Mar 27, 2023
What Broke Sweden? Real Estate Bust Exposes Big Divide
(Bloomberg) -- A half-finished bridge designed to connect two Stockholm neighborhoods has come to epitomize the seismic change Sweden is going through. On one side, an affluent neighborhood that's part of one of Stockholm's oldest suburbs, on the other, an enclave of 1970s-era public housing blocks with a dense population of migrants and a reputation as a trouble spot.
The two suburbs — Ursvik and Rinkeby on the outskirts of the Swedish capital — are physically separated by a four-lane highway. Yet the divisions are much wider than that in a country built on egalitarian ideals, but which now finds itself in the grip of an economic and social crisis. Some local politicians complain that the bridge, originally planned for public transport but now used as a pedestrian crossing for the residents from Rinkeby to visit shops on the other side, is damaging their property prices and that it could cause criminality to spread.
Several want it pulled down.
It is a reminder that while Sweden sits between France and Switzerland in a ranking of dollar billionaires, many poorer Swedes have seen the gap between the haves and the have-nots widen dramatically in recent times. The economy has been buffeted by rising inflation over the past 12 months, interest rate hikes and a slumping currency. The fallout has triggered Europe’s worst house price collapse and a drop in household consumption. Even with the upheavals from the Ukraine war denting other European nations, Sweden is the only economy in the region projected to contract in 2023.
At the heart of Sweden’s woes is a dysfunctional housing market, which has not only cemented social divides, but exacerbated them.
The country’s property boom — which saw prices increase by almost 250% in the past 20 years — was fueled by razor-thin borrowing costs and a shortage of rental properties. This lack of housing squeezed poorer families into overcrowded accommodation. And pushed others into buying — the total value of mortgages increased 459% in the two decades up to 2022. Before the latest crisis, household debt, including mortgages and consumer debt, had soared to more than 200% of disposable income, according to the OECD’s latest data from 2021. That is double the level in Germany.
Until now these problems had been papered over by cheap money and an ever-growing economy. With both coming to an end the vulnerabilities in the system are being exposed. An over indebted middle class now faces the prospect of not being able to afford to pay their mortgages, much less everyday luxuries.
At the same time the number of corporate bankruptcies soared to the highest level in at least a decade in January as construction companies came under pressure. The rate of home construction is now expected to fall to roughly half of what is needed to keep up with population growth, creating a vicious cycle that sows the seeds for more housing strain in the months and years ahead.
The central bank views real estate lending as the biggest risk in the financial system and has warned about the impact of rising household debt on everything from consumption to bankruptcies and bank losses. It has repeatedly called for housing and tax reforms with former Governor Stefan Ingves criticizing the level of the property tax, which is among the lowest in the world.
K2A Knaust & Andersson Fastigheter AB, a builder and manager of rental apartments, has lost 70% of its market value since the Riksbank started hiking rates last year. It has postponed almost all of its construction starts due to the market uncertainty. “If you're looking at the situation from a societal perspective, it's a huge problem,” Chief Executive Officer Johan Knaust said. “There will be a big vacuum in construction.”
The problems are mounting for the government. Although unemployment has remained relatively stable — telecom-equipment company Ericsson AB and Electrolux AB, the appliance manufacturer, are among those to announce job cuts — the rise in bankruptcies and slowdown in the economy could see that change. Meanwhile Sweden’s biggest pension fund has taken a hit of as much as $2 billion in the fallout from the collapse of Silicon Valley Bank. Even membership of Nato, which seemed set to be fast tracked after Russia invaded Ukraine, has been caught up in geopolitical rows.
“There's a risk that residential construction will slow more than 50% this year,” Nordea Bank economist Susanne Spector said. “This will weigh on GDP and there's a risk that also other construction investments will fall. Some heavily indebted property firms and municipalities will probably delay projects.”
Growing social tension became evident in last year’s election. Amid concerns about gang violence, which has led some to dub Sweden the gun-crime capital of Europe with almost 400 shootings last year, the once fringe Sweden Democrats became the second largest party. The nationalist group now props up Prime Minister Ulf Kristersson’s minority government.
The Rinkeby-Ursvik bridge is scheduled to be completed this year. But a local branch of the Sweden Democrats has already found an alternative use for it, trying to turn it into a political rallying point for its anti-immigrant message. “The bridge from Rinkeby makes it easier for criminals to recruit your children into crime,” the party told local voters during last year’s campaign. “We take your children’s safety seriously. Tear down the bridge!”
Rental black market
Christina Abdulahad remembers vividly the moment her dream, of renting an apartment in a quiet neighborhood of the Swedish capital, turned into a nightmare. The 28-year-old, a graduate of Lund University where she had advised other students about how to avoid fraud in rental housing, did her due diligence before she agreed to take on the new apartment.
But waiting to pick up the keys outside the three-room home she was alarmed to find others turning up to do the same thing. It transpired that Abdulahad, and around nine others, had handed over their deposits to a woman who had stolen the identity of the legal tenant. Abdulahad said she was cheated out of 43,500 Swedish kronor ($4,200), part of an elaborate fraud involving multiple bank accounts that raked in a total of about half a million Swedish krona, estimates Abdulahad, who met with numerous other victims.
“It felt like a nightmare,” said Abdulahad, choking up as she recalled how she dragged her belongings to the new flat in the Swedish capital. “It turned my life upside down.”
Karl-Johan Lantz, the officer leading the investigation into Abdulahad’s case, said the police had identified several more incidents with “the same modus operandi.” He added that they were set to question suspects over “fraud and possibly money laundering” offenses.
Critics argue that such cases are a byproduct of the dysfunction in the property market, one that is getting worse.
"I don't see any improvement for the coming years with the current policies," Alexander Wilson van Deurs, chairman for advocacy group Jagvillhabostad.nu, said. "More people will get hurt."
Sweden has long fallen short on its constitutional pledge to provide an affordable place to live for all of its 10.4 million people, but until recently that was masked by the growing economy which had helped disguise flaws in the system.
The shortage of affordable accommodation is hitting recruitment. The Stockholm Chamber of Commerce reported last year that three out of four heads of human resources said the housing situation was making it harder for their firms to hire new staff.
Rents are negotiated annually by landlords and the tenants association. Advocates say the system helps create a rental market in Stockholm where teachers, police officers, street cleaners and other public sector workers can afford to live alongside bankers, software developers and government officials. Yet supply hasn’t kept up with demand for decades. Average waiting times for a rent-controlled apartment is now 9.2 years, but can stretch up to 20 years in some parts of the capital.
That has sparked a black market in rental leases, which are now very valuable for those who hold them, but out of the reach of many of those who really need them. It has also opened the door to frauds like the one that ensnared Abdulahad.
This can be a lucrative business for those on the inside. They get a nice place for little money and can hold on to it for friends and family, or they can cash in by selling the lease under the table. But for migrants and others without the resources or connections to secure housing, they’re vulnerable and are forced into shady deals for rental apartments. One woman who needed housing for herself and her daughter paid $40,000 for one of these illicit rental leases in a suburb of Stockholm.
“What was I supposed to do,” said the woman, who asked not to be identified, “live under a bridge or queue 15 years for an apartment?”
The black market only works for those who can afford it. “We meet a lot of women who are returning to abusive relationships because they can't find anywhere to live,” said Fanny Hansen, a coordinator at a victim support group in Sodertalje south of Stockholm.
The government tried to clamp down on this illicit trade in 2019 by imposing penalties on buyers of second-hand leases, not just the sellers. Yet the illicit trade is rampant, even if the data is sketchy. One government report from 2017 put the share of re-sold rental contracts at between 10% and 50% of the public housing supply.
"There is an ongoing inquiry on bringing more order in the rental market, and this is an important part of the government's work to fight crime, including organized crime,” said Andreas Carlson, Sweden’s minister of housing and infrastructure. “This is a component in that work."
A few miles northwest of Stockholm is one of the country’s most ambitious projects designed to fill the housing gap. But construction crews have become thin on the ground at Barkarbystaden — a property development with plans to eventually house 30,000 people. Work on a cluster of 200 apartments that were supposed to be finished by early March was slowed, to drip feed their release into the market, in response to the slump. And local officials are delaying granting new building rights because of the economic environment.
Emelie Grind, director of community development at Jarfalla, the municipality redeveloping what was once a military airbase, justified delaying the grants, saying that “things need to settle down” first.
The site, which will be linked to downtown Stockholm by the city’s Tunnelbana mass transit system, is an example of what Sweden wants to be. Surrounded by nature reserves and dotted with parks and public spaces, the new urban center is designed for a mix of families and singles and has been served by electric self-driving buses since 2018.
But, said Martin Hofverberg, chief economist for Sweden’s tenants association, there is a disconnect in the market. “We have a system that is rigged to not build houses. When the economy slows down, construction plummets.”
To revive house building, local leaders want the government to restore investment aid. The initiative, which granted subsidies for constructing rental apartments and student accommodation, was ended by Kristersson’s coalition, which said it was too expensive.
It has also become a political minefield. Allowing landlords to charge more for attractive apartments, which could make more homes available, is unpopular with voters.
Carlson ruled out any new investment support but said the government does need “to broaden ownership so that more people can enter the market."
For Abdulahad, and tens of thousands of others, that will seem like a pipedream “I don’t have any hopes I will get the money back,” she said. “I just want the people stopped. This can’t keep happening over and over.”
--With assistance from Kati Pohjanpalo, Charles Daly, Niclas Rolander and Jonas Ekblom.
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