supply, no policies seem to be in place that would artificially
suppress demand. The current account surplus has already corrected markedly
since 2007 and is expected to decline further in the medium term. Besides
contributing to the high surplus, constraints in the construction sector have
been conducive to strong dynamics in house prices, although at the same time
preventing an excessive construction boom. ·
Despite
a continued reduction in the export market shares, the Swedish economy remains
one of the most competitive in the EU. Disregarding the crisis
years 2008-2009, the losses in market shares have been marginal over the last
10 years. Market share losses in goods have been largely compensated by gains
in services. The losses reflect structural changes rather than unfavourable
domestic cost developments or eroding quality competitiveness. Unit labour
costs and prices have been growing more slowly in Sweden than in its main
trading partners. However, the strengthening of the Swedish krona and higher
growth in unit labour costs in 2012 indicate competitiveness challenges in the
near term. In a broader context, moderate shrinking of market shares can be
seen as a positive development in view of the strong current account surplus
and euro-area rebalancing. ·
Macroeconomic
risks related to high indebtedness of the private sector continue to be
important,
despite a number of mitigating factors and recently introduced policy measures
on housing and corporate taxation. Corporate debt has declined substantially
since 2009 but remains high even if the large bulk of inter-company loans is
disregarded. Household debt has stabilised only recently and is not likely to
decline in the near future given the continued credit growth and a low mortgage
amortisation pace. On the other hand, various indicators of financial health of
corporations and stress tests for households, as well as the low rate of
defaults during the 2008-2009 crisis, alleviate to some extent concerns about
the private actors' capacity to service their debts. Credit supply and demand
conditions do not indicate any imminent deleveraging pressures. ·
The
Swedish housing market has been stable over the last year, but remains a
potential source of instability for the future. Despite some recent
measures, inefficiencies still weigh on the housing supply, especially linked
to cumbersome planning processes connected to the local planning monopoly of
the Swedish municipalities, limited competition within the construction sector
and the remaining regulation of the rental market. Together with debt-inducing
housing taxation, these inefficiencies tend to create an upward-bias in house
prices and thus contribute to increasing household indebtedness. The IDR also discusses
the policy challenges stemming from these developments and possible policy
responses. A number of elements can be considered. ·
Household indebtedness could be tackled within the framework of a global reform addressing
the various incentives biasing demand towards property ownership. A gradual
phasing-out of the tax deductibility of interest payments could thus be
combined with strengthening the recurrent property taxation. This would restore
neutrality among investment alternatives, but also free up fiscal space to
reduce taxes that are more harmful to growth. Mortgage amortisation
requirements could be envisaged to curtail excessive borrowing and lending. ·
With a view to lowering the level of corporate
debt, it could be worth exploring how the tax-induced debt bias could be
further reduced beyond measures already taken to tackle international fiscal
optimisation by multinational companies. ·
In order to improve housing market efficiency,
further reforms to the rent-setting system might be envisaged to allow market
forces to establish an optimal supply of rental housing at an adequate price. Such
reforms could be staged in two steps whereby the first might be to allow rents
of newly produced rental units to reflect tenants' willingness to pay. As a
second step, rent levels of the remaining stock of rentals could be gradually
adapted. It might also be worthwhile to explore how the role of individual
tenants in rent negotiations might be strengthened, and to allow for an
increased freedom of contract. Streamlining the planning and zoning processes
would increase the flexibility of housing supply, foster competition in the
construction sector and decrease construction costs. This could be achieved for
example by limiting the appeal procedures, clarifying cost responsibilities,
reconciling building and environmental regulations and by giving
municipalities, which have a de facto local planning monopoly, clearer
incentives to decrease the administrative burden on construction companies and
provide more efficient services. These measures are generally mutually reinforcing, as an improvement
in the functioning of the housing market is likely to help reduce household
debt levels. A well-considered timing and gradual implementation of the
measures would be crucial to achieve the foreseen long-term benefits without
destabilising the housing market in the short-term. Although the cyclical
situation in the housing and mortgage market does not encourage important
reform steps in the near future, it is important to start preparatory works for
measures requiring longer administrative or legislative procedures, or wider
political and public support. Interlinkages between
external and internal imbalances also should be kept in mind. On the one hand,
measures to tackle constraints in the construction sector are likely to spur
construction investment, and by making it accessible to foreign competition,
work in favour of a lower current account surplus. On the other hand, measures
resulting in fast deleveraging would lead to higher savings and, thereby,
stronger current account surplus. 1. Introduction
On
28 November 2012, the European Commission presented its second Alert Mechanism
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No.
1176/2011 on the prevention and correction of macroeconomic imbalances. The AMR
serves as an initial screening device helping to identify Member States that
warrant further in depth analysis to determine whether imbalances exist or risk
emerging. According to Article 5 of Regulation No. 1176/2011, these
country-specific “in-depth reviews” (IDR) should examine the nature, origin and
severity of macroeconomic developments in the Member State concerned, which
constitute, or could lead to, imbalances. On the basis of this analysis, the
Commission will establish whether it considers that an imbalance exists and
what type of follow-up it will recommend to the Council. This is the
second IDR for Sweden. The previous IDR was published on 30 May 2012, on the
basis of which the Commission concluded that Sweden was experiencing
macroeconomic imbalances, in particular as regards developments related to
private sector debt and the housing market. Overall, in the AMR the Commission
found it useful, also taking into account the identification of an imbalance in
May, to examine further the persistence of imbalances or their unwinding. To
this end this IDR takes a broad view of the Swedish economy in line with the
scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP). 2. Macroeconomic situation and potential
imbalances 1.
2.
2.1.
Macroeconomic scene setter
Prior to the 2008/2009
crisis, Sweden enjoyed a long period of strong economic growth, averaging 3.5%
between 1998 and 2007. This period was characterised by far reaching economic
reforms which set the ground for sound public finances, increasing employment,
low-inflationary environment and excellent competitiveness position. As a
relatively small and open economy, Sweden was hit forcefully by the 2008/2009
crisis, but recovered quickly once demand from Sweden's main trading partners resumed.
The rapid recovery was helped by a sharp depreciation of the Swedish krona as
well as expansionary fiscal and monetary policies. The Riksbank cut the repo
rate by 4.5 pps within a few months and the fiscal injection amounted to 1¾ %
of GDP in 2009. Despite rapid credit growth and a house price boom before the
crisis, the housing market proved rather resilient and provided another
buttress to the crisis-hit economy. In 2010 and 2011, the Swedish economy experienced
buoyant growth of 6.1% and 3.9% per year, respectively. Since late 2011, the
economy has decelerated again in the wake of the euro-area sovereign-debt
crisis and another global slowdown. A recession has been avoided but GDP growth
is expected to be meagre in 2012-2013, around 1% per year. The unemployment
rate which has never fully recovered after the 2008/2009 crisis is likely to turn
around 8% again in 2013. The gloomy unemployment outlook is driven by
diminished demand from both consumers and firms and as the latter are
pressurised by dropping profitability and lower sales, lay-offs are a likely
reaction to counter the negative development. The strong krona is also taking a
toll on the prospects for an export-driven recovery. Sluggish economic growth
is expected to bring general government finances from slightly positive to
slightly negative numbers in 2012 and 2013. Given the different starting
position, the fiscal and monetary policy – although accommodative - are not
likely to provide the same cushioning as during the 2008/2009 slowdown. Growth
is expected to resume in the second half of 2013 as confidence returns and
households and companies start realising their pent-up consumption and
investment plans. The recovery will gain full speed in 2014 when the economy is
expected to grow by 2.5-3%. Graph
1. GDP growth and unemployment Source: Commission
services (Eurostat) Note:
Forecast for 2012 GDP growth
2.2.
Sustainability of external positions
Sweden's current
account surplus has been above the indicative scoreboard threshold since
2004. It corrected from 9.1 to 7.2% of GDP between 2008 and 2012. Developments over
the last year confirmed previous trends in the composition of the current
account surplus. In particular, the trade surplus
in services (4% of GDP in 2012) which became the main contributing element in
2009, continued to be significantly larger than the trade surplus in goods (2.1%
of GDP). The contribution of investment income has been stable (2.3% of GDP) but
lower than in 2007-2008 due to lower repatriated profits from Swedish
investment abroad. Current transfers show a stable negative balance (-1.3% of
GDP) reflecting Sweden's position as a net contributor to the EU budget and an
aid donor on a global level. The capital account does not have any significant
impact on the external balance of the country. The financial
account provides a more stable picture than before the crisis. Although cross-border financial flows are typically very volatile,
their net value has had a stable sign since 2009. Since the crisis, Swedish
banks have intensified their lending abroad, causing net outflows in the other
investment item. At the same time, they have increasingly financed themselves
through bonds issuance to foreign investors, which resulted in net portfolio
inflows. The latter has coincided with increasing foreign demand for Swedish
debt securities, including government bonds. Net outflows of foreign direct
investment have also remained important, reflecting lower FDI coming to Sweden
after the crisis but also repayment of debts to foreign owners. Official
reserves have been more or less stable over the last year. Graph 2. Current account decomposition || Graph 3. Financial account decomposition Source: Commission services (Eurostat) || Source: Commission services (Eurostat) The net
international investment position (NIIP) has deteriorated since 2011 and
remains negative (-14.4% of GDP in 2012),[1]
despite continued strong current account surpluses. Sweden is the only surplus country in the EU which has seen its NIIP
worsening between 2007 and 2012. As shown in the 2012 IDR, in that period Sweden
recorded significant negative valuation effects which outweighed the effects of
the current account surpluses. This means that total returns on Swedish assets
abroad (taking into account current yields and the change in the asset price)
have been lower than returns on assets held by foreigners in Sweden.[2]
The negative valuation effects have come mainly through the FDI category and to
a lesser extent through portfolio investment. They have been mainly related to
(i) the steady appreciation of the Swedish krona since 2009,[3]
(ii) a decreasing value of Swedish FDI abroad relative to foreign holdings in
Sweden and, (iii) an increasing value of Swedish bonds held by foreigners
relative to the value of foreign bonds held by Swedes (see Graph 7). Swedish
net external debt also increased over the last year (preliminary figures
suggest 63% GDP in 2012) along with increased sales of Swedish corporate bonds
to foreign investors. The correction which started in 2009 and was driven by
repayment of inter-company loans to foreign affiliates has thus ceased. Given
the high level of Swedish net external debt (fourth highest in the EU as % of
GDP), its further expansion could be a reason for concern (a large part of
external debt is attributable to cross-border inter-company lending which are
discussed in section 3.2). Graph 4. NIIP decomposition || Graph 5. Net lending and borrowing by sector Source: Commission services (Eurostat) || Source: Commission services (Eurostat) Graph 6. Valuation effects || Graph 7. Decomposition of valuation effects Source: Commission services (Eurostat) || Source: Commission services (Eurostat) * For 2012, preliminary figures on the basis of quarterly data Looking at sectoral
saving-investment balances, all sectors show net creditors position. The expanding current account surplus between 1995 and 2007 can be
attributed mainly to increased savings by both households and the government
which resulted from the tax and pension reforms and the adoption of an
ambitious fiscal target in the 1990s. Apart from higher savings, net lending
has also been to some extent related to lower investment. The investment ratio
was far below the EU level for a decade following the crisis at the beginning
of the 1990s, mainly on account of low construction investment, but also due to
a structural shift from manufacturing to services. A number of constraints in
the construction sector prevented it from responding excessively to strong housing
demand after 2000 (see also section 3.1.2). Public investment in construction
has also been rather limited, possibly as a result of a strong political
commitment to fiscal surplus targets. Beside construction, investment might
have been also hindered by several shortcomings in the market for services
(e.g. fixed tariffs for provision of certain listed services or limited access
of foreign service providers to Sweden until 2011). At present, the overall
investment ratio have already caught up with the EU levels, but investment in
construction and housing as % of GDP still remains below the EU average . In view of the above
arguments, it would be difficult to establish that the current account of
Sweden should point to an underlying imbalance in the economy. The current account surpluses have not
resulted in an accumulation of net external wealth, but have rather corrected
large current account deficits from the past. Domestic demand does not seem to
be artificially suppressed domestic demand, with the exception of the
construction sector and the service sector where domestic regulation might have
led to lower levels of investment and imports, respectively. Sweden allows its
currency to float freely, wages are set among social partners with no political
intervention and, if anything, fiscal policy has provided support to domestic
demand in recent years. The surplus has been rather underpinned by a high level
of saving in the government and household sector which increased in response to
the severe economic crisis in the early 1990s and the subsequent reforms of the
tax, pension and fiscal framework. The current account
surplus has already corrected substantially - from 9.1% to 7.1% of GDP between
2008 and 2011 – and is likely to decrease further in the medium term. Several factors are in place which are likely to continue to push
the Swedish current account further to balance also in the future: continued
deleveraging in other parts of Europe which leads to lower demand for Swedish
exports as well as their lower cost-competitiveness, appreciation of the
Swedish krona, decreasing household savings as the post-war boomers retire and
ageing of the population continues, and growing competition from developing
countries. Lower current account surpluses would most likely be compatible with
a sustainable external position of Sweden: ECFIN calculations suggest that a
balanced current account would be sufficient to bring NIIP close to zero by
2025, disregarding valuation effects.
2.3.
Competitiveness and trade performance
Taking a
global view on Sweden's competitiveness, it is clear that the Swedish economy
remains one of the most competitive of the EU. It is characterised by
a high technological advancement, solid R&D and innovation performance,
reliable and transparent institutions as well as a higher education and
training that deliver satisfactory results. Nevertheless,
over 2007-2011, Sweden's export market shares (EMS) for goods and services have
continued to drop (Graph 8), recording a negative growth rate of
-11.6% over the five year period, similar to the 2006-2010 time period,
highlighted in the 2012 in-depth review for Sweden (-11.9%); in both cases, the
MIP scoreboard indicator flashed (-6% being the threshold). Nevertheless, when
decomposing the latest five-year-period, the lion's share of this loss occurred
in the crisis years of 2008 and 2009 (-4.1% and -6.9% respectively), whereas
during remaining years the drop in EMS has been more subdued (in 2011 it stood
at -0.5%). The loss in
EMS is linked mostly to the market for goods and the sector-level
analysis contained in the 2012 IDR is still relevant. Hence, the decline is
mostly due to structural factors linked to the traditional product mix of
Swedish exports: paper products are increasingly losing ground as carriers of
information, and saw mill products are facing constraints due to the weak
economic outlook of the construction sector. Likewise, the numerous suppliers
to the car industry are facing increased competition from fast-growing,
export-oriented economies that are in the process of being integrated into the
world economy. Sweden needs
to be observant in terms of the competitive advantages the country has over
low-cost emerging economies, to make sure that its products remain demanded by
export markets. The intensity of competition in internal markets can be
approximated by an indicator of overlapping or similarity of export structures,
the so called Finger-Kreinin index. The index ranges from 0 to 100; where 100 indicates
perfect similarity and, on the contrary, 0 indicates that the export structures
are completely different. For Sweden, the overlapping index with China is 30.5%,
being among the higher in the EU (Graph 9). As for many other EU member
states, the overlap is particularly high for textiles and textile articles,
mineral products and miscellaneous manufacturing but Sweden also competes with
China in sectors such as basic metals and articles of base metal, machinery and
mechanical appliances. Graph 8. Export market share growth (% y-o-y) || Graph 9. Export similarity index: China vs. EU countries – Partner: World Source: Commission services (Eurostat) || Source: Comm.services calculations using UN's COMTRADE More than
half of the Swedish exports of goods are destined to other EU countries, and with
the crisis of the euro-zone, combined with the strong appreciation of the
Swedish krona during the third quarter of 2012 (5% compared to the second
quarter of the year), the majority of all EU member states (including Germany, one
of Sweden's largest trade partner) recently showed less interest in Swedish
goods. Official data on Swedish exports to Germany in 2012 point to a reduction
of -4%, which is identical to the overall drop. However, Sweden's share of high-technology
products in exports has remained fairly constant over the last decade, and
stood at 13.9% in 2011. In parallel,
Sweden's net position is somewhat compensated by a corresponding gain in the export
market share for services (Graph 10), driven to some extent by the
on-going servicification of the manufacturing industry which increases the
interdependency of trade in services and merchandise. The services sector
accounted for 1.81% of the world market shares for services in 2010-2011, and
among the different types of services, other business services and computer and
information services contribute the largest surplus.[4] Under the
heading other business services, the largest share is comprised of exports of
merchanting, which typically involves the mediation of goods from a foreign
supplier to a foreign customer. Merchanting can also cover the purchase by a
Swedish resident of goods from a non-resident, and subsequent resale of the
goods to another non-resident. During the process, the goods neither enter nor
leave the compiling economy. The income received from the service is entered
under exports of services irrespective of the direction of the stream of goods.
Should these types of services be removed from the exports data, the
development would be much more subdued. The inherent volatility of these types
of services poses some questions linked to the sustainability of what now
accounts for roughly one third of the trade in services. In total, although Sweden's trade balance can be
explained partly by the goods surplus (2.4% of GDP in 2011), the services
surplus is however even larger (3.6% in 2011), bringing the total
Swedish trade balance to a fairly large surplus of around 6% of GDP. This
decomposition is likely to continue strengthening in the future, i.e. the share
of services in total exports is expected to increase further going forward,
also reflecting the fact that roughly 70% of the Swedish GDP comes from the
production and consumption of services, and that this share is continuously
rising. Graph 10. Evolution of exports market shares in goods and services (in % of world share) || Graph 11. Contribution to overall trade balance for goods by Broad Economic Categories (%) Source: UN COMTRADE data || Source: Eurostat COMEXT, Commission services calculations More
recently, the loss in export market shares is linked to changes in the real
exchange rate of the Swedish krona vis-à-vis the currencies of its trade
partners.
During the summer of 2012, the krona appreciated substantially against in
particular the euro (by some 8% in Q3 2012, compared to the same period in
2011) and thereby squeezing margins of Swedish export-reliant industry further.
Especially saw mills and pulp and paper industries voiced concerns over the
development, and demanded further repo rate cuts. In September, the Riksbank
cut the rate to 1.25% and in December it was further lowered to 1% in order to
support the Swedish economy. Meanwhile, the exchange rate also stabilised to
some extent. When
comparing Swedish cost developments against those of trading partners, no major
challenges in terms of competitiveness emerge. While unit labour costs
have been growing more slowly than in the euro-area over the last few years (Graph
12), there are signs that this situation may be reversed in the years to come
(appreciation of the Swedish krona, employees' compensation growing faster than
GDP etc), which in that case could be conducive to euro-area rebalancing.
Nevertheless, no particular trends are discernible at this stage, and it will
be important to observe the outcome of the on-going wage bargaining round to
assess possible wage increases going beyond productivity growth indications,
and the real compensation per employee. Looking at the recent past, unit labour
costs grew in both services and industry over 2007-2010. At the sectoral level,
manufacture of (i) basic metals, (ii) motor vehicles, trailers and
semi-trailers, (iii) electricity, gas, steam and air conditioning, and (iv) construction
have the highest sectoral contribution to total ULC, suggesting that Sweden
might be dropping behind in terms of its competitiveness in these areas. It still
holds true that the real effective exchange rate (REER), based both on HICP and
unit labour costs, is characterised by some degree of volatility, as
described in last year's IDR. In particular, the REER being strongly linked to
the nominal exchange rate and co-varying with the developments of the Swedish
krona vis-à-vis the currencies of trading partner economies, currency
fluctuations have an immediate impact on developments (Graph 13). A new foreign trade and investment promotion
structure under the name of Business Sweden has been created recently through
the merge of what used to be the Swedish Trade Council and the Invest Sweden
agency.
It is owned jointly by the Swedish government (represented by the Ministry for
Foreign Affairs) and the private business via the Swedish Foreign Trade
Association. It is hoped that there will be synergies from the two types of
activities (promoting Swedish exports and attracting FDI to Sweden) and that
the joint structure will also improve the efficiency of government funding. To sum up, despite
some challenges Sweden counts among the top performers in terms of its relative
competitiveness, and this is something which has also been high-lighted by
various competitiveness rankings carried out by international observers.. For
example, the World Economic Forum's 2012-13 Global Competitiveness report ranks
Sweden as number four out of 144 countries. The World Bank's 2013 "Ease of
Doing Business" report lists Sweden as the 13th most favourable country
(out of 185 countries, but slipping from the 8th place of the 2012 edition) in
which to run a business. The OECD describes the Swedish innovation performance
as one of the best in the world (OECD, 2013). Finally, the European
Commission's 2012 Innovation Union Scoreboard ranked Sweden as the best EU
country in terms of innovation performance, dominating in three out of eight
dimensions measured by the scoreboard. However, Sweden faces a challenge in
terms of the unsatisfactory degree of commercialisation of innovative products
and counts among the countries that need to raise their R&D intensity more
quickly in order to reach the tentative national R&D target of 4% of GDP in
2020. R&D intensity has decreased from a peak of 4.13% of GDP in 2001 to
3.42% in 2010 (1.07% public + 2.35% private), according to Eurostat.[5] Graph 12. Decomposition of ULC developments || Graph 13. Decomposition REER developments || Source: Commission services (AMECO) Note: Forecast for 2012-2014 || Source: Commission services (AMECO) Note: Forecast for 2012-2014
2.4.
Private sector indebtedness
Private debt
remains at a high level (231% of GDP in 2011), far above the threshold of 160% of
GDP. Following
three years of correction, Swedish private debt as a percentage of GDP is
expected to increase in 2012 since its absolute growth has not decreased as
quickly as GDP decelerated (preliminary data based on first-three quarters
suggest 235% of GDP for 2012). The correction in 2009-2011 was on account of
decreasing indebtedness of non-financial corporations which generate about two
thirds of total private debt. On the other hand, household debt, which account
for the remaining third, has not seen any correction and has remained stable at
around 81% of GDP since 2009. To complete the picture, financial
corporations also contribute significantly to the country's debt (with 129% of
GDP in 2011). On the other hand, public debt stands at a relatively low level of
around 40% of GDP. Graph 14. Decomposition of debt (% of GDP), consolidated data || Graph 15. Credit developments (% of GDP) Source: Commission services (Eurostat) * For 2012: preliminary figures on the basis of quarterly data || Source: Commission services (Eurostat) * For 2012: preliminary figures on the basis of quarterly data At 149% of
GDP in 2011, corporate debt in Sweden was the fifth highest in the EU, but a
number of circumstances mitigate concerns about its sustainability. The
previous review showed that the debt-to-GDP ratio is overstated by a large
share of cross-border lending within multinational companies (almost 50% of
GDP) which tend to minimise their tax payments by exploiting differences
between corporate taxation in countries they operate in. Lending within
multi-national groups involves lower risks than other types of lending, since
liabilities of Swedish affiliates are typically matched by assets of foreign
affiliates. The Swedish government has recently made changes to corporate
taxation in order to limit the tax minimisation by companies. Various
indicators of Swedish corporations' financial health, such as debt-to-assets,
debt-to-equity, default rate or interest burden, do not point at any
significant sustainability risks. The very low number of company defaults
during the 2008/9 crisis also argues for a rather strong financial standing of
Swedish corporations. Annual credit growth declined from 6.3% to 1.4% between January
2012 and January 2013 and is expected to remain subdued also in the coming
months. Despite these
mitigating factors, the high level of corporate indebtedness calls for further
investigation of the driving forces and potential sources of vulnerability. In section
3.2 of this review, the role of corporate taxation in the debt-inclined
behaviour of corporations will be discussed, as will. credit conditions, in
particular the role of low risk weights attributed by banks to corporate
lending. The size of deleveraging pressures will be assessed against various
indicators of debt overhang and credit supply and demand pressures to determine
the likelihood of further deleveraging in the Swedish corporate sector. Graph 16. Leverage ratios, Non-financial corporations || Graph 17. MFI lending to households (% of GDP) Source: Commission services (Eurostat) * For 2012: preliminary figures on the basis of quarterly data || Source: Commission services (Eurostat), ECB Household
debt stands at more than 80% of GDP, or 170% of disposable income in Sweden. The lion's
share of household debt is made up of mortgages (Graph 17), the build-up of
which has gone hand in hand with the rising housing prices over the last 15
years. At present, credit growth for mortgage loans is less expansive but still
amounts to approximately 4.5% per year and still outpaces the growth of
disposable income. Based on this development, the Riksbank Governor has issued
a recommendation of not letting the household indebtedness exceed 200% of
disposable income, due to the apparent risks for the financial stability of the
country. The vulnerability caused by the substantial household indebtedness is
also the reason why this topic, and its relation to the developments of the
Swedish housing market, is analysed in-depth in the subsequent chapter of this review.
Last year's review identified housing taxation
and weak amortisation as the main factors contributing to the build-up of
household debt. A very low property tax together with generous tax relief on
interest payments tilt the incentive structure towards debt-financed investment
in property. As for amortisation, 100% loan-to-value mortgages were
not uncommon in Sweden before the crises. Increasingly, borrowers opted for
amortisation-free loans and banks were not particularly interested
in obliging clients to reduce their debt. These factors
contributed to the debt build-up, which has to some extent already been
addressed by the national authorities. As a first step, an 85% loan-to-value
cap was introduced in October 2010. It has however been possible to
circumvent the cap by taking up other types of loans to complement mortgages, a
practice which some Swedish banks have on offer (Swedish Financial Supervisory
Authority, 2012(b)).To hold back household debt accumulation, the FSA has
recommended the introduction of a 15% risk-weight floor for mortgages,[6] compared to
the current 6% in order to reflect a changing risk profile. Through the
stricter rules, the amount of capital that banks have to set aside to protect
against potential mortgage loan losses would increase sharply. Although default
rates have historically been very low in Sweden, the FSA argues that caution is
necessary. The tougher rules imply that an additional 20 billion Swedish kronor
would be locked in as core capital under the so called Pillar 2 (Financial
Supervisory Authority, 2012). However, to a large extent Swedish banks have
already taken account of the capital levels brought about by the measure, which
is currently being consulted with stakeholders. Another important step is
the foreseen strengthening of capital adequacy and liquidity
requirements for banks, which in Sweden goes beyond the minimum Basel III
requirements and is introduced earlier than in other EU countries (10% Core
Tier 1 capital as soon as possible, and 15% as from 2015). To a large extent,
Swedish banks have already adjusted to the tougher requirements. Possible
mortgage amortisation requirements are also being evaluated. The Governor
of the Riksbank has spoken out in favour of regulating amortisation practices. In
March 2013, the government also tasked the FSA with preparing an action plan
for the establishment of a sound culture of amortisation, whereby banks are to
become more active in advising clients to amortise at a reasonable pace. The
action plan is meant to be finalised by mid-October 2013. The assets
owned by Swedish households do, however, substantially exceed their debt, but
these assets are typically bound in either housing or pension savings which means
that it may prove difficult to rely on them should Swedish households need to
deleverage quickly. A problematic linked issue is that households might reduce
spending to rebuild their balance sheets even after a modest decline in real
estate prices. This could impact negatively on GDP growth and employment and
induce a negative feed-back loop affecting house prices. In addition, the
distribution of assets tends to be uneven by generational, regional and
income-related axes. This means an increased vulnerability of new borrowers,
which tend to be young adults without accumulated wealth, having entered the
housing market at an elevated price level. High private
debt entails considerable risks for the financial sector as well as for the
government finances. Although Swedish public finances and the
banking sector look generally sound, a more substantial deleveraging could
likely reduce the perceived robustness of these sectors. For the banking
sector, the risks include potential loan losses on mortgages or corporate loans
and a subsequent potential loss in investor's confidence leading to a more
difficult access to funding in international markets. For public finances, the
risks include a drop in tax revenues (property taxes, stamp duties, corporate
income tax) in case of a house price correction or a significant contraction of
the corporate sector. In addition to this direct effect, deleveraging pressures
affect the fiscal position indirectly by negative feedback effects on growth.
Even without any deleveraging, the preference for debt-financing by both households
and corporations and the tax minimisation practices by multinationals translate
into substantial losses in government revenues from direct taxes. In this
review, these feedback effects between individual sectors will be investigated more
closely.
2.5.
Housing market development
The development of the housing market in Sweden
has stabilised over the last couple of years, after experiencing massive price
hikes over more than a decade. The MIP scoreboard indicator reports a 1% price
increase of deflated house prices in 2011. In 2012, the latest figures also suggest
modest price increases, for the country as a whole with a real price increase
of roughly 1%. Graph 18: Deflated house prices in the Nordic region, Index 1995Q1 = 100 || Graph 19. House price cycle Source: Sveriges Riksbank || Source: Eurostat, ECB, OECD, BIS Comparing price developments in Sweden with
neighbouring countries, it is clear that Sweden has not experienced the large
correction that has taken place over the last few years, for example
in Denmark (see Graph 18). Nevertheless, the Swedish housing market has some
characteristics which justify a continued in-depth monitoring of this sector. Views
diverge as to whether the prices are estimated to be in line with fundamentals
or whether signs of a misalignment can be established. This issue was analysed
exhaustively in the 2012 IDR, which concluded that although some indicators
pointed at an overvaluation (for instance the price-to-rent ratio,
affordability ratios etc), others suggested a development in line with the
underlying conditions which have been characterised by a strong rise in
disposable incomes, a relatively resilient labour market, specific debt-biased
tax measures which contributed to price increases etc. Yet, the position of
Sweden in comparison with other countries' housing cycles calls for some
caution (see Graph 19). Looking ahead, the nearest year is however not expected
to include dramatic price movements in either direction. With global economic uncertainty, the bleak
outlook for 2013, rising unemployment and dropping household consumption there
are evident downside risks to the asset market. In case of a future
house price correction, Swedish households would risk having difficulties to
deleverage at a reasonable pace, as assets are for the most part tied up in
long-term pension savings and in real estate. The effects could be exacerbated
as described in section 2.4 by a negative feed-back loop resulting from a
reduction in consumption. Moreover, assets are not evenly distributed and
highly indebted households risk ending up insolvent even after a relatively
modest price fall. With most mortgages having interest rate terms of at most
five years, any future interest rate increases could put additional strains on
the already highly indebted households. The Swedish housing market is also characterised
by some inefficiencies on the supply side. For example, Swedish construction
investments are only half of those of other Nordic countries, both in relation
to GDP as well as population (Swedish Construction Federation, 2012). In
2009-2011 the number of households also increased by 43,000 more than the
number of new housing units (Confederation of Swedish Enterprise, 2012). Recent
data on housing starts point towards a continued decline for both residential
one-dwelling-buildings and multiple-dwelling-buildings and in total, housing
investments dropped by almost 13% (from already low levels) during the third
quarter 2012 compared to the same period in 2011 (Statistics Sweden, 2012 (c)),
and the construction industry does not expect investments to pick up this year.
Moreover, the rental market is afflicted by structural problems linked to
several decades of stringent rent regulation, which is only recently showing
signs of some softening. As a result
of the above-mentioned difficulties linked to the development of the Swedish
asset market, a detailed analysis of some of the key challenges is warranted. 3. In-depth analysis of selected topics 3.
3.1.
Housing market and household sector indebtedness
In Sweden,
and in particular in the three main urban areas of Stockholm, Gothenburg and
Malmö, the price of real estate has increased substantially over the last 15
years,
both as concerns single family dwellings and apartments (Graph 20). This
development has spurred the increase in household indebtedness, which as
mentioned above now stands at ca. 170% of disposable income or ca. 80% of GDP.
The worryingly high private debt levels, as well as housing market price developments,
were key themes of the European Commission's in-depth review for Sweden of 30
May 2012. House prices have been characterised by modest nominal increases
since the 2012 IDR, with prices having increased by
2 per cent on an annual basis in the last quarter of 2012, compared to the same
period last year for one- and two-dwelling buildings (Statistics Sweden, 2013).
Nevertheless, household indebtedness remains at historically high levels.
Credit growth is still positive, albeit at levels under 5% per year (4.5%
in January 2013). Graph 20. Evolution of House Price Index and MFI Loans for House Purchase Source: Commission services (Eurostat), ECB Last year's
review did not conclude on a possible misalignment of house prices. Whereas most
traditional indicators, such as price-to-rent or affordability indices,[7] suggested a
significant overvaluation, the adjusted price-to-rent ratio or econometric
estimates found house prices to be close to their fundamental value.[8] Due to stable
nominal prices, affordability ratios have improved over the last year (Graph
21), indicating a smaller possible overvaluation than in last year's report,
ranging from a suggested 13% overvaluation for the price-to-disposable income
ratio, to 22% for the price-to-earnings ratio in 2012Q3. Graph 21: Housing affordability indices Source:
Ecowin, Sweden Statistics The
price-to-rent ratio[9]
has not changed compared to last year and remains some 34% above its historical
average at the end of 2012. However, the price-to-rent ratio adjusted for
the evolution of the user cost of home ownership (fundamental ratio),[10] suggests a
much smaller misalignment (4% if mortgages of five-year maturity are
considered, and 9% if an average mortgage rate is used as demonstrated in Graph
22). It should be noted that according to these indicators, house prices have
exceeded their fundamental value since last year. This could be found
counterintuitive given the decreasing mortgage rates. The reason is that
expected inflation declined more strongly than mortgage rates, resulting in
higher user costs. Graph 22: Price-to-rent ratios (actual vs. fundamental) … for mortgages with a five-year maturity || … for mortgages with an average maturity || Source: Sweden Statistics,
own calculations The most
important factors explaining the price increases over the last fifteen years
are fundamental factors such as an increased income level, low interest rates,
and increased population density in urban areas etc. (accounting for
2/3 of the price increase), according to a recent analysis of the house price
developments carried out by the Swedish National Board of Housing, Building and
Planning (February 2013). The Board, using a dynamic panel data model, also
finds that the remaining 1/3 of increases are explained by factors related to
backward-looking expectations of continued price increases. The latter is found
to be a risk factor, as in the event of even moderate price falls, these
expectations may create strong pro-cyclical patterns. In addition
to analysing the supply and demand side reasons behind, as well as the
sustainability of, the price increases, the 2012 review also pointed towards
other factors causing inefficiencies in the Swedish housing sector, namely the depressed
construction activity as well as the still regulated rental market.
These particularities have also been raised by the OECD in its 2012 Economic
Review of Sweden, which recommends a reform of the housing market. The sustained
household indebtedness linked to the substantial mortgage loan portfolio merits
a renewed in-depth evaluation, in particular as the price-to-disposable
income ratio is above the historical average and as the interest burden in
Sweden, measured as the share of the disposable income, is also the fifth
highest of the EU-27, standing at 4.5%, which adds further weight to the
affordability analysis (European Commission, 2013). Nevertheless, when looking
at the housing market it also seems pertinent to address some of the supply
side restrictions identified in last year’s In-Depth Review in more detail in
this assessment. Therefore, the focus lies on assessing the bottlenecks present
in the Swedish housing market structure, with a special focus on the
construction industry in terms of planning, zoning and appeal processes, as
well as the specificities of the Swedish rental market.
3.1.1 Swedish housing market overview
Sweden counts
roughly
4.5 million dwellings, split between approximately 2.5 million apartments in
multi-dwelling-buildings and 2 million single-family-buildings.[11] The apartment
segment is made up of roughly 1.6 million rental apartments (63%), 930,000 tenant-owned[12] ones (37%)
and a mere 182 owner-occupied condominiums.[13](Statistics
Sweden, 2012 (d)). Corresponding figures for Stockholm County, with a
population of roughly 2.1 million, are roughly 970,000 dwellings distributed
between 700,000 apartments in multi-dwelling-buildings and some 270,000
single-family-buildings. However, in Stockholm a majority of apartments are
tenant-owned (51%), which is a share significantly above the national average. Over time,
tenant-owned apartments have been gaining in popularity. Compared to
1990, there are some 33,000 more rental apartments whereas the number of
tenant-owned ones have become ten times more numerous and rose by 317,000 (Graph
23). In addition to the fact that numerous tenant-owned apartments were
constructed over this period, a significant share of these has previously been
rental apartments which were subsequently converted into tenant-owned
apartments. In fact, since 2000 more than 150,000 such conversions have taken
place, out of which 72% are to be found in Stockholm County. The conversions
concerned both privately and publicly owned properties. However, conversions
managed by public housing companies have been a hot political issue over the
last decade, especially in Stockholm which has seen its stock of rental
apartments diminish substantially.[14]
Nevertheless, the rather far-reaching sell out of publicly owned rental
apartments in Stockholm show some signs of a slowdown, as in 2011 only 1,740
rental apartments were sold (Swedish National Board for Housing, Building and
Planning, 2012(a)). The
exponential growth in the number of tenant-owned apartments over the last
decade has been coupled with an unprecedented price increase for dwellings of
this type of tenure, as well as for one-dwelling-buildings albeit
to a smaller extent. Housing price developments, and the possible existence of
a housing bubble in Sweden, are topics that were investigated extensively in
the 2012 in-depth review for Sweden. In the present report it shall therefore
be sufficient to summarise the developments having taken place since then.
Graph 23: Changes in stock of tenant-owned and rented dwellings 1990-2011.
Sweden. Index: 1990=100 Source: Statistics Sweden At the
national level, housing prices for one-dwelling-buildings have remained
reasonably stable over the last year, with a 2% nominal increase
between the fourth quarter of 2012 and the same period 2011 according to
official data, which would translate into a ca. 1% increase in real terms. The
area of Greater Stockholm witnessed a nominal price increase of 3% for this
type of dwellings. In the Greater Gothenburg area prices climbed by 4 %,
whereas the Greater Malmö area saw them decrease by 1%, which is partly linked
to deleveraging strives of Danish residents (Statistics Sweden, 2013). Compared
to the previous three-month-period, nominal prices remained unchanged in
December 2012-February 2013. As concerns the price developments of tenant-owned
apartments, there was a more expansive nominal increase of 8% over the period
from December 2011 to December 2012 (Svensk mäklarstatistik, 2013). The prices of
tenant-owned apartment show more dynamics also in a somewhat longer perspective. Analysing
price developments over the last five years since the pre-crisis peak in mid-2007
until end-2012,[15]
the nominal prices for tenant-owned apartments increased by 11.1% at the
national level (by 7% in Stockholm), whereas the inflation measured as CPI over
the same period was 7.6% (9% if measured by HICP), suggesting only a mild
increase in real prices. For one-family dwellings, nominal prices increased by
9% over that period, suggesting stable prices in real terms. Whereas prices of
one-dwelling houses have declined slightly since their all-time peak,
tenant-owned apartments are still climbing (Graph 24). This tendency is also
being reflected in the latest real estate agents' sales statistics, which point
at a 3% nominal price increase for dwellings of this type of tenure in January
2013, compared to a corresponding figure of ±0% for
one-dwelling-buildings (Svensk mäklarstatistik, 2013). Graph 24: Price development of Swedish tenant-owned apartments and one-dwelling-buildings 2000-2012. Index: 2000=100. Source: Svensk mäklarstatistik, Swedish Board of Housing, Planning and Building The Swedish
housing market has benefitted from certain reform measures during the course of
the last couple of years, which might on the one hand have played a role
in stabilising prices. For instance, in October 2010, a loan-to-value cap of
85% was introduced for new mortgage loans and there are currently expectations
of the introduction of an upward-adjusted risk weight floor of 15%. Moreover,
there seems to be an increased pressure on households to amortise on their
mortgages. On the other hand, the Swedish government has not signalled any
intention to review the generous mortgage interest rate deductibility scheme,
nor to strengthen and widen the recurrent property tax. It may also be argued
that the gradual cuts of the Riksbank’s policy rate, down to 1% in December
2012, and the linked drops in mortgage interest rates (standing at roughly 3.25%
at the beginning of 2013) have spurred price developments. Expectations
about the future have been mixed. At the end of 2012, surveys suggested
that households’ outlook on the housing market was increasingly pessimistic. At
the time, fewer Swedes believed in rising prices ahead, whereas more expected
price drops (Demoskop, December 2012 and SKOP, January 2013). Nevertheless, it
should be noted that these survey results tend to be quite volatile, and
following the repo rate cut of the Swedish Riksbank in December 2012, the
sentiments about future housing market development shifted towards the positive
among households (Demoskop, January and February 2013). The larger Swedish
banks have put forward rather cautious forecasts for the near future, ranging
from expectations about stable prices (with the possible exception of the
capital region, where price increases cannot be excluded) to predictions of
price drops of up to -5% in 2013.[16]
In terms of their purchasing power related to housing investments, recent indicators
suggest that households' possibilities of buying real estate and taking on
mortgages improved during the fourth quarter of 2012, compared to the previous
quarter on the back of real wage increases combined with low mortgage interest
rates and in spite of slightly rising prices (Swedbank, 2013 (b)). Focussing on
the economic fundamentals, the Swedish economy is still experiencing a downturn
with weak exports and labour market. The linked uncertainty
may on the one hand cause risk averse households to hesitate to take on
substantial mortgages. On the asset side, most Swedish savings are tied up either
in long-term pension funds or in real estate, which means that even moderate
price drops in the short run could risk leading to a situation where Swedish
households face trouble deleveraging at an appropriate pace and thereby cause
more substantial drops in the long run. It is also the case that with a repo
rate of 1% following the December 2012 cut by the Riksbank[17], mortgage
interest rates are unprecedentedly low and possible future increases would put
strain on households. On the other hand,
wage expectations are rather stable. Real interest rates are
also expected to stay low for a prolonged period of time making the expected
cost of assuming debt lower[18].
In addition, at least in the Stockholm area, prices are also spurred through
the insufficient construction activity coupled with the constant population
increase. However,
price variations are rather large across the country, both as
regards one-dwelling-buildings and tenant-owned apartments. The former sell at
an average of ca. SEK 2 million, with the average price at the county level
ranging from roughly SEK 3.7 million in Stockholm county to roughly SEK 1
million in northern parts of the country. The latter, on the other hand, sell
at a national average of about SEK 25,000 per square meter. In Stockholm city,
prices are more than twice as high and apartments sell for roughly SEK 58,000
per square meter whereas for the county as a whole the average sq. m. price
level is ca. SEK 36,000. Whereas income levels are in general higher in the
capital than in other areas, the differences are not of a corresponding
magnitude. The clearly specific Stockholm characteristics are rather linked to
longstanding supply restrictions and to demographic factors, which have been
driving prices for many years. Looking more
closely at demographic developments, data suggests that there
may be a gap between the population growth and the supply of housing, a gap
which is exacerbated in urban areas and cities with university colleges[19]. For
instance, during 2006-2011 the number of households increased by 80,000 more
than the number of newly constructed dwellings in Sweden (Confederation of
Swedish Enterprise, 2012), and the Swedish National Board of Housing, Building
and Planning estimates that more than 30,000 new dwellings should be
constructed yearly to accommodate the population growth while the projected
housing starts for 2012 is just slightly above 20,000 projects. This figure
should be compared to the situation in the early 1990s, before the housing
bubble burst, when approximately 50,000 dwellings were constructed yearly
(Swedish National Board of Housing, Building and Planning, 2012(b)). Stockholm
county alone, which grows by ca 40,000 inhabitants per year, would need
approximately 15-20,000 new dwellings per year, whereas in reality only roughly
half of that number is achieved (County Administrative Board in Stockholm,
2012). To conclude, rigidities
on the housing market may be linked to foregone employment opportunities and
hampered growth. This is linked to the fact that supply-side restrictions
cause a number of difficulties at different levels, as young adults cannot find
proper housing, population density increases in spite of income growth,
students may take decisions on where to study based on the housing situation,
rather than the academic merits, of a given university etc. Swedish urban areas
also need to be able to attract innovative companies and talented employees,
often in competition with cities located within the same region, or even part
of Europe. In particular Stockholm has an important role as growth engine and
in this context, the described challenges stand out as particularly
problematic. For this reason, it seems warranted to further examine the
above-mentioned supply side challenges of the Swedish housing market.
3.1.2 Challenges
linked to the construction sector
Following the
crisis of the early 1990s, there was a severe contraction of the Swedish
construction sector, a contraction which may still be making itself felt
through a suboptimal activity level, although the sector
was in a clearly expansive phase until the 2008-2009 crisis (Graph 25). The
Swedish construction sector (in particular as far as the construction of
dwellings is concerned) is also characterised by a high degree of price
sensitivity (OECD, 2012), which in the current situation with uncertainty about
price developments in the housing market means that firms cut down on
investments. Construction activities are also expected to remain subdued until
the economic outlook becomes more stable and the pick-up that follows could be
weaker than that after the 2008-2009 financial crisis. The OECD recently
reported that construction costs in Sweden have also risen rapidly from already
high levels, and now count among the highest in Europe, a fact which is not
conducive to an expansion of housing starts. In fact, for the country as a
whole, these costs have made construction largely unprofitable over the period
1980-2005, as measured by the average Q ratio of house prices to construction
costs (OECD, 2007). Graph 25. Residential investment and building permits Source: Commission services (Eurostat) In 2012, construction
of new dwellings dropped substantially and is expected to remain depressed in
2013.
Total investments in dwellings’ construction is estimated to have amounted to
SEK 130 billion, roughly equally distributed between rebuilding activities and
the building of new dwellings. This represents a drop (as compared to 2011
levels) of -1% and -17% respectively. Estimations for 2013 predict unchanged
levels (Swedish Construction Federation, 2012). The exceptionally low number of
building permits that were granted in 2012 is expected to hold back investments
this year. The number of granted building permits, fell with an average of more
than 40% during the first three quarters of 2012, which should be seen in the
perspective of a high cumulative demand for housing investments, especially in
urban areas (Swedbank, 2013). In terms of the output, preliminary figures
suggest that 20,050 housing starts (4,750 units in one- or
two-dwelling-buildings and 15,300 units in multi-dwelling-buildings) took place
in 2012, which corresponds to a drop of 23% compared to 2011 when the
construction of slightly more than 26,000 dwellings was started (Statistics Sweden,
2013 (b)). These output
levels are clearly below par, when seen from a historical perspective, as they
were several times higher, a few decades ago. Whereas the
construction of roughly 100,000 dwellings per year during the 1960s and 1970s,
which was instrumental in addressing the housing shortages of those decades,
was not upheld during the 1980s, a new peak was reached in the early 1990s
before all construction activities collapsed as a consequence of the bubble
bursting. Since then, Sweden has built up an investment gap in the construction
of dwellings of SEK 1,500 billion, compared to the OECD-average. Also when
looking at housing investments as a share of GDP, Sweden is placed persistently
below other European countries. Over the last decade (2002-2011), housing
investment amounted to 3.2% of GDP on average, while the corresponding figure
for the EU stood at 5.5% of GDP. The
restricted construction can hence be argued to constitute a supply side
explanation to the big house price increases discussed in chapter 3.1.1
and risks affecting growth negatively by putting limits to the mobility of
workers, students, immigrants etc. It is therefore important to assess the
efficiency of the sector and whether there are institutional factors holding
back activity levels. It often
takes several years to launch a new project, as each one needs to go through
lengthy zoning and planning processes. Before building
permits are granted, a detailed development plan designating residential,
commercial and industrial areas first has to be put in place and appeals may be
launched at both stages. As a result, it is not uncommon that before a final
green light is given by the municipality in which the land is located, several
years may have elapsed. The rules governing the zoning and planning processes
are also perceived as opaque and there are unwanted variations in their
applicability across municipalities (Kalbro, T., Lindgren, E. and Paulsson, J.,
2012). Uncertainty lies both with the developer as well as with the civil
servants having to carry out an assessment before granting or rejecting
building permits. Different pieces of legislation may point in opposite
directions (for instance as regards environmental protection and the
reconversion of industrial sites into housing) and local politicians may be
cautious to support projects that risk disturbing incumbent residents. Municipalities,
representing a local planning monopoly, face no direct consequences when
projects are delayed or become more costly due to inefficiencies in the
processing, and may therefore be inclined to rather preserve the status
quo. These
challenges have to some extent been addressed by the Swedish government. However,
substantial results in terms of increased construction have so far failed to
emerge, in spite of several amendments to the Planning and Building
Law (Plan- och bygglagen) both in 2007 and 2010 in order to simplify the
planning process. In a continued effort, the government commissioned a public
inquiry in November 2011 to assess how the planning process could be rendered
more efficient. The inquiry, published in January 2013, proposes limiting
appeal procedures, clarifying cost responsibilities and increasing
transparency. The increased predictability is expected to lower the risks for
construction companies and investors, which in turn is expected to lead to
larger housing investments, increased competition and resulting lower prices
(Statens Offentliga Utredningar, 2012:91). Nevertheless, the proposals were
instantly met by opposition by the Swedish Association of Local Authorities and
Regions (SALAR), which claims that by regulating the process more thoroughly,
increased transparency may well be achieved but only at the price of an even
increased administrative burden. Other reform
strands include a public inquiry looking into how the municipalities apply the
rules in place on technical characteristics' requirements of the Planning and
Building Law. The inquiry (Statens Offentliga Utredningar, 2012:86) found that
the unharmonised application leads to additional costs, which are
estimated to hamper construction. Proposals brought forward include limiting
the possibilities for municipalities to introduce specific technical
requirements going beyond the common set of rules, and streamlining appeal
procedures. Moreover, the Swedish National Board of Housing, Building and
Planning is to assess how more student housing and dwellings specifically
dedicated to young adults could be constructed through specific measures such
as the introduction of more generous rules relating to temporary dwellings,
lowering requirements in terms of the standard of the dwellings etc. The review
is to be concluded by mid-2013. Another review has been commissioned in order
to avoid diverging interpretations of existing legislation linked to noise
levels in construction and housing (to be finalised by 31 August 2013). The
current rules are often interpreted in different ways by various actors on
municipal and county level, which slows down the conversion of industrial sites
into dwellings and contributes to limiting construction. With a clearer set of
limits regarding noise levels, the planning process should be rendered more
efficient. The 2013
Budget also foresees additional resources for processing appeals
at the county administrative boards, thereby hopefully speeding up the process.
Finally, a legislative proposal relating to the responsibility of
municipalities for the provision of housing will be put before the Parliament
before the end of 2013, clarifying that in addition to simply evaluating the
housing needs within its own boundaries, each municipality also has to take
the regional perspective and, together with neighbouring municipalities,
ensure that housing needs are being met. This new piece of legislation is of
particular relevance for metropolitan areas, such as the Greater Stockholm
area, and is meant to stimulate a coordinated approach towards reducing the
housing shortage (Swedish National Board of Housing, Building and Planning,
2012 (d)). However, the proposal also contains the possible reintroduction of
state aid for construction, a measure which the Swedish Competition Authority
is strictly against as it risks distorting the competition and further drives
up prices. The
burdensome processes preceding the issuance of a construction permit weigh on
efficient competition in the construction sector. The sector has
traditionally been dominated by large, national companies which have sufficient
financial and human resources to face the challenges. Concerns about the insufficient
competition in the construction sector have been previously voiced also
by the Swedish Competition Authority who pointed at deficiencies in public
procurement practices and the existence of corruption (Swedish Competition
Authority, 2011). This assessment is to some extent confirmed in a recent
survey, where it was found that four out of ten Swedish construction companies
believe that the public procurement system works badly and that it is
characterised by insufficient competition and quality concerns. The risks for
corruption are still judged to be high, but few actors take action to minimise
them and as many as 90% of the surveyed companies have no, or very little,
knowledge of the new Swedish legislation linked to bribery that entered into
force in mid-2012 (PWC, 2013). In this context, the government has commissioned
a public inquiry to assess how a sounder competition could be achieved and,
specifically, how to reduce tax evasion and black labour in the construction
sector. The inquiry is to be finalised by January 2014. Finally, a
parliamentary committee related to housing supply in urban growth areas is to be set
up by the government. The committee is to evaluate the current system and the
role of the municipalities with a view to addressing the housing shortage in
the major cities through improved regional integration. The committee will be
established during the spring of 2013 and shall finalise its task at the
beginning of the next mandate period, starting in autumn of 2014.[20] In light of
the above, it seems somewhat premature to evaluate the usefulness of these
inquiries and proposals, especially as the government has announced
that in the months ahead, they will be scrutinised with the objective of
reforming the planning and building process, and that there is hence no clear
legislative proposal at this stage. However, should the reforms indeed lead to
an increased transparency and predictability, the market might open up for new
players, in particular smaller and foreign-based companies which have so far
had a very small market share due to the high entry barriers of the sector. The
proposed changes should also involve public procurement[21], where
divisions into smaller lots, better specified call for tenders and a shorter time
period from call to submission and outcome would favour a diversification of
the market actors.
3.1.3 A
squeezed residential rental market
There are
approximately 1.6 million rental apartments in Sweden, accounting for 63% of
the total stock of apartments. In terms of the owner structure, the
distribution is fairly even between private landlords and public housing
companies. A very small share is also owned by the Swedish state, counties and
directly by municipalities (Graph 26). Graph 26: Rental apartments in Sweden by type of owner, 2011 Source: Statistics Sweden Rent levels
have traditionally been negotiated exclusively between the Swedish Union of
Tenants (Hyresgästföreningen) and the publicly owned housing companies. Private
landlords have been obliged not to surpass the price ceiling established during
these negotiations with more than maximum 5%. The rent regulation system has
its roots in the post-war period, and it has limited rents' responses to market
signals over several decades. According to the OECD, Sweden is characterised by
an exceptionally high degree of rent control in the private rental market, for
example as concerns control of rent levels, how rent increases are negotiated
etc (OECD, 2011). In Sweden, the latter takes place through a rent valuation
model based on a set of characteristics defined as the so called utility value
of any given dwelling. These characteristics include factors such as the level
of standard, services offered and the condition of the dwelling, with the age
of the building often becoming a proxy for these factors (Graph 27). However,
factors pertaining to the actual market value of rental leases (for example the
relative proximity to the city center) have not, until recently, been included.
Graph 27: Development of rents in Sweden 2000-2011 Source: Statistics Sweden[22] This has led
to landlords not being able to charge tenants market-clearing rents in central
city locations as compared to suburban areas, although the size of
the investment differs substantially, thereby discouraging investments in
rental housing. The insufficient supply on the rental market creates an
emphasised pressure on dwellings of other types of tenure, most notably on
tenant-owned apartments (which are the closest substitute in urban areas) the
prices of which escalate as has been showcased in Sweden over the last fifteen
years. It also creates an undesired indebtedness and risk exposure for
individuals who are in a sense forced to own although they would actually
rather rent if the opportunity were available. Graph 27 demonstrates, however,
that also rent developments have outpaced inflation over the last decade. Until 2011,
there has also been a situation of unfair competition on the rental market, as
municipally owned housing companies did not operate on market-based conditions,
having had access to implicit credit guarantees from their respective
municipalities. In 2005, the Swedish Property Federation therefore filed a
complaint with the European Commission objecting precisely to this form of
state aid, and to the bench-marking role of the two partite negotiations. The
complaint was found justified and in 2011 a new system was put in place, under
which the approximately 300 municipally owned housing companies must no longer
benefit from preferential conditions, and their exclusive role in rent-setting
disappeared through the introduction of separate negotiations between the
Swedish Union of Tenants on the one hand, and municipally owned and private
landlords on the other hand As a result of the new law that took effect on 1
January 2011, municipally-owned housing companies (MHCs) are henceforth meant
to act in a business-like way, striving to achieve business aims, and should
not have a social function but rather be open to all sorts of tenants. Given
that MHCs are to compete on equal terms with private companies, behaving as any
other long-term private investor, the role of these companies may be put into
question. Rents are
still being set according to the principles of the utility value system, irrespective
of the change in legislation, hence not allowing any real rent level
dispersion between, for instance, metropolitan city centers and suburbs.
Tenants that have been able to sign contracts for centrally located apartments,
with rent levels far below the market clearing rate, therefore tend to be unwilling
to let go of their contracts even if they no longer need them, which
substantially reduces mobility on the rental market.[23] As a
consequence, most municipalities located in urban areas face a shortage of
available rentals and administer queuing systems whereby future tenants may
wait to be allocated an apartment, often after having queued for several years
(please see Box 1 for a description of the Stockholm Housing Service). A public
inquiry looking into the unsatisfactory situation on the rental market was
presented to the government in December 2012. The inquiry criticises
the current system and proposes “a gradual transition to entirely new market
conditions” as being “necessary in order to create a functioning rental market
in the long term”. Somewhat pragmatically, it however also lists a number of
measures that could be immediately put in place, under the system launched in
2011. Among the several useful avenues proposed to rebalance the situation,
i.e. to give investors incentives to meet the demand for rental housing, it is
suggested to allow for an increased spread whenever rent tribunals examine
rental levels. Moreover, the geographical location of rental apartments should
be given an increased weight in the utility value basket of characteristics,
which forms the basis for rent negotiations. In parallel with the supply side
restrictions existing in metropolitan areas, other parts of the country are
characterised by an excess supply in the rental market with rents higher than
justified by market conditions. This is also a consequence of the utility value
system, whereby rental apartments located in relatively unattractive
municipalities with limited employment opportunities, may nevertheless be
coupled with high rents given that they are of a high standard, well-serviced
etc. More market-oriented rent levels would benefit tenants in such areas
(Statens offentliga utredningar, 2012:88). Considering
the more long-term objective of moving towards market-clearing rents, a similar
transition, which may be evaluated as a reference, was carried out in Finland
in the 1990s. The Finnish deregulation concerned only the private rental
market while the publicly owned rentals still apply a cost-coverage method for
rent setting and the dwellings are allotted according to a social needs-based
approach. The transition was carried out in two steps with the first allowing
for rents reflecting tenants' willingness to pay only for newly produced rental
units, and the second involving a gradual transition also for the existing
stock of rentals. The effect implied a 57% rent increase on average over the
1990-2004 time period, however variations where noticeable across regions with
Helsinki seeing rents increase by 71%. Nevertheless, it is also estimated that
the reform was coupled with new rentals entering the market, as potential
landlords realised the potential benefit of letting their property (Kulander et
al, 2008).[24]
Looking at
rental markets of other Nordic countries, it may be observed that similarly
to Sweden, in Denmark the rental market structure is also that of a broad
tenants' base with a unified rent setting system for the majority of rental
dwellings. However, the public housing is not owned by the Danish
municipalities but rather by non-profit organisations. In Norway, there are no
publicly owned housing companies and in general policies are biased towards
housing ownership. The supply of rentals is generally limited to private
individuals letting (parts of) their own dwellings (Stockholm County
Administrative Board, 2013). In addition
to the traditional rental market, with contracts being allotted through
municipal services, a smaller secondary market for privately let dwellings
exists.
Different sets of rules apply depending on whether the dwelling is a sub-let rental
unit or a let tenant-owned apartment, but until early 2013 joint
characteristics have been that the permission of the land lord or the housing
cooperative association respectively has been necessary, and that it has not
been possible for lettors to go beyond the rental level of comparable rental
objects located in the same area.[25]
This rule is believed to have limited the supply of privately let tenant-owned
apartments especially in urban areas, as with such a set-up not even the housing
expenses of the lettor, which in addition to the fees to the housing
cooperative association typically includes substantial mortgage interest rates,
are covered. In an attempt to widen the base of available rentals, the
government proposed in its Budget Bill for 2013 to relax these rules and allow
tenant-owners to demand rents that would make private letting profitable
(limited to one unit per person). Moreover, it was proposed to abolish the permission
requirement. The proposal was met by protests by the opposition, but was
partially endorsed by the Parliament in December 2012. The compromise means
that private lettors and tenants may agree on rent levels based on the actual
costs borne by the lettor, and as a general guidance for rent-setting in the
future a 4% return on the market value plus the monthly fees will be
applicable. However, lettors are still obliged to ask the housing cooperative association,
which will grant permissions in justified cases such as work or studies
elsewhere, trial cohabitation etc. These changes entered into force on 1
February 2013 and there are some expectations of rising rent levels for privately
let apartments in urban areas, in particular in Stockholm city. Such
adaptations would replicate the potential market-clearing rents of rental
apartments, and in this light a continued evaluation of the price developments
and market effects would be useful. Box 1: An outlier at 59°19′46″N 18°4′7″E : Stockholm's rental market - benefits insiders at the expense of outsiders A sub-optimally functioning housing market can have detrimental effects on growth and employment. Mobility is hampered as workers and students may hesitate to take up offers of employment and/or studies knowing that they may be faced with a grim housing situation. This is of course a more pronounced problem in urban areas, where the costs of buying an apartment are also far above the national average. Debt levels of new mortgage borrowers in the municipality of Stockholm stand at more than six times their disposable income (Sveriges Riksbank, 2012). A price per square meter of roughly SEK 58,000 limits investment possibilities. In the present economic situation, with apparent downside risks on the housing market, and a likely stable price development in the short run, investment decisions tend to be long-term. Persons brought to Stockholm to work or study for shorter periods, generally prefer other options. A well-functioning rental market therefore seems crucial for the Stockholm region to continue to attract young adults, immigrants and people in search of better job prospects or education. Changing structure of the Stockholm housing market The development of Stockholm county’s housing market over the last couple of decades has mirrored that of the national changes in tenant-owned and rented dwellings, but in an even more exaggerated way. At present, the distribution between rentals and tenant-owned apartments is even (Graph 28) at somewhat less than 40% each of the total stock, which is to be compared with a predominance of roughly 60% of rentals in 1990. The difference corresponds to more than 100,000 rental apartments having been converted into tenant-owned ones. Private property owners have found the regulated structure dissatisfying and have therefore chosen to exit the market by converting rental units into property that can be sold at market value, a strategy which has proved to be profitable also for the former tenants. As for publicly owned housing companies, the income from the sales (amounting to SEK 35 billion, or roughly EUR 4 billion, for the Stockholm-based MHCs) has been used to renovate and upgrade the remaining stock, as well as to a limited extent to launch production of new rental dwellings; investments that cannot fully be financed via the regulated rents. Graph 28: Distribution of various types of tenure in Stockholm county, 1990 and 2010 Source: Country Administrative Board of Stockholm Social
considerations All
municipalities in Stockholm county report that there are too few rental
dwellings available, which makes it especially difficult for young adults and
immigrants to find appropriate housing (County Administrative Board of
Stockholm, 2012). Immigrants, and persons with foreign-born parents, are also
more likely than persons born in Sweden of Swedish origin to have low
incomes, creating an additional barrier to finding suitable accommodation in
the Stockholm area. In Sweden, social housing, in the meaning of a separate
stock of housing being reserved for low-income households at low rents, has
been rejected by the legislator. Instead, targeted groups (notably pensioners
and single-parent households with children) may benefit from housing
allowances with certain eligibility criteria such as income, number of
children etc. However, as a consequence of political decisions the rules have
become tougher and the number of households receiving such support has
dwindled over the last couple of decades. Another strand of possible support
for weak households goes via the municipality, and the share of households
living on such economic support is higher among households with a foreign
background. For the Stockholm municipality taken as a whole, the figures are
9.2% for foreign-born persons and 2.2% for persons born in Sweden, but in
certain immigrant-dense suburbs the corresponding share climbs up to 20% (Lind,
forthcoming 2013). The difficult situation linked to the regulation of the
Stockholm rental housing market, which has been further aggravated by
population growth and suppressed construction, puts additional strain on
integrating low-income, immigrant households. The conversion from rentals to
tenant-owned apartments has also, to some extent, created a shift in the
composition of the stock of remaining rentals, as the conversions
predominantly took place in high- and/or middle-income areas where tenants
could afford to take on mortgages, whereas low-income households remained as
tenants. Hence, although Sweden does not de jure have a social housing
sector, de facto the country, and its capital in particular, may be
moving in this direction. Households
not having the option to buy tenant-owned apartments, or to come by rental
contracts via contacts etc., can queue to be allotted a rental apartment. The Stockholm Housing
Service manages a queue of almost 400,000 prospective future tenants, and the
queue is growing by the year (for reference, the queue grew with 9% in 2012
and as recently as a decade ago it stood at 82,000 members). In order to be
allocated an apartment in the central areas of the city, future tenants have
to wait for 14-17 years. In the suburbs, the waiting time is not quite as
long but as a general rule suburbs within closer commuting distance require
roughly a decade’s queuing. Nevertheless, the picture is not quite as bleak
for newly produced dwellings, where due to the higher rent levels the average
queuing time required was roughly five years in 2012. On the other hand, due
to the very limited construction activities in 2012 less than two thousand
such contracts were allocated (Stockholm Housing Service). Pressure is
mounting on rent levels In theory,
landlords of newly constructed rentals may charge market rents as new
apartments are exempt from the normal rent negotiations under the
utility-value-system.
However, they need to obtain prior agreement on the rent level from a local
tenants’ association, otherwise the rent may be questioned by the Rent
Tribunal upon request of tenants. Moreover, even with such an agreement, the
exemption only covers the first fifteen years (only the first ten years until
end-2012). Thereafter rents may be disputed by referring to comparable
rentals. Hence, charging full market rents is a risky strategy for landlords,
who often opt for a middle way. In fact, some estimations suggest that market
rents in the city center would be up to 50% higher than the actual rents in
new developments. At the same time, the latter were 45% higher than average
conventional rents in 2010 (Lindblad, 2010). There have
also been some attempts by landlords to increase rents on the stock of rental
dwellings through the so called Stockholm model (Stockholmsmodellen). The model was
negotiated between the Swedish Property Federation, the Swedish Association
of Public Housing Companies and the Swedish Tenants' Union in 2008-2011 with
the aim of widening the application of the utility value system to better
take tenants' real preferences into account when setting rents. For
Stockholm, this entails a bigger focus on the location of the building.
However, the practical implementation of the model has caused friction
between the parties as landlords demand rents closer to market-clearing
levels. The Rent Tribunal is currently assessing demands of roughly 10-15%
rent increases for a number of pilot properties. Should the verdict side with
the landlords, widespread rent increases are likely to follow in the whole
Greater Stockholm area. A parallel
development towards market-clearing rents can be observed on the market for
privately let apartments.
As from February 2013, tenant-owned apartments and one-dwelling-buildings may
be privately let at a rent linked to the market value of the property (and
not having to be equivalent to the rent of a comparable rental dwelling), a
fact that should also put an upward pressure on rents especially in the urban
areas. Black
market activities: Over the
last decades the current set up of the rental market has however provoked a
substantial black market
with different characteristics, the most common ones being i) sub-letting
without the permission of the landlord and at rent levels higher than those
of equivalent rentals, and ii) trade with rental contracts. There are
indications that subletting without permission takes place widely in
Stockholm.
In fact, Stockholm county's largest housing companies estimate that between
10 and 20% of their total stockis being sub-let without permission. In 2012,
these companies agreed to 782 sub-lettings but at the same time they estimate
that approximately 9,000 rental apartments among their stock were being
sub-let without the necessary permissions. Engaging is such behaviour is not
particularly risky for the individual tenant: while in theory one risks
losing one's rental contract, in 2012 less than 500 persons actually did so.
Nine out of ten sub-let apartments have rent levels that widely surpass those
of comparable rentals (County Administrative Board of Stockholm. 2013). Trade with
rental contracts must also be assumed to be a widespread phenomenon, although it is by
definition difficult to pinpoint the extent of these illegal activities. The
Swedish Property Federation estimates that every year, five to seven per cent
of all rental units get new tenants in Stockholm, but only roughly 0.5% are
allotted by the landlord or the Stockholm Housing Service while swapped
tenancies account for the remaining share. Approximately 50% of all such
swapped tenancies (or roughly 2,200 cases per year) are accompanied by
illegal transactions whereby the tenant of the less attractive rental pays
money to the tenant of the more attractive one in order to sign a rental
contract. This branch of the black market is estimated to account for
approximately SEK 660 million (or almost EUR 75 million) per year, which
represents on average SEK 300,000 per apartment, only in Stockholm city.
Including the Greater Stockholm area, black market transactions are estimated
to amount to roughly SEK 1.2 bln per year (The Swedish Property Federation,
2006). With a
sequenced transition to market-clearing rents, such market anomalies would
gradually be phased out,
which should lead to better access to the rental market for, in particular,
vulnerable groups such as young adults and immigrants who are most at risk of
having to pay for tenancies while at the same time being characterised by low
and insecure incomes. Future
outlook: It is clear
that the
Stockholm rental market is challenged by severe distortions resulting from
the several decades of rent regulation. What was once introduced as a
crisis measure during the 1940s has remained in place and hampered efficient
solutions to the detriment of the inhabitants of the capital. The Greater
Stockholm area is important as a catalyst for increased prosperity and
employment, and a key challenge for the future is making sure that
insufficient housing supply does not become a drag on growth. The reform
steps outlined have the potential of addressing some of the problem areas,
but can, most likely, not substitute for a deregulation of the rental market
in the longer run.
3.1.4 Household
indebtedness
As noted in chapter 2, household indebtedness
increased strongly over the last decade and reached slightly over 170% of
disposable income in 2010 (Graph 29). The lion’s share of household
borrowing is made up of mortgage debt, the growth of which has been intimately
linked with the increases in housing prices discussed above.[26] Nevertheless,
debt levels seem to have stabilised and in its forecasts until and including
2015, the Riksbank expects unchanged, or slightly decreased, debt levels. Graph 29. Households' liabilities || Graph 30. Households' mortgage credit growth, annual % change Source: Eurostat || Source: Sveriges Riksbank Mortgage
credit growth continued to slow down during the course of 2012, and the pace of
mortgage expansion has fallen to a year-on-year rate of around 4.5% in January
2013
(Graph 30). Factors behind this continued slowdown in new mortgage issuance
include moderate house price growth, heightened uncertainty about the economic
outlook reflected in economic sentiment indicators and forecasts of rising
unemployment and, possibly, more restrictive lending practices by banks, partly
reflecting the introduction in October 2010 of a 85%-cap on the loan-to-value
for new loans and, to a lesser extent, possibly also the introduction of
amortisation requirements by SEB and the linked expectation that other banks
may follow. Contrary to the credit growth contraction in 2010 and 2011, lately
it has been coupled with falling mortgage interest rates. The Riksbank cut the
repo rate on three occasions in 2012, bringing it down to 1%[27], which was
also to some extent reflected in the variable mortgage rates, despite the fact
that the margins on variable-rate mortgages have increased as an effect of
banks not having reduced their lending rates at the same pace as their funding
costs have fallen due to the decrease in risk premiums for the Swedish banks
during 2012 (Sveriges Riksbank, 2012). In
a situation of high and increasing household debt, the developments in the
mortgage and housing market have become a factor in formulating monetary
policy. Over
the last few years, the Executive Board of the Riksbank has been divided as
regards whether housing market considerations should be taken into
account when taking decisions on monetary policy. Increasingly over the course
of 2012, the bleak economic outlook spoke in favour of further cuts of the repo
rate. Nevertheless, the fear that such cuts would translate into lower mortgage
rates, and, as a consequence, increased borrowing by households, held back some
Members from arguing for too substantial cuts.[28]
In
the current context, with low mortgage interest rates, households' interest
ratios (i.e. interest expenditure-to-disposable income) are also low, and
standing at 4.4% in December 2012. Nevertheless, going forward interest rates
are expected to pick up. Higher rates would of course have a negative
consequence for the interest ratio, which is expected to climb to 6% towards
the end of 2015. Measures of affordability suggest that the mortgage servicing
costs are manageable for Swedish households. Stress tests (Swedish Financial
Supervisory Authority, 2012 (b) and 2013) also indicate that a vast majority of
households would be able to honour their obligations also under various adverse
scenarios. Nevertheless, the stress tests do not evaluate what would happen to
households' consumption when income and expenditure levels shift, how banks'
costs and access to funding would be affected or whether households could
quickly lower other types of expenditure and/or use their savings to continue
to service their debt in adverse conditions. The net worth of households
indicates that on average assets (corresponding to roughly 630% of disposable
incomes in mid-2012 and including the market value of real estate) are more
than three times larger than the liabilities, but the corresponding figure for
liquid assets is approximately ca. 150% which is lower than the accumulated
debt (Graph 31). Almost
half of all Swedish real estate assets are located in the three major urban
areas,
where big house price increases have also been observed over the last fifteen
years. In the event of future price falls, this situation may become
problematic as households in these areas are therefore particularly sensitive
to price changes and adapt by changing their consumption patterns. In this
context, Stockholm is most at risk, with 35% of all mortgages but only 25% of
the employment income (Swedish National Board of Housing, Planning and
Building, 2012). The
distribution of debt between different income groups is another aspect of the
assets/liabilities matching issue. In this context, it is noteworthy that 57%
of the total stock of mortgages is held by the households with the top 20%
income level (having an average indebtedness level of 277% of disposable income).
Similarly, the 20% of households with the lowest incomes (having an average
indebtedness level of 38% of disposable income) accounted for only 2% of total
mortgage debt. This result suggests that households' ability to service their
debts should be rather satisfactory (SEB, 2012). Graph 31: Households' wealth and debts as % of disposable income Source: Sveriges Riksbank Moreover, comparing debts to the value of assets
is not a reliable indicator of the leverage. The value of assets is
volatile – it is prone to speculation and tends to increase in boom periods and
contract in bust periods. Therefore, it is appropriate to discount for these
evaluation effects, e.g. by comparing debt to deflated assets (see Graph 32). So
while the standard debt-to-assets ratio has not increased compared to its 1995
level (30%), the adjusted ratio of "notional leverage" shows an
increasing trend.[29]
This indicates that indebtedness of Swedish households has to a large extent
been driven by the increasing value of assets. In Denmark, the rapid increase
in notional leverage between 2003 and 2007 signalled an unsustainable debt
built-up which subsequently led to a pronounced house price correction. Graph 32: Debt-to-asset ratio – standard vs. notional leverage (in %), selected Nordic countries || Source: Commission services (Eurostat, own calculations) Another less reassuring
characteristic of the composition of households' debt is the fact that there
are large variations in the degree of indebtedness within the segment. The already
high average indebtedness of slightly above 170% of disposable income includes
households without any debt which means that for households with debt, the debt
levels are often much higher. This is particularly the case in urban areas (Graph
33), where housing expenses are substantial, but even when the three
metropolitan areas are excluded, the indebtedness level of new borrowers is on
average four times as high as the disposable income (Sveriges Riksbank, 2012).
Graph 33: Debt levels of new mortgage borrowers in major urban areas vs. remaining parts of the country Source: Sveriges Riksbank The
increase in indebtedness has been coupled with a trend towards a higher share
of mortgages taken up at variable interest rates, which in last 15 years
have been on average lower than fixed rates and therefore perceived as
attractive for the consumers who perhaps do not fully take the risk into
account that interest rates may increase. In Sweden, it remains costly to
change from one type of contract to the other, as many banks fully compensate
for foregone interest rates whenever clients wish to switch from fixed to
variable mortgage rates or change the total duration of the mortgage, hence discouraging
them from altering the conditions of mortgage contracts. In
the context of especially the urban areas, but also for new borrowers in
general, it is also interesting to look at the amortisation behaviour of
households.
This group of borrowers tend to prefer amortisation-free mortgages, or in any
case mortgages with an amortisation period of more than 50 years (57% and 21%
respectively), with the underlying risky assumption that real estate
investments will almost by default increase in value over time. Less than 15%
foresee to pay back their mortgages within 30 years. While a slow pace of
amortisation may not seem as problematic for young people, it is certainly a
matter of concern for households approaching or beyond retirement age.
Loan-to-value ratios for new loans for these age groups amounted to 50-60% in
2011 (Financial Supervisory Authority, 2012). It is with this development in
mind that the Swedish National Board for Housing, Building and Planning issued
a recommendation in the autumn of 2012 that households should increase their
amortisation pace. It is based on factors such as that high indebtedness is not
a phenomenon concerning only young households but that the average indebtedness
level of pensioners is also substantial and stands at 53% of disposable income,
and that households have become used to seeing real estate as a virtually risk
free investment which will always increase in value. Nevertheless, Swedish
households have experienced price drops rather recently (2007/2008) and
although the housing market seems to have stabilised, mortgage loans are still
associated with a certain level of financial risk. Based on the above, the
Board recommends an amortisation pace which at the very least would imply that
indebtedness levels do not increase further in the future. In practice, this
corresponds to amortisations of roughly 2-4% per year in real terms and while
this essentially corresponds to the actual figure it is counterbalanced by the
fact that consumers constantly take up new mortgages, meaning that for the
economy as a whole there was a negative amortisation of roughly -3.6% in 2012
(Swedish National Board of Housing, Building and Planning, 2012 (e)). The
development has also been scrutinised by the Riksbank, which together with the
Swedish Financial Supervisory Authority look into the issue of whether measures
to stimulate amortisation are needed. The Swedish Bankers'
Association's recommendation that loans with a loan-to-value of more than 75%
should be amortised down to at least that level[30] has not been fully
implemented by banks, at least not in the past, as they may hesitate to rein in
the highly profitable mortgage loan segment.[31]
Out of the four major Swedish banks,[32]
only Swedbank is in favour of introducing legal requirements relating to
amortisation while the others refer to the existing recommendation. SEB has
already introduced an amortisation requirement on its own account, meaning that
new borrowers are obliged to amortise mortgages with loan-to-value rates of
more than 70%, i.e. a somewhat more stringent requirement as compared to the
recommendation.[33]
In a recent survey, the FSA concludes that the 85% LTV mortgage cap
continues to have a positive effect in stabilising mortgage developments, as
the households' loan-to-value ratio for new loans is currently around 70 per
cent. The survey also shows that nine out of ten households with a
loan-to-value ratio above 75 per cent amortise. The number of
households taking loans that have a loan-to-value ratio above 85 per cent is limited
(roughly 11%). However, only four out of ten households with a loan-to-value
ratio of less than 75 per cent amortise, and the average repayment period for
mortgages being amortised is more than 140 years. The government has
tasked the FSA with preparing an action plan on how to promote a better
amortisation culture among banks and borrowers, where, while not introducing
any new legal requirements, banks will still be obliged to issue specific
guidance to clients on a suitable amortisation pace etc. by mid-October 2013. Certain
policies are likely to have contributed to the debt accumulation and the
slowing amortisation pace, as pointed out in last year's IDR. A reform
which is very likely to have affected the housing market and tilted the
incentives of households towards debt-financing is the drastic reduction of the
property tax that took place in 2008[34],
leaving the deductibility scheme intact. The generous interest rate
deductibility stands out as particularly conducive to debt accumulation
(European Commission, 2012). In Sweden, mortgage rates are 100% deductible
against capital income, which is quite unique as most other countries, for
example Denmark and Belgium, have set a ceiling for the maximum allowed
deductibility. In case of a deficit, interest payments are deductible against other
types of income (for example labour) at 30% up to SEK 100,000 (roughly EUR
11,000). Thereafter, it decreases to 21%, but there is no upper limit meaning
that all borrowers get a tax subsidy irrespective of the size of their
mortgages (Swedish
National Board of Housing, Building and Planning, 2012 (e)). In its
December 2012 economic survey of Sweden, the OECD also brings up these issues
as areas for potential reform, as does the Swedish Centre for Business and
Policy Studies in its 2013 Economic outlook report. However, the Swedish
government has so far not taken any taxation-related steps to propose measures
to reduce the debt bias.[35]
In fact, the Minister of Finance rather confirmed that no proposals targeting
neither the interest rate deductibility scheme, nor the property tax, are
foreseen, claiming that it would risk provoking heavy price falls on the
housing market.[36]
Whereas the timing and sequencing of a possible phase out should of course be
subject to careful analysis, the measures as such should assist in balancing
the situation. It is clear that a global reform, touching all the
above-mentioned domains, would be preferential as compared to a piece-meal
approach targeting only specific aspects thereof. The Swedish
system of giving tax payers the right to defer capital gains tax resulting from
a sale of private real estate (given that they buy a replacement residence and
that certain other conditions are fulfilled), is another issue linked to
housing taxation which may be reviewed. This system was first introduced in
1968 to counter possible lock-in effects resulting from tax payers not being
able to change residence to an equally priced dwelling due to the obligation to
pay the capital gains tax up front, and in order to stimulate mobility in the
labour and housing market. Since the introduction, it was reformed in several
steps and even abolished in 1990-1994. At present, capital gains amounting to
SEK 256.6 billion have been deferred, which translates into SEK 56.5 billion in
deferred taxes distributed over roughly 600,000 approved deferrals. Taking into
account the magnitude of the measure, as well as the complexity of the rules
linked to the system, the Swedish Tax Agency recently recommended scrapping the
system (Swedish Tax Agency, 2012). According to their proposal, the new rules
would enter into force as from 1 January 2015 and leave current deferrals
unchanged. At the same time, the tax rate is proposed to decrease from 22% of
the gain to roughly 19% to compensate the tax payers. The proposal is currently
assessed by the Ministry of Finance. The
consequences of the current system, and its possible abolition, need to be well
understood. The system likely has adverse price effects on housing, as the
deferrals enable tax payers to finance more expensive real estate. Also, it
creates other types of lock-in effects, such as the reluctance of home owners
to sell property and move to a rental unit as that would lead to an immediate
and full taxation of the capital gain. The link to the level of indebtedness of
the Swedish households is also worthwhile to consider in this context, as the
deferred tax payments constitute an additional debt weighing on households'
balance sheets. The downside risks for consumption are larger in a stagnating
market, as tax payers having previous deferrals and subsequently selling their
dwellings at a loss, are still obliged to pay a certain share of the capital
gains tax related to the initial investment. In the
Swedish context, consumption loans are also increasingly warranting some
concern.
In particular short-term credits (so called text loans, or SMS loans, due to
the instant application procedures via text messages) may be troublesome as
they risk attracting predominantly vulnerable groups such as young adults. The
Swedish Enforcement Authority reports that in 2012, the number of enforcement cases
grew by 62% and that approximately one fifth of all cases concern young adults
between 18-25 years old. The Authority finds that the procedures applied to
assess the credit worthiness of borrowers are insufficient and that interest
rate levels are problematic, in particular as the text loans target consumers
with an already weak standing (Swedish Enforcement Authority, 2013). In
Finland, the government has recently proposed a new piece of legislation
introducing a cap of the reference rate plus 50% effective interest rate for
consumer credits under EUR 2,000 combined with stricter application procedures[37]. The Swedish
Enforcement Authority has proposed that similar limitations should be
introduced also in Sweden. The Swedish government has declared that as a first
step, the Swedish FSA will get increased possibilities to impose sanctions on
market actors, and as a second step a legislative proposal to address the
situation will be presented most likely by mid-2013 giving the Consumer
Protection Agency the possibility to fine credit providers that fail to check
the credit worthiness of applicants appropriately.[38]
3.2.
Indebtedness of the non-financial corporate
sector
3.2.1. Recent developments in non-financial corporate debt
Debt of
non-financial corporations accounted for 149% of GDP in 2011 and was the fifth
highest in the EU, far above the euro area average (99% of GDP). Corporate
debt has gradually declined by 20 percentage points since its peak in 2009. In
2012, the correction ceased because of a sharp drop in GDP growth which was not
followed by the same deceleration in credit to corporations. While the GDP is
forecast to have grown by a mere 1% in 2012, credit to corporations grew by 3.8%.
Therefore, it is expected that corporate debt might increase marginally as a
percentage of GDP in 2012. In terms of
consolidated data, Swedish corporate debt is lower but still high in EU
comparison. In 2011, consolidated debt of Swedish corporations stood at
133% of GDP, which was the fourth highest level in the EU (to compare with the
euro area average of 84% of GDP). In Graph 34, consolidated debt is illustrated
by the total of the red and blue areas. Due to reasons explained below as well
as specific statistical issues, consolidated data are more appropriate in assessing
the debt burden of Swedish corporations. [39]
Graph 34. Corporate debt as % of GDP: consolidated and
super-consolidated view Source: Statistics Sweden A large share
of corporate debt takes the form of cross-border intra-group loans which entail
lower risks than other types of borrowing. Corporate debt consists
mainly of ordinary loans (46% in 2011) and inter-company loans and trade
credits (42%), while borrowing through securities forms a smaller part (10%). Inter-company
loans from abroad constitute about one third of consolidated corporate
debt (corresponding to 47% of GDP in 2011), which is among the highest shares
in the EU. It was also this type of borrowing which increased most markedly
over the past decade. As explained in the last year's review and further in
section 3.2.2, the wide use of intra-group borrowing from abroad is motivated
by efficient tax minimisation and not by a need to cover up for insufficient
profits. From a sustainability point of view, intra-group loans entail much
lower risks than ordinary loans from banks or from other corporations.
Multinational companies typically cover net debts in one country by net assets
in affiliates in another country. A majority of intra-group lending to the
country (55% for Sweden) is directly channelled to other affiliates abroad. Therefore,
risks attached to intra-group lending would have to be assessed on the basis of
net lending/borrowing positions of multinational groups, the data on which are,
however, not available. In this
light, the debt-to-GDP ratio draws an exaggerated picture of indebtedness of
Swedish corporations. If cross-border inter-company lending were
deducted from the consolidated data, Swedish corporate debt would amount to 87%
of GDP in 2011, a level comparable with the European averages (see the blue
area in Graph 34). Also, the development of this measure over time would seem
less worrying since it has been very stable between 1995 and 2006 and
accumulation of debt was limited only to period 2006-2008 (and a part of this accumulation
has already been corrected). Given the
drawbacks of the debt-to-GDP indicator, it is useful to complement the analysis
with other indicators of corporate sector leverage. Balance-sheet
indicators suggest a rather healthy situation of non-financial corporations. The ratio
of debt to financial assets (51% in 2011) in Sweden is below the euro area
average (56%). The debt-to-equity ratio (58%) is even far below the euro
area average (78%). Over the past decade, both indicators have been relatively
stable, or even declined slightly, confirming that liabilities grew hand in
hand with financial assets/equity. In contrast, the ratios have increased
moderately in the euro area during the same period. Graph 35. Leverage ratios, Non-financial corporations, Sweden || Graph 36. Leverage ratios, non-financial corporations, euro area Source: Commission service (Eurostat) || Source: Commission servces (Eurostat), ECB However, some
caution is needed when regarding growing assets as a mitigating circumstance
for mounting debt. First, it is useful to determine to what extent
accumulation of debt was facilitated by an increasing value of assets. These
valuation effects are unstable and tend to evaporate in bust periods, therefore
they may overestimate the firms' ability to incur liabilities. If these effects
are discounted for, the leverage ratio (called also "notional
leverage"[40])
for Sweden appears to follow an upward trend (Graph 37). This contrasts with
the situation in the euro area where the average notional leverage has not
diverged significantly from the standard ratio compared to 1995. Second, it is
pertinent to look at the maturity composition of assets and liabilities. Sweden
shows a rather high and rising share of volatile assets[41] (76 vs. 66%
in the euro area), whereas almost the entire debt is long-term (97 vs. 74% in
the euro area, 2011), suggesting a growing maturity mismatch between assets and
liabilities. Graph 37. Debt-to-assets ratio – standard vs. notional leverage Source: Commission services (Eurostat) Indicators
of the capacity to repay do not suggest a clear need for deleveraging. If gauged against
gross operating surplus, Swedish corporate debt remains the fifth highest
in the EU and on an increasing trend. However, this indicator suffers from the
same bias as the debt-to-GDP ratio, given the large share of intra-group
lending.[42]
The interest burden (9.6% of value added in 2011) is above the euro area
average (5.7%) but has come down significantly since the 1990s along with
declining interest rates. Graph 38. Debt-to-gross operating surplus, Sweden vs. euro area || Graph 39. Interest burden, Sweden vs. euro area Source: Commission services (Eurostat) || Source: Commission services (Eurostat), ECB Debt
sustainability analyses do not point to imminent deleveraging pressures. Cluster and principal
component analysis which relates the level of debt with the size of
accumulation (both for the debt-to-assets and debt-to-operating surplus ratios)
identifies Sweden as prone to suffer from deleveraging pressures, but risks are
considered lower than in other similarly-indebted countries (Cuerpo, Drumond, Lendvai,
Pontuch and Raciborski, 2013).[43]
Typically, if the size of debt accumulation over time is considered,
Sweden appears in a relatively low-risk position. Indeed, compared to the 2000
level, non-consolidated corporate debt as a percentage of GDP has increased
only by some 14 percentage points, which is less than in most other countries
(in the euro area, debt-to-GDP increased by 28 pps).[44] On the other
hand, analyses based on the level of the debt indicate a clear need for
deleveraging (see the above discussion on debt-to-GDP or debt-to-operating
surplus). Following the approach presented in Cecchetti et al.[45] or Arcand et
al.,[46] Swedish corporate
debt would also be far above the levels where debt becomes a drag on growth.
However, the utility of all indicators relating corporate debt to GDP or
operating surplus is undermined in the case of Sweden by the overstated level
of the debt-to-GDP ratio due to a high share of intra-group borrowing from
abroad. The
relatively healthy financial situation of Swedish corporations is also
illustrated by a low rate of company defaults, even in weak economic environment.
The
default rate for Swedish companies declined from 1.-1.5% before the 1990s
crisis to around 0.8% in 2012. It did not increase substantially even during
the crisis of 2008/09, suggesting that Swedish companies can cope with their
debt levels even under a sharp economic downturn (Graph 40). Graph 40. Company default rate (in %) Source: Sveriges Riksbank Notwithstanding the indications of contained
deleveraging pressures, the high level of Swedish corporate debt still calls for
vigilance.
The level of corporate debt remains high even if the inflating effect of
intercompany loans is disregarded (above 100% of GDP in 2011, non-consolidated).
The strong deleveraging in 2009-10 indicates that the rapid debt built-up in
the preceding years might have been excessive pushing for a return to a more
sustainable path. Although intra-group loans involve clearly lower risks than
other forms of debt, they should not be fully ignored since some minor risks
may remain with respect to the overall debt-asset position of the multinational
groups, as well as with respect to maturity and currency composition of this
cross-border lending.
3.2.2. Factors
behind Swedish corporate indebtedness
The higher
level of corporate debt in Sweden can be explained by several Sweden-specific
factors.
These would include a strong presence of multinational companies, company
taxation and a long-period of an easy access to credit. The fact that
Sweden
has traditionally been the cradle of a number of large, multi-national
companies tends to amplify corporate
debt vis-à-vis the Swedish GDP. While recording their debts in Sweden,
the multinational companies incur income from global sales. Therefore, their
indebtedness should be viewed against their global activities. As mentioned
earlier, another feature distinguishing Sweden is the wide use of borrowing
from foreign affiliates of the same corporate group, a phenomenon which is
motivated by the set-up of company taxation in Sweden. The generous
tax deductibility of interest payments has given an incentive to Swedish
companies to finance their investments with debt rather than equity. If
combined with a relatively high corporate income tax and double taxation
agreements with several countries, it invites to an aggressive tax planning by
multinationals operating in Sweden. Multi-national companies typically channel
loans from affiliates in countries with lower corporate taxes to their Swedish
affiliates which then deduct the interest payments from taxable income. The
multinationals can determine the interest costs paid on loans to their Swedish
affiliates (be it an owner or a subsidiary) to influence the size of profits to
be taxed in Sweden. By charging a higher than the market interest rate on these
loans, multinationals succeed in avoiding profit taxation in Sweden.[47] The tax
minimisation also explains why FDI into Sweden takes predominantly the form of
share acquisitions mirrored by a loan from the foreign parent company. In 2010,
35% of FDI in Sweden was financed through loans, while the comparable figure
for Swedish FDI abroad stood at mere 4%.[48]
Foreign investors typically establish a holding company in Sweden with a small
equity capital but a large loan which allow the holding company to buy a
decisive share of the Swedish company (Sveriges Riksbank, 2012(b)) . This
behaviour can be illustrated by the fact that loans from parental companies
account for more than 60% of all intra-group lending from abroad and have seen
a steeper increase than loans from foreign subsidiaries of Swedish-owned
companies. Given the tax deductibility of interest payments, it is more
profitable for foreign investors to hold assets in Sweden in the form of
interest-bearing loans to holding-companies in Sweden and not as shares in the
acquired Swedish company. Foreign owners typically charge interest payments on
loans to their Swedish subsidiaries (which have been deductible from taxable
profits) that are higher than possible dividends from share ownership (which
would have been derived from after-tax profits). The
government has recently taken some measures to limit the most far-reaching tax
minimisation practices by the multinationals. In 2009, tax regulations
were introduced which reduced the tax deductibility of interest payments for
intra-group loans related to the acquisition of shares from an affiliate. Following
a series of public inquiries on various related issues, new legislation came
into force in January 2013 which extends the restrictions on interest
deductibility to all types of loans, regardless of their purpose (PWC, 2012)[49]. These
measures are likely to eliminate a large share of corporate debt which is
solely driven by tax avoidance, in particular the intra-group loans.
Intra-group lending from abroad has become further less attractive following
the reduction in the corporate income tax from 26.3 to 22% as of beginning of
2013. Nevertheless, it remains to be seen how these steps will eventually
affect the level of corporate debt. Some aspects of the new legislation bring about
a high degree of uncertainty about how different cases will be treated by the
Swedish Tax Agency (namely uncertainties about the interpretation of
"sound commercial reasons" which may justify the use of intra-group
lending). Also, since the stripping of interest deductibility is limited to
internal loans, it may not fully avoid external loans in acquisition structures
and it does not solve the systemic debt-bias in company taxation. Finally,
escalation of corporate debt in 2003-2008 has been also facilitated by the
low-interest-rate environment and low perceived risk of lending to
corporations. Following the economic slowdown in 2001-03 related to the
burst of the IT bubble, interest rates remained at very low levels for several
years. This spurred high demand for credit by Swedish companies. Low interest
rates coincided with a rather lenient lending attitude by Swedish banks towards
both corporations and households. In view of a long period of a low rate of
company defaults, the banks may have started to underestimate the risks
associated with lending to corporations. This led to an excessive expansion of
credit to corporations in 2006-2008 (annual growth of 16%). Still today, there
are concerns that banks may in their internal risk assessment models assign too
low risk weights to loans to the corporate sector.
3.3.
Linkages from private debt to the real economy,
the financial sector and public finances
At moderate levels, debt is beneficial for the
economy and leads to higher growth. If economic agents are
able to borrow and save, they can consume and produce even without current
income. However, if debt exceeds a reasonable level, it can act as a trigger of
long and painful financial and economic crises, marked with a number of bankruptcies
and contraction in consumption and investment. Given the interlinkages between
the sectors of the economy, high indebtedness of one sector tends to have
negative consequences for other sectors. Even if the banking and public sectors
are regarded as sound, a major need for deleveraging of households or
non-financial corporations can change the status of the sector substantially.
3.3.1. Risks for the real
economy
Sweden has already
experienced a financial crisis driven by overindebtedness already in the early
1990s.
The crisis was preceded by a housing and credit boom triggered by the abolition
of credit regulations in 1985. The corporate debt level had risen to about 120%
of GDP in 1992 and household debt exceeded 60% of GDP. The necessary
deleveraging process was painful and sent GDP growth to negative figures for
three consecutive years. Consumption contracted as house price falls forced
households to repair their balance sheets. The investment ratio plummeted from
23% in 1990 to 15.5% in 1994 and it took a further 15 years for the investment
ratio to catch up with the EU levels. The debt-to-GDP levels decreased by some
25 percentage points for the corporate sector and household leverage declined
by 15-20 percentage points between the peak and the trough. Deleveraging typically
affects output via falling consumption and investment but also through a debt-deflation
spiral. On
the former, in reaction to a fall in asset prices, households repair their
balance sheets by cutting on consumption and lowering their demand for housing
investment. On the latter, despite deleveraging in nominal terms, falling
prices slow down deleveraging in terms of real debt, which forces households to
deleverage even more aggressively. Low inflation or deflation results in high
real interest rates which further discourage investment. In the Swedish
context, it could be mentioned that an independent monetary policy is able to
cushion these effects of deleveraging. While in deleveraging parts of a
monetary union, falling prices typically lead to high real interest rates, an
independent monetary authority can lower policy rates drastically to fight
deflation and to keep real interest rates low. Also, positive inflation helps
to erode the ratio of debt to nominal GDP. Deleveraging
of the private sector may also leave permanent trace in terms of lower potential
output. The
capital stock can be negatively affected due to a decrease in the investment
level by deleveraging companies. The stock of investment often does not reach
the pre-crisis level. There may be also permanent negative effects on the
labour force due to exclusion from the labour market following long-periods of
unemployment. Notwithstanding
the relatively low imminent risks of deleveraging suggested by various analyses
discussed earlier in the note, the effects of potential deleveraging on the
real economy should not be neglected. An internal QUEST model[50] simulates the
impact of household deleveraging combined with a fall in house prices on the
main macro-economic aggregates (Cuerpo, Drumond, Lendvai, Pontuch and
Raciborski, 2013). It shows that a shock leading to a 20 pps reduction in the
households' debt-to-GDP ratio and a 15-percent fall in house prices in the long
run would decrease output by 3% in the first three years and have a negative
permanent effect on GDP of about 1.5%. The unemployment rate would rise by 1.7
pps. Consumption would decline by 3% and investment drop by 6% within the first
three years after the shock. The model also predicts a prolonged period of low
housing investment. These results are broadly consistent with the deleveraging
experience in Sweden in the 1990s. However, while the model estimates that
household consolidation lasts more than ten years, with half of the
consolidation happening in the first six years, the Swedish experience suggests
a much faster pace of deleveraging (the main consolidation phase was completed
in four years, reducing the debt to GDP ratio by 10 pps).
3.3.2. Risks for the financial
sector
Compared to
the situation before the 1992 crisis, but also in comparison with the other EU
countries, the Swedish financial sector appears to be in a relatively good
shape.
Swedish banks are well capitalised, their profitability measured as returns on
equity has improved over the last year and the share of underperforming loans
is very low, banks' exposure to countries in receipt of EU or IMF financial
assistance is marginal. However, the financial sector continues to be
vulnerable to risks related to its size, strong international exposure and
heavy reliance on short-term funding, largely in foreign currencies. Market funding
still being a major source of funding, the ratio of loans to currency and
deposits is high, amounting to 117% in 2011, compared to 79% for the euro area.
Moreover, the majority of wholesale funding in the form of securities issuance
takes place in foreign currencies (Sveriges Riksbank, 2012). These risks
have been addressed thoroughly by the Swedish authorities since the 2008/2009 crisis
through a number of measures to strengthen the resilience of the financial
sector. The
major step was a decision to apply stricter requirements for capital adequacy
and liquidity by banks ahead of the Basel III schedule.[51] The risks have
been also picked up by the Financial Crisis Committee, which was set up by the
Swedish government in 2011 with the task of preventing and managing financial
crises. The Committee proposes the establishment of a macroprudential council
in Sweden which, among other tasks, should "analyse and present proposals
on how to improve crisis prevention" for instance by developing tools that
manage "risky interdependence and links between players and markets, for
example, rules on debt levels" (Statens Offentliga Utredningar, 2013:6). Although private
sector debt is of course a cornerstone of a modern economy, it also constitutes
a direct risk to the financial sector through two channels. First, there
is a risk of loan losses related to defaults on mortgages or non-performing
loans to corporations. At the moment, this risk seems to be rather limited.
However, a long period of low default rates may have led banks to underestimate
risks related to household and corporate lending. The second channel - risks
related to a loss in investor's confidence - appears more likely. A downturn in
sentiment driven by international developments or an asset price fall in Sweden
could result in a more expensive or difficult access to funding in
international markets. An analysis
of credit supply and demand conditions suggests that the probability of deleveraging
is rather low in Sweden. A composite indicator of credit supply and
demand pressures places Sweden among countries with the lowest short-term
deleveraging pressures in the EU (Cuerpo, Drumond, Lendvai, Pontuch and
Raciborski, 2013). The supply of credit is sufficient[52], facilitated
by an easy access by the Swedish banks to cheap foreign funding. This is
related to the relatively high perception of the soundness of Swedish banks, if
measured by capital adequacy, return on equity or the share of non-performing
loans. The risk of a spill-over from the sovereign debt is low, as public
debt-to-GDP ratio stands below 40% and sovereign credit default swaps are among
the lowest in the EU. On the demand side, the current risks are slightly higher
given the recent deterioration in the economic outlook and economic sentiment.
Higher expected unemployment and continued uncertainties about the external
development are likely to have a depressing effect on credit demand. On the
other hand, the housing market has been resilient over the past year and given
the high sensitivity of Swedish households to interest rates, which have fallen
considerably over the past year, sustained demand for mortgage lending can be
expected also in the future.
3.3.3. Risks for public
finances
Financial crises and
deleveraging affect negatively also the government budget balance and public
sector's indebtedness. In the wake of the Swedish financial
crisis of 1992-1993, the government balance has plummeted from a surplus of 2%
of GDP in 1990 to a deficit of 11% of GDP in 1993. The hand-over of debt
from the private to the public sector was also particularly evident in the
countries which experienced a property bubble, such as Ireland, the UK, the USA
or Spain. On the revenue side,
tax receipts tend to drop significantly with falling
asset prices. Experience from countries with housing busts show that
construction booms can lead to an overestimation of the soundness of the public
finances. The decline is particularly noticeable in the performance of capital
taxes, such as capital gain tax, property taxes and stamp duties. In Ireland,
collected capital taxes dropped by 80% between 2006 and 2009 and their share in
total tax revenue declined from 16 to 5%. In addition, tax receipts further
fall due to the second-round effects on consumption and production. Households
cut back on consumption in order to restore their balance sheets. Companies
decrease investment and restructure their balance sheets by selling assets. Lower
production leads to higher unemployment and thereby significant losses in
revenues from taxes on income. In the Swedish context,
the unlimited tax deductibility of interest payments for both households and
corporations translates into significant foregone revenues for the state
budget. To illustrate the size of these revenues, the partial stripping of the
tax relief on interest payments on intra-group loans in 2013 is expected to
generate an additional SEK 8.8 billion, corresponding to 0.2% of GDP. On the expenditure
side, private sector deleveraging affects public
finances via the automatic stabilisers. Higher unemployment requires
more spending on unemployment benefits, retraining, subsidised jobs and other
social allowances. Also, a drop in confidence of investors can make servicing
of public debt more expensive due to higher interest rates charged on
government bonds. The effects on the
public debt are substantial and long-lasting. The
above mentioned QUEST simulation suggests that deleveraging amounting to 20-pps
reduction in the households' debt-to-GDP ratio, combined with a 15-percent fall
in house prices in the long run leads to a deterioration in the public
debt-to-GDP ratio by about 11 percentage points in the first ten years. The
Swedish experience from the early 1990s indicates that effects on public debt
can be even stronger. Public debt jumped from 43% of GDP in 1990 to 78% in 1994
and it took fifteen more years of responsible consolidation to bring the debt
ratio back below 40%. 4. Policy challenges The analysis in
sections 2 and 3 indicates that developments in the areas of private debt and
the housing market are the main potential sources of macroeconomic imbalances
in Sweden. These challenges
were already identified under the MIP in the first IDR and relevant policy
responses were reflected and integrated in the country-specific recommendations
issued for Sweden in July 2012 (CSR 2). Progress in the implementation of those
recommendations will be analysed when assessing the Swedish National Reform
Programme and Convergence Programme under the European Semester. Against this
background, this section discusses different policy avenues that could be
envisaged to address the challenges identified in this IDR. Concerning
the challenge of high private debt, a number of different avenues can be
considered: Notwithstanding recently
introduced policy measures, risks related to the high indebtedness of the
private sector remain. Further reforms along the lines detailed below would
reduce the exposure of the Swedish economy to potential imbalances as high debt
levels pose a downside risk to consumption and investment, but also to the
health of the financial sector, and in extremis to the currently sound
public finances. Housing taxation: The analysis identified a clear debt-bias in housing taxation that
creates incentives for households to finance their investment in housing
through debt rather than own savings. The Swedish tax system offers a generous
deductibility of interest payments on mortgages. At the same time, following
the reform of property taxation, the recurrent property taxes have practically
disappeared and ceased to counterweight the effect of the tax relief on
mortgages. Due to the reduced relative price of debt financing, households have
often preferred to save in other forms (such as investing in the stock market)
rather than repaying their mortgages. This has contributed to an increased
leverage of the household sector. To reduce the risk of
an unsustainable accumulation of household debt, one avenue could be to correct
the debt bias in housing taxation by a global reform gradually phasing-out the
tax deductibility of interest payments while at the same time strengthening
again the recurrent property taxation. Such a reform would not only restore
neutrality among investment alternatives, but also free up fiscal space to
reduce taxes that are more harmful to growth, such as labour income taxes. In
this context, possible risks of adverse social effects of a property tax reform
need, however, to be kept in mind.[53]
Introducing amortisation requirements and favouring lending based on real
repayment ability, rather than the value of the asset, could also be envisaged.
Making it less costly for borrowers to switch between fixed and variable
mortgage rates could also give incentives to households to opt for fixed rates.
It is clear that the
timing of reforms would need to be well chosen, in order not to feed the
remaining uneasiness of the housing market. A sequenced approach also seems
warranted in this context. However, although the timing of the actual
implementation of the reforms could be discussed, their content and structure
may already be established so that the roll out is facilitated once the timing
is judged to be appropriate. Financial
supervision: Household debt accumulation has been
facilitated by the rather lenient lending standards of Swedish banks. Since
2000, there has been a trend towards ever longer amortisation periods, with new
mortgages often including no or very limited amortisation. Debt-servicing
consisting mainly of interest payments, has enabled households to take on
larger loans, especially as mortgage rates have trended down at the same time. In
addition, risk weights on mortgages applied by Swedish banks have so far been among
the lowest in the EU and may not reflect the real risks related to high household
indebtedness. To prevent a continued
increase in household indebtedness, amortisation requirements could be
envisaged for new mortgage loans. Moreover, prudent lending could be fostered
by increasing the risk weights for mortgages. On both strands, the authorities
are already taking some steps. The Financial Supervisory Authority has launched
a public consultation on a possible introduction of a risk weight floor of 15%
for mortgages. The Association of Swedish Bankers also put in place a recommendation
on amortisations in December 2010, which many banks claim to follow. Discussions
are also continuing between the FSA and the Riksbank on this topic. Corporate taxation: As described in the analysis above, corporate taxation has been a
decisive contributing factor behind increasing corporate indebtedness in
Sweden. The combination of a generous tax deductibility of interest payments
and a relatively high corporate income tax in Sweden has inspired advanced tax
planning by multinational companies and foreign owners of Swedish companies.
This has led to an escalation of corporate debt, in particular in the form of inter-company
loans from abroad. Even for local companies, the tax deductibility has made it
more beneficial to finance their investments with debt rather than equity.
Although intra-group loans clearly involve lower risks than other types of
debt, this form of debt should not be fully ignored since some risks may remain
with respect to the overall debt-asset position of the multinational groups, as
well as with respect to maturity and currency composition of this cross-border
lending. Also, the tax planning entails non-negligible amounts of foregone tax
revenues for the state budget. Within the 2013 budget,
the government has introduced several reforms to company taxation which address
these issues. Firstly, the corporate income tax has been lowered from 26.3 to
22%. Secondly, new legislation on the tax deductibility of interest payments
entered into force to curtail the aggressive tax minimisation practices by
multinational companies. These steps go in the right direction, but it remains
to be seen what effect they will eventually have on the level of corporate
debt. Also, further ways to reduce the debt-bias in company taxation could be
considered, such as a generally applicable cap on the tax relief for interest
payments. It would not only bring benefits in lowering corporate indebtedness,
but also higher tax receipts. Concerning the
challenges in the housing market, a number of different avenues can be
considered: The Commission's
analysis shows that inefficiencies still weigh on the Swedish housing market.
These are likely to have significant effects on the economy as a whole since
they contribute to a) long-term underproduction of dwellings; b) higher prices
of tenant-owned apartments and one-dwelling-building due to lack of available
rental units. The latter subsequently spills over into a risk for higher
household indebtedness. Therefore, even though some measures have been
undertaken recently, further policy actions could be envisaged to improve
housing supply as well as market efficiency. Rental market: The analysis shows that rent regulation tends to impede a rational
development of the housing stock and to keep house prices at an elevated level.
The functioning of the rental market might be enhanced in the long term by moving
further towards market-clearing rents. The characteristics of the rent-setting
system have limited rents' response to market signals over several decades. Rents
are set according to the utility value system, which does not fully allow for
dispersion in rent levels between metropolitan city centres and suburbs. For
urban areas, this has led to landlords not being able to charge tenants market-clearing
rents in central city locations as compared to suburban areas, although the
size of the investment differs substantially, thereby discouraging investments
in rental housing. The insufficient supply on the rental market creates an
emphasised pressure on dwellings of other types of tenure, most notably on
tenant-owned apartments (which are the closest substitute in urban areas) the
prices of which escalate as has been showcased in Sweden over the last fifteen
years. It also creates an undesired indebtedness and risk exposure for
individuals who are in a sense forced to own although they would actually
rather rent if the opportunity were available. Restrictions on private letting
of tenant-owned apartments have until now further contributed to a suboptimal
supply of housing services. Most municipalities located in urban areas face a
shortage of available rentals and administer queuing systems for allotting
tenancies. The government has
already taken some measures to reduce the negative effects of rent regulation,
e.g. by a partial reform to the rent setting system in 2011 and by a simplification
of private lettings. With a view to increasing the flexibility of the housing
market and limiting upward price pressures, further easing steps in the
direction of market-clearing rents might be taken to allow market forces to
establish an optimal supply of rental housing at an adequate price. Possible
avenues to explore in this context could be to open up for allowing rents of
newly produced rental units to reflect tenants' willingness to pay as a first
step. As a second step, rent levels of the remaining stock of rentals could be
gradually adapted (cf. the Finnish experiences of deregulating the private
rental market in the 1990s). It might also be worthwhile to explore how the
role of individual tenants in rent negotiations might be strengthened, and to
allow for an increased freedom of contract. Housing supply: The analysis also highlighted some restrictions and rigidities in
the construction sector that tend to hold back construction activity, create an
upward-bias in house prices and at the same time affect growth negatively by
limiting mobility of workers and households in general. These institutional
features include lengthy and intransparent zoning and planning processes and an
uneven application of rules for the issuance of building permits by municipalities
that in practice have a local planning monopoly. Low predictability of
potential returns from construction investments has a clear discouraging effect
for potential investors. Cumbersome and intransparent rules create high entry
barriers for new entrants, especially for small or foreign companies. The
Swedish construction sector has traditionally been dominated by large national
companies with sufficient financial and human resources to face the challenges,
a situation which has limited the competition in the sector. In this context, a
streamlining of the planning and zoning processes could be considered. In
particular, these processes could be rendered more efficient by limiting the
appeal procedures and clarifying the cost responsibilities. Also,
municipalities could avoid insisting on specific technical requirements going
beyond the common set of rules. A more regional view when evaluating municipal
housing needs, and increased cooperation between neighbouring municipalities in
planning the necessary infrastructure could also be a way forward. Within
public procurement, splitting tenders into smaller lots with shorter call
periods and more specific requirements in the call for tenders would also
favour more competition and the involvement of SMEs and foreign companies in
the market. Some initiatives along these lines have been already introduced by
the Swedish authorities and others are under consideration. It could also be evaluated
whether giving municipalities clearer incentives (for example through the
introduction of fees in case of delays, allowing counterparts to appeal in case
of turned down building permit demands etc.) to process planning and zoning
requests more efficiently might alleviate the administrative burden for the
construction companies and at the same time shorten the time required to
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much finance?, IMF Working Paper No. 161, 2012. Cecchetti, S., Mohanti, M.S. and Zampolli, F., The
real effects of debt, BIS Working Paper No.352, 2011. Confederation of Swedish Enterprise, Släpp
strypgreppet kring nya bostäder – förutsättning för jobb och tillväxt, December
2012. County Administrative Board of Stockholm
(Länsstyrelsen i Stockholms län), Läget i länet: Bostadsmarknaden i
Stockholms län 2012, Rapport 2012:16, 2012. County Administrative Board of Stockholm
(Länsstyrelsen i Stockholms län), Bostäder i andra hand – en översikt,
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Andre, Ch., Recent house price developments: the role of fundamentals,
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i praktiken – är PBL i takt med tiden?, Royal Institute of Technology (KTH
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skulle hyresmarknaden i Stockholm påverkas av friare hyressättning?,
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de rikaste, November 2012. SKOP, Hushållens förväntningar om
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bostadsrätter under 2012, (http://www.maklarstatistik.se/media/13408/f%c3%b6rdjupad_statistik_201302.pdf),
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bostadsrätter fortsätter stiga, 14 February 2013 (b). Sveriges Riksbank, Finansiell stabilitet
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opinion Dnr 562/2012, 18 January 2013. Swedish Construction Federation (Sveriges
Byggindustrier), Byggkonjunkturen Nr 4, 12 December 2012. Swedish Enforcement Authority, Obetalda
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Planning (Boverket), Bostadsbristen ur ett marknadsperspektiv, Rapport
2012:18, 2012(b). Swedish National Board of Housing, Building and
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och bostadsmarknaden med byggprognos, November 2012 (c). Swedish National Board of Housing, Building and
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(e)). Swedish National Board of Housing, Building and
Planning (Boverket), Choices on the Housing Market, Market report, May
2012 (f)). Swedish National Board of Housing, Building and
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avskaffad uppskovsrätt – bilaga 1, Promemoria, Annex to Dnr
131-203632-12/1152, 17 December 2012. World Bank, Doing Business report, 2013. World Economic Forum, Global Competitiveness
Report, 2012-13. [1] If measured
by market value, Swedish NIIP would be positive (5.7% of GDP in 2011). [2] European Commission, Current Account Surpluses in the EU (2012). [3] Foreign assets are mainly denominated in
foreign currencies (88% in mid-2012), whereas the majority (58% in mid-2012) of
foreign liabilities is denominated in the national currency. [4] Other business services comprise mainly merchanting
and other trade-related services, operational leasing services and
miscellaneous business, professional and technical services [5] http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Gross_domestic_expenditure_on_R%26D,_2000-2010_(%25_share_of_GDP).png&filetimestamp=20121016060906
and http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Gross_domestic_expenditure_on_R%26D_by_sector,_2005_and_2010_(%25_share_of_GDP).png&filetimestamp=20121016060835 [6] It is
necessary for banks to hold a certain amount of Tier 1 capital on their balance
sheets for all loans they issue. The risk profile of the loans determines how
much capital has to be set aside. So far, Swedish banks' risk weights for
mortgages have been much lower than those of other European banks (5-10%
compared to 20-25%). (WSJ, 26.11.2012). [7] In order to
identify unsustainable developments in housing markets, affordability
(price-to-income) and dividend (price-to-rent) ratios can be compared to their
long-term averages; the gaps between the actual value of the former and the
corresponding long-term averages provide indicators of the degree of over- or
under-valuation of house prices. Conclusions based on such indicators must be
treated with caution due to the underlying assumptions. Meaningful comparisons
with long-term averages generally require stationary series. However, unit root
tests point to non-stationary affordability and dividend ratios in many
countries. [8] European Commission, 2012(c). [9] In view of the characteristics of the Swedish rental market, which
includes rent setting based on the so called utility-value-system (described in
section 3.1.3), the value added of analysing price-to-rent ratios might be
discussed. [10] The fundamental ratio takes into account structural changes, such
as the development in user cost of home ownership. User cost reflects changes
in mortgage rates, housing taxation, depreciation and expected capital
gains/losses. For further details on the approach, see Girouard, Kennedy, van den
Noord and André (2006). [11] This should be seen against a population of roughly 9.5 million. [12] Tenant-owned
apartments ("bostadsrätter") are apartments owned by an association,
in which the respective residents own a share giving them the right to reside
in a particular apartment. This means that you do not in theory own a
particular apartment and decisions regarding more substantial renovations and
sub-letting of particular apartments (as well as decisions about major
renovations affecting the collective parts of the property such as main ducts,
stairways, entrance hall, garden etc) have to be taken at collective level. [13]
Owner-occupied apartments constitute a new form of tenure in Sweden, having
been introduced in May 2009 and so far being applicable only to newly
constructed buildings. While tenant-owned apartments are actually not the
property of the resident-buyer (please see above), owner-occupied dwellings
represent a three-dimensional property. The new form of tenure has not yet
succeeded in attracting the full attention of investors, but to widen the
accessibility the government has commissioned a public inquiry which is to look
into the possibility of opening up the market for conversion from rental units
to owner-occupied ones. The inquiry is to be finalised in spring 2014. [14]
The
conversions have often taken place on very beneficial terms for the tenants
that accept them, as the market value of the newly created tenant-owner's
apartments usually by far exceeds the initial investment required. [15] http://www.affarsvarlden.se/hem/bostad/article3618032.ece [16] http://www.di.se/#!/artiklar/2012/12/21/makropanelen-kallare-bostadsmarknad-2013/ [17] The repo rate was left unchanged by the Executive Board in February
2013. [18] The growth of debt is linked to the estimated rate of return on
investment. As housing is immobile, housing investments are normally discounted
using the relevant rate of inflation. Borrowers deflate nominal interest rates
with national price indices. When interest rates drop and housing prices rise
as has been the case in Sweden, the real cost of borrowing decreases, hence
making it reasonable for households to take on more debt and hence spur further
price increases. [19] Since many years, almost the entire population growth in Sweden,
amounting to roughly 70,000 persons per year, takes place in metropolitan areas
and university cities. Metropolitan Stockholm accounts for roughly half of the
population growth of the entire country (Swedish National Board of Housing,
Building and Planning, 2012). [20] General elections are planned for 14 September 2014. [21] The Swedish Association of Public Housing Companies has recently
taken an interesting initiative to spur the construction of new rental units at
competitive prices. By launching a call for tenders for a framework contract
giving their member companies the chance to construct new rental dwellings with
an upper price ceiling, the traditional market players have been challenged to
come up with innovative solutions. With the prospect of being able to replicate
identical buildings in numerous municipalities across the country, construction
companies may rely on economies of scale to ensure a satisfactory level of
profitability, although each new building offers rental housing at prices
approximately 25% below the average of other newly constructed rentals. The
first such building was inaugurated in January 2013 and several other projects
are under way. [22] No data for
2010 on rent of newly built apartments. [23] According to Swedish law, tenants having a direct lease are
entitled to continue to rent the apartment for as long as the rent is paid and
neighbours are not disturbed, etc. This is known as ‘security of tenure’. [24] Deregulation of the rental market in the Czech Republic which took
place in 1992-2013 led in its second stage to an equalisation of market and
regulated rents, with the former decreasing by about 15% in large cities. [25] A very limited surcharge has been allowed for instance in cases of
furnished apartments etc. [26] This development was also described in the 2012 In-depth review for
Sweden (European Commission, 2012(c)). [27] As mentioned earlier on, the Exectuive Board decided to hold the
repo rate unchanged in February 2013, although two Deputy Governors entered
reservations against the decision, arguing for further cuts. [28] In particular, the Governor Stefan Ingves has warned against
further built-up of mortgage debt in a situation of extremely low interest
rates. On the other hand, Deputy Governor Lars E O Svensson argued that
monetary policy has little effect on household debt in the short run and (with
low and stable inflation) no effect in the long run. Hence, an expansionary
monetary policy would not tangibly increase the risks from household debt (see
minutes of the Executive Board's meetings at http://www.riksbank.se/en/Press-and-published/Minutes-of-the-Executive-Boards-monetary-policy-meetings/).
[29] For the concept of notional leverage, see Cuerpo Drumond, Lendvai,
Pontuch and Raciborski (2013). [30] http://www.swedishbankers.se/web/bfmm.nsf/lupGraphics/PM%20Principer%20för%20bolån%20slutlig.pdf/$file/PM%20Principer%20för%20bolån%20slutlig.pdf [31] In January 2013, the Governor of the Riksbank Stefan Ingves stated
that it would be preferable if banks could take care of this issue via
self-regulation but that unless banks are willing to take their
responsibilities, legal measures should be foreseen. The Ministry of Finance
reacted by refuting this proposal while at the same time confirming the
government's intention to come up with proposals strengthening the willingness
of households to amortise in spring 2013 (http://www.dn.se/ekonomi/regeringen-inget-lagkrav-pa-amortering) [32] SEB, Svenska Handelsbanken, Nordea and Swedbank. [33]
http://www.dn.se/ekonomi/fyra-av-fem-banker-sagar-ingves-forslag [34] The property
tax was lowered from 1.2% of the cadastral value (the cadastral
value amounts to 75% of the market value) to the lower of either 0.75% of the
cadastral value or 6512 SEK (or roughly 700 EUR, a very low ceiling that would
apply to the vast majority of houses), which drastically reduced the taxation
of housing. [35] A minor reduction of the tax on apartment buildings tends to
indirectly increase the debt bias for tenant-owned apartments, as the tax
balancing the interest deduction is reduced. [36] http://sverigesradio.se/sida/artikel.aspx?programid=83&artikel=5384141
and http://www.regeringen.se/content/1/c6/20/72/49/895b99ad.pdf. [37] Approved by the Finnish Parliament in the first reading on 7
February 2013: http://web.eduskunta.fi/Resource.phx/pubman/templates/22.htx?id=5519. [38] http://www.regeringen.se/sb/d/17003/a/208537 [39] Consolidated
data are more appropriate in the Swedish case due to a wide use of intra-group
lending and also due to statistical issues (a statistical revision in 2004 and
implausible data for inter-company lending within Sweden since 2006). [40] For the concept of notional leverage, see Cuerpo, Drumond, Lendvai,
Pontuch and Raciborski (2013). [41] Volatile assets include financial derivatives, shares and other
accounts receivable/payable (notably trade credits). [42] Since debts are incurred by Swedish affiliates of multinational
groups to be reallocated within the group, the operating surplus of the entire
group would be more appropriate as a benchmark. The indicator thus provides a
biased picture of Swedish corporate sector's indebtedness. [43] The composite indicator points at certain risks of deleveraging
pressures stemming from the part of capacity to repay, but the pertinence of
this indicator is questionable due to the impact of the inter-company loans. [44] However, given a statistical revision in
2004, consolidated data should rather be used to assess the debt dynamics.
These point at a larger accumulation of debt by 41 pps, which is still lower
than in other countries. [45] Cecchetti et al.(2011) estimates that
corporate debt above 90% of GDP is detrimental to growth. [46] Arcand et al. (2012) conclude that the
marginal effect of financial depth on output becomes negative if credit to the
private sector reaches 100% of GDP. [47] Indeed, data show that the average interest rate paid by
foreign-owned subsidiaries in Sweden on their loans from their foreign owners
is one percentage point above the average interest rate paid on loans from
Swedish subsidiaries to foreign parents. Interest payments from Sweden are
also systematically higher than interest payments flowing to Sweden from
abroad. Economic commentary, Riksbank, 2012/3. [48] According to Swedish Tax Agency, Most FDI has originated from
Luxembourg (low corporate taxes) and Belgium (where taxation can be minimised
through using the "notional interest deduction"). [49] However, as was the case before, interest payments are tax
deductible if a) the creditor is taxed on the interest at a rate of at least
10% should the interest income be the only income for the creditor (10% tax
test), or b) the debt has been undertaken for "sound commercial
reasons". [50] QUEST is a new-Keynesian dynamic stochastic general equilibrium
model developed by the European Commission (see http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm) [51] The original entry into force of the new requirements was planned
for January 2013 but has been delayed due to negotiations at EU level about the
final shape of the Capital Requirements Directive IV. 53 See the Business Tendency Survey by
the National Institute of Economic Research. [53] For more details on the social effects of property taxation see
Chapter "Taxation in the context of the Europe 2020 strategy on employment
and poverty" in European Commission 2012 (b).