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
Date: 2013-04-10
Institutions: European Commission
Subjects: Sweden, competitiveness, economic disparity, economic situation, economic survey, indebtedness, macroeconomics, private-sector liquidity, property market

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 124 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 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 114 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 123 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
 
Contents

EXECUTIVE SUMMARY AND CONCLUSIONS ..................................................................................3 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

INTRODUCTION ..............................................................................................................5 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES ........................................5 

Macroeconomic scene setter.........................................................................................5 

Sustainability of external positions...............................................................................6 

Competitiveness and trade performance.......................................................................9 

Private sector indebtedness.........................................................................................13 

Housing market development .....................................................................................17 

IN-DEPTH ANALYSIS OF SELECTED TOPICS....................................................................19 

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 

2 

 
 
 
 
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 
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.  

labour  costs 

in  2012 

in  unit 

•  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 

3 

 
 
 
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. 

4 

 
 
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 

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 
5 

 
 
 
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 

%

9

6

3

0

-3

-6

90 92 94 96 98 00 02 04 06 08 10 12

Real GDP growth

Unemployment rate

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. 

6 

 
 
 
 
 
 
Graph 2. Current account decomposition  

Graph 3. Financial account decomposition 

12

10

8

6

4

2

0

-2

-4

-6

P
D
G

f
o
%

95

97

99

01

03

05

07

09

11

Capital account (KA)
Current transfers
Income balance
  Trade balance - services
  Trade balance - goods
Trade balance
Current account balance (CA)
Net lending/borrowing (CA+KA)

25

20

15

10

5

0

-5

-10

-15

-20

P
D
G

f

o
%

95

97

99

01

03

05

07

09

11

Net errors and omissions
Official reserves (net)
Other investment (net)
Portfolio investment (net)
Direct investment (net)
Current account balance
Net lending/borrowing (CA+KA)

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). 

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. 

7 

 
 
 
 
 
 
 
 
 
  
                                                            
Graph 4. NIIP decomposition  

Graph 5. Net lending and borrowing by sector 

50

0

P
D
G

f
o
%

-50

-100

95

03

01

07

05

11

09

97

99
Net portfolio investment
Changes in reserves (net)
Other investment (net)
Net direct investment
Net financial derivatives
Net external debt (neg. sign)
Net int'l investment position (NIIP)
Marketable debt (portfolio debt instr. and other investment, net)

10

8

6

4

2

0

P
D
G

f
o
%

-2

-4

99 00 01 02 03 04 05 06 07 08 09 10 11

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

Source: Commission services (Eurostat) 

Source: Commission services (Eurostat) 

Graph 6.  Valuation effects  

Graph 7. Decomposition of valuation effects 

cumulative CA

NIIP, nominal
value

VALUATION  
EFFECTS

P
D
G

f
o
%

30,0

20,0

10,0

0,0

-10,0

-20,0

-30,0

-40,0

% of GDP

40

20

0

-20

-40

99

97

01
Source: Commission services (Eurostat) 

03

05

07

09

11

2000

2002

2004

2006

2008

2010

2012*

Dir inv, assets

Dir inv, liab

Portfolio inv, assets

Portfolio inv, liab

Other inv, assets

Other inv, liab

Fin derivatives (net)

Reserves (net)

Total net

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 
8 

 
 
 
 
 
 
 
 
 
 
 
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%).  

9 

 
 
 
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  

30

20

10

0

-10

-20

-30

-40

)

%

(

y
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c

f
o
e
t
a
R

96

98

00

02

04

06

08

10

Denominator: World Export growth (neg. sign)
Numerator: Export growth
EMS growth rate

40

35

30

25

20

15

10

5

0

IE GR FI PT BE DK AT SE FR ES NL DE IT

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. 

10 

 
 
 
 
 
 
 
 
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 (%)  

2

1,8

1,6

1,4

1,2

1

0,8

0,6

0,4

0,2

0

Total goods

Intermediate goods

Fuel

Consumer goods

Capital goods

Goods

Services

-4,0

-2,0

0,0

2,0

4,0

6,0

Balance of  trade in goods, % GDP

01 02 03 04 05 06 07 08 09 10 11 12

2000-2001

2010-2011

Source:  UN COMTRADE data 

Source: Eurostat COMEXT, Commission services calculations 

4  Other  business  services  comprise  mainly  merchanting  and  other  trade-related  services,  operational  leasing 
services and miscellaneous business, professional and technical services 

11 

 
 
 
 
 
 
 
                                                            
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 

12 

 
 
 
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  

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

8

6

4

2

0

-2

-4

-6

98

00

02

04

06

08

10

12

14

Inflation (GDP deflator growth)
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in Euro Area

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

10

8

6

4

2

0

-2

-4

-6

-8

-10

98

00

02

04

06

08

10

12

14

NEER
REER (HICP)

relative HICP (-)
REER (ULC)

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. 

5 
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Gross_domestic_expenditure_on_R%2
and 
6D,_2000-2010_(%25_share_of_GDP).png&filetimestamp=20121016060906 
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Gross_domestic_expenditure_on_R%2
6D_by_sector,_2005_and_2010_(%25_share_of_GDP).png&filetimestamp=20121016060835 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 14. Decomposition of debt (% of GDP), 
consolidated data 

Graph 15. Credit developments (% of GDP) 

P
D
G

f
o
%

500

450

400

350

300

250

200

150

100

50

0

P
D
G

f

o
%

50

40

30

20

10

0

-10

-20

95

97

99

01

03

05

07

09

11

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

95

97

99

01

03

05

07

09

11

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

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.  

14 

 
 
 
 
 
 
 
 
 
 
 
   
Graph 16. Leverage ratios, Non-financial 
corporations 
180

s
t
e
s
s
a

)

%

(

l

a
t
o
t
d
n
a
P
D
G

,
y
t
i
u
q
e
o
t

t
b
e
d

f
o
s
o
i
t
a
R

160

140

120

100

80

60

40

20

0

95

97

99

01

03

05

07

09

11

Debt / GDP

Debt / assets

Debt / equity

Debt / assets, consolidated

Graph 17. MFI lending to households (% of GDP)  

P
D
G

f
o
%

70

60

50

40

30

20

10

0

99 00 01 02 03 04 05 06 07 08 09 10 11

Loans for house purchase
Loans for consumption
Loans for housing, EA
Loans for consumption, EA

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. 

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 
15 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
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. 

weights for mortgages have been much lower than those of other European banks (5-10% compared to 20-25%). 
(WSJ, 26.11.2012).  

16 

 
 
 
 
                                                                                                                                                                                         
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   

300

250

200

150

100

50

0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Sweden

Denmark

Finland

Change from trough to peak (%)

DE

0

FI

LU

BE

50

100

IT

SE

200

150

FR

250

300

350

AT

PT

CZ
EL

SI

MT

SK

PL

HU

ES

NL
UK

DK

BG

EE

IE

RO

LV

Previous 
trough

)

%

(

a
t
a
d
t
s
e
t
a

l

o
t

k
a
e
p
m
o
r
f

e
g
n
a
h
C

10

0

-10

-20

-30

-40

-50

-60

-70

-80

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 

17 

 
 
 
 
 
 
 
 
 
 
 
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. 

18 

 
 
 
 
  
3. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS  

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  

40

30

20

10

0

-10

-20

-30

-40

40

30

20

10

0

-10

-20

-30

-40

0
0
Q
3

0
1
Q
3

0
2
Q
3

0
3
Q
3

0
4
Q
3

0
5
Q
3

0
6
Q
3

0
7
Q
3

0
8
Q
3

0
9
Q
3

1
0
Q
3

1
1
Q
3

1
2
Q
3

MFI loans for house purchase, yoy change (rhs)

Residential Investment, yoy change (nominal terms) (lhs)

Relative HPI yoy change (HH&NPISH final consumption expenditure deflated) (lhs)

Nominal House Price Index yoy change (lhs)

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 

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 
19 

 
 
 
 
 
 
 
                                                            
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 

140

130

120

110

100

90

80

70

overvaluation

93

95

97

99

01

03

05

07

09

11

price to GDP per capita

price to earnings

price to disposable income per capita

Source: Ecowin, Sweden Statistics 

The price-to-rent ratio9 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.  

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).    

20 

 
 
 
 
 
 
                                                                                                                                                                                         
Graph 22: Price-to-rent ratios (actual vs. fundamental) 

… for mortgages with a five-year maturity 

… for mortgages with an average maturity 

175

150

125

100

75

50

Fundamental

Actual

overvaluation

Fundamental

Actual

overvaluation

175

150

125

100

75

50

86 88 90 92 94 96 98 00 02 04 06 08 10 12

96

98

00

02

04

06

08

10

12

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. 

21 

 
 
 
 
 
 
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-owned12  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 
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)).  

in  Stockholm  which  has  seen 

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.

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. 

22 

 
 
                                                            
Graph  23:  Changes  in  stock  of  tenant-owned  and  rented  dwellings  1990-2011.  Sweden.  Index: 
1990=100 

160

150

140

130

120

110

100

90

92

94

96

98

00

02

04

06

08

10

Rented dwellings

Tenant-owned dwellings

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). 

15 http://www.affarsvarlden.se/hem/bostad/article3618032.ece 

23 

 
 
 
 
 
 
                                                            
Graph 24: Price development of Swedish tenant-owned apartments and one-
dwelling-buildings 2000-2012. Index: 2000=100. 

300

250

200

150

100

50

0

2000

2002

2004

2006

2008

2010

2012

Tenant-owned apartments

One-dwelling-buildings

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)). 

16 http://www.di.se/#!/artiklar/2012/12/21/makropanelen-kallare-bostadsmarknad-2013/ 

24 

 
 
 
 
                                                            
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  Riksbank17,  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 lower18. 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 colleges19. 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). 

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). 

25 

 
 
                                                            
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 

0
0
1
=
5
0
0
2

160

140

120

100

80

60

40

20

0

95

97

99

01

03

05

07

09

11

Building Permits (2005=100)

Residential Investment (% of GDP, right axis)

Source: Commission services (Eurostat) 

P
D
G

f
o
%

5

4

4

3

3

2

2

1

1

0

26 

 
 
 
 
 
 
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.  

27 

 
 
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 
increasing 
limiting  appeal  procedures,  clarifying  cost  responsibilities  and 
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 

28 

 
 
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  procurement21,  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. 

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. 

29 

 
 
 
                                                            
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 

1%

51%

48%

Rental units owned by the state, the counties and directly by municipalities

Municipal housing companies

Private landlords

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.  

30 

 
 
 
 
Graph 27: Development of rents in Sweden 2000-2011 

Yearly rent 
SEK/sq m

1500

1400

1300

1200

1100

1000

900

800

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rent of newly built apartments
Rent of apartments in the remaining stock
Hypothetical rent development in line with CPI

Source: Statistics Sweden22 

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 

22 No data for 2010 on rent of newly built apartments. 

31 

 
 
 
 
                                                            
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  

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.   

32 

 
 
                                                            
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 

25 A very limited surcharge has been allowed for instance in cases of furnished apartments etc. 

33 

 
 
 
                                                            
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  

1990

2010

%

70

60

50

40

30

20

10

0

Rental dwellings

Tenant-owned
apartments

One-dwelling-buildings

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 

34 

 
 
 
 
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) 

35 

 
 
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. 

26  This  development  was  also  described  in  the  2012  In-depth  review  for  Sweden  (European  Commission, 
2012(c)). 

36 

 
 
 
 
 
                                                            
Graph 29. Households' liabilities 

Graph 30. Households' mortgage credit growth, 
annual % change  

s
t

e
s
s
a

d
n
a
P
D
G

f

o
%

90

80

70

60

50

40

30

20

10

0

I

D
G
%

180

160

140

120

100

80

60

40

20

0

95

97

99

01

03

05

07

09

11

Debt / GDP, Households
Debt / fin. assets, Households
Debt / gross disposable income, Households (right axis)

%

14

12

10

8

6

4

2

0

02

03

04

05

06

07

08

09

10

11

12

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  

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 
37 

 
 
 
 
 
 
 
 
 
                                                            
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).  

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/).  

38 

 
 
 
                                                                                                                                                                                         
Graph 31: Households' wealth and debts as % of disposable income 

% of disposable 
income 

700

600

500

400

300

200

100

0

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Total wealth

Real wealth

Liquid wealth

Debts

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 

%

60

50

40

30

20

10

0

%
60

50

40

30

20

10

0

95

97

99

01

03

05

07

09

11

95

97

99

01

03

05

07

09

11

SE debt-to-assets

SE debt-to-deflated assets

FI debt-to-assets
FI debt-to-deflated assets
DK debt-to-assets
DK debt-to-deflated assets

Source: Commission services (Eurostat, own calculations) 

29 For the concept of notional leverage, see Cuerpo Drumond, Lendvai, Pontuch and Raciborski (2013).  

39 

 
 
 
 
  
 
 
                                                            
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 

% of disposable 
income 

700

600

500

400

300

200

100

0

Stockholm

Malmö

Göteborg

Other
municipalities

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 

40 

 
 
 
 
 
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 
level30 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 

30 
http://www.swedishbankers.se/web/bfmm.nsf/lupGraphics/PM%20Principer%20för%20bolån%20slutlig.pdf/$fi
le/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 

41 

 
 
                                                            
the  drastic  reduction  of  the  property  tax  that  took  place  in  200834,  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 

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. 

42 

 
 
                                                            
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  procedures37.  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    

by 

37  Approved 
the  Finnish  Parliament 
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).  

7  February 

reading 

2013: 

first 

the 

on 

in 

43 

 
 
 
                                                            
Graph 34. Corporate debt as % of GDP: consolidated and super-consolidated view 

% of GDP

180

160

140

120

100

80

60

40

20

0

intra-sector lending within Sweden

intra-company from abroad

debt excl. intra-company loans from abroad

95

97

99

01

03

05

07

09

11

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 

44 

 
 
 
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   

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(

160

140

120

100

80

60

40

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95

97

99

01

03

05

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11

Debt / GDP

Debt / assets

Debt / equity

Debt / assets, consolidated

s
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160

140

120

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95

97

99

01

03

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11

Debt / GDP

Debt / assets

Debt / equity

Debt / assets, consolidated

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 assets41 (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. 

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).  

45 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 37. Debt-to-assets ratio – standard vs. notional leverage 

%
80

75

70

65

60

55

50

45

40

95

97

99

01

03

05

07

09

11

SE debt-to-assets

SE debt-to-deflated assets

EA debt-to-assets

EA debt-to-deflated assets

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  

1000

900

800

700

600

%

500

400

300

200

100

0

95

97

99

01

03

05

07

09

11

Debt / gross operating surplus SE

Debt-to-gross operating surplus EA

25

20

15

%

10

5

0

95

97

99

01

03

05

07

09

11

Interest payments / value added SE

Interest payments / value added EA

Source: Commission services (Eurostat) 

Source: Commission services (Eurostat), ECB 

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.  
46 

 
 
 
 
                                                            
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 %)  

3

%

2,5

2

1,5

1

0,5

0

85 87 89 91 93 95 97 99 01 03 05 07 09 11

Source: Sveriges Riksbank 

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 

 
 
 
   
                                                            
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 

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").  

48 

 
 
 
                                                            
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 

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".   

49 

 
 
    
                                                            
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  model50  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, 

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) 

50 

 
 
 
 
                                                            
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 sufficient52, 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 

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.  

51 

 
 
 
                                                            
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%. 

52 

 
 
 
  
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 

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).  

53 

 
 
 
 
 
                                                            
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 

54 

 
 
 
 
 
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. 

55 

 
 
 
 
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 construct.  

56 

 
 
    
 
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