Macroeconomic imbalances, Sweden 2013.
Date: 2013-08-21
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Sweden, debt, economic forecasting, economic indicator, housing, macroeconomics, ownership, public finance

ISSN 1725-3209

EUROPEAN 
ECONOMY

Occasional Papers 141 | April 2013

                        Macroeconomic Imbalances 
Sweden 2013

Economic and 
Financial Aﬀ airs

Occasional Papers are written by the Staff of the Directorate-General for Economic and 
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intended to increase awareness of the technical work being done by the staff and cover a 
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Reproduction is authorised provided the source is acknowledged. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Macroeconomic Imbalances 

Sweden 2013 

EUROPEAN ECONOMY 

Occasional Papers 141 

 
 
 
 
 
 
 
 
 
 
 
 
 
ACKNOWLEDGEMENTS 

This  report  was  prepared  in  the  Directorate  General  for  Economic  and  Financial  Affairs  under  the 
direction of Servaas Deroose, deputy director-general, Matthias Mors and Anne Bucher, directors. 

The  main  contributors  were  Matthias  Mors,  Christian  Weise,  Hanna  Aspegren  and  Pavlína  Žáková. 
Statistical assistance was provided by Adja Awa Sissoko.  

Comments on the report would be gratefully received and should be sent, by mail or e-mail to: 

Christian Weise 
European Commission, 
Unit G2 
B-1049 Brussels. 
e-mail: Christian.Weise@ec.europa.eu 

The cut-off date for this report was 1 March 2013. 

ii 

 
 
 
 
Results  of  in-depth  reviews  under  Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic imbalances 

SWEDEN  is  experiencing  macroeconomic  imbalances,  which  deserve  monitoring  and  policy  action.  In 
particular, macroeconomic developments regarding private sector debt and deleveraging, coupled with remaining 
inefficiencies in the housing market deserve continued attention. Although the large current account surplus does 
not raise risks similar to large deficits in other countries, the Commission will continue to monitor developments 
of the current account in Sweden. 

Some deleveraging has taken place in the non-financial corporate sector. Recent reforms in company taxation are 
likely  to  further  reduce  the  level  of  corporate  debt  by  limiting  tax  minimisation  by  multinational  companies. 
Household debt has stabilised but the main contributing factors – the debt-bias in housing taxation and the slow 
mortgage amortisation pace – remain in place. Low interest rates on mortgages also contribute to debt build-up. 
On the other hand, various indicators of household leverage as well as credit supply and demand conditions do 
not  indicate  imminent  deleveraging  pressures.  The  housing  market  has  been  stable  over  the  last  year  and 
concerns  about  a  possible  overvaluation  have  subsided.  Yet,  the  housing  market  remains  a  potential  source  of 
instability  for  the  future.  Despite  some  recent  measures,  housing  supply  remains  constrained  by  cumbersome 
planning processes, limited competition within the construction sector and regulation of rental markets. Together 
with  debt-bias  housing  taxation,  these  inefficiencies  tend  to  create  an  upward-bias  in  house  prices  and  in 
household indebtedness. 

Excerpt of country-specific findings on Sweden, COM(2013) 199 final, 10.4.2013. 

3 

 
 
 
 
 
 
Executive Summary and Conclusions 

1. 

Introduction 

2.  Macroeconomic Situation and Potential Imbalances 

2.1.  Macroeconomic scene setter 
2.2. 
Sustainability of external positions 
2.3.  Competitiveness and trade performance 
2.4.  Private sector indebtedness 
2.5.  Housing market development 

3. 

In-Depth Analysis of Selected Topics 

3.1.  Housing market and household sector indebtedness 

3.1.1.  Swedish housing market overview 
3.1.2.  Challenges linked to the construction sector 
3.1.3.  A squeezed residential rental market 
3.1.4.  Household indebtedness 

3.2. 

3.3. 

Indebtedness of the non-financial corporate sector 
3.2.1.  Recent developments in non-financial corporate debt 
3.2.2.  Factors behind Swedish corporate indebtedness 

Linkages from private debt to the real economy, the financial sector and public finances 
3.3.1.  Risks for the real economy 
3.3.2.  Risks for the financial sector 
3.3.3.  Risks for public finances 

4. 

Policy Challenges 

References 

LIST OF GRAPHS 

2.1.  Real GDP growth and unemployment 
2.2a.  Current account decomposition 
2.2b.  Financial account decomposition 
2.3a.  NIIP decomposition 
2.3b.  Net lending and borrowing by sector 
2.4a.  Valuation effects 
2.4b.  Decomposition of valuation effects 

9 

11 

13 

13 
13 
16 
20 
22 

25 

25 
27 
30 
33 
38 
44 
44 
47 
48 
48 
49 
50 

53 

56 

13 
14 
14 
15 
15 
15 
15 

5 

 
 
 
2.5.  Export market share growth (% y-o-y) 
2.7.  Export similarity index: China vs. EU countries - Partner: World 
2.6a.  Evolution of exports market shares in goods and services (in % of world share) 
2.6b.  Contribution to overall trade balance for goods by Broad Economic Categories (%) 
2.8a.  Decomposition of ULC developments 
2.8b.  Decomposition of REER develoments 
2.9a.  Decomposition of debtby sector 
2.9b.  Credit developments 
2.10a. Leverage ratios, Non-financial corporations 
2.10b. MFI lending to households 
2.11a. Deflated house prices in the Nordic region, 1995Q1=100 
2.11b. House price cycle 
3.1.  Evolution of House Price Index and MFI Loans for House Purchase 
3.2.  Housing affordability indices 

3.3.  Price-to-rent ratios (actual vs fundamental) 
3.4.  Changes in stock of tenant-owned and rented dwellings 1990-2011; 1999=100 
3.5.  Price development of Swedish tenant-owned apartments and one-dwelling-buildings 2000-

2012; 2000=100 

3.6.  Residential Investment and Building Permits 
3.7.  Rental apartments in Sweden by type of owner, 2011 
3.8.  Development of rents in Sweden 2000-2011 
3.9a.  Households'liabilities 
3.9b.  Households'mortgage credit growth, annual % change 
3.10a. Debt-to-assets ratio: standard vs. notional leverage - Sweden 
3.10b. Debt-to-assets ratio: standard vs. notional leverage, Finland and Denmark 
3.11.  Households' wealth and debts as % disposable income 
3.12.  Debt levels of new mortgage borrowers in major urban areas vs. remaining parts of the 

country 

3.13a. Leverage ratios, non-financial corporations, Sweden 
3.13b. Leverage ratios, non-financial corporations, euro area 
3.14.  Corporate debt, consolidated and super-consolidated view 
3.15.  Debt-to-assets ratio - standard vs. notional leverage 
3.16a. Debt-to-gross operating surplus, Sweden vs. euro area 
3.16b. Interest burden, Sweden vs. euro area 
3.17.  Company default 

LIST OF BOXES 

3.1.  An outlier at 59°19'46''N 18°4'7''E : Stockholm's rental market - benefits insiders at the expense 

of outsiders 

16 
17 
17 
17 
19 
19 
20 
20 
21 
21 
23 
23 
25 
26 

26 
27 

28 
30 
33 
33 
39 
39 
40 
40 
40 

41 
44 
44 
45 
45 
46 
46 
47 

35 

6 

 
 
 
 
7 

 
 
 
 
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 its export market shares, the Swedish economy remains one of 
the most competitive in the EU. Disregarding the crisis years 2008-2009, the losses in market shares 
have  been  marginal  over  the  last  10  years.  Market  share  losses  in  goods  have  been  largely 
compensated  by  gains  in  services.  The  losses  reflect  structural  changes  rather  than  unfavourable 
domestic  cost  developments  or  eroding  quality  competitiveness.  Unit  labour  costs  and  prices  have 
been growing more slowly in Sweden than in its main trading partners. However, the strengthening of 
the Swedish krona and higher growth in unit labour costs in 2012 indicate competitiveness challenges 
in the near term. In a broader context, moderate shrinking of market shares can be seen as a positive 
development in view of the strong current account surplus and euro-area rebalancing.  

·  Macroeconomic  risks  related  to  high  indebtedness  of  the  private  sector  continue  to  be 
important,  despite  a  number  of  mitigating  factors  and  recently  introduced  policy  measures  on 
housing and corporate taxation. Corporate debt has declined substantially since 2009 but remains high 
even  if  the  large  bulk  of  inter-company  loans  is  disregarded.  Household  debt  has  stabilised  only 
recently  and  is  not  likely  to  decline  in  the  near  future  given  the  continued  credit  growth  and  a  low 
mortgage amortisation pace. On the other hand, various indicators of financial health of corporations 
and  stress  tests  for  households,  as  well  as  the  low  rate  of  defaults  during  the  2008-2009  crisis, 
alleviate  to  some  extent  concerns  about  the  private  actors'  capacity  to  service  their  debts.  Credit 
supply and demand conditions do not indicate any imminent deleveraging pressures.  

·  The Swedish housing market has been stable over the last year, but remains a potential source 
of instability for the future. Despite some recent measures, inefficiencies still weigh on the housing 
supply,  especially  linked  to  cumbersome  planning  processes  connected  to  the  local  planning 
monopoly  of  the  Swedish  municipalities,  limited  competition  within  the  construction  sector  and  the 
remaining  regulation  of  the  rental  market.  Together  with  debt-inducing  housing  taxation,  these 
inefficiencies  tend  to  create  an  upward-bias  in  house  prices  and  thus  contribute  to  increasing 
household indebtedness.  

The  IDR  also  discusses  the  policy  challenges  stemming  from  these  developments  and  possible  policy 
responses. A number of elements can be considered. 

·  Household  indebtedness  could  be  tackled  within  the  framework  of  a  global  reform  addressing  the 
various  incentives  biasing  demand  towards  property  ownership.  A  gradual  phasing-out  of  the  tax 
deductibility of  interest payments could thus be combined  with strengthening the recurrent property 

9 

 
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. 

10 

 
 
 
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). 

11 

 
 
2.  MACROECONOMIC SITUATION AND POTENTIAL 

IMBALANCES 

2.1.  MACROECONOMIC SCENE SETTER 

excellent 

employment, 
and 

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, 
low-inflationary 
increasing 
competitiveness 
environment 
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.  

rate  which  has  never 

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 
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 
although 
accommodative - are not likely to provide the same 
cushioning  as  during  the  2008/2009  slowdown. 
Growth is expected to resume in the second half of 
2013  as  confidence  returns  and  households  and 
pent-up 
companies 

and  monetary 

realising 

policy 

their 

start 

– 

consumption  and  investment  plans.  The  recovery 
will gain  full speed in 2014 when the economy is 
expected to grow by 2.5-3%.  

Graph 2.1:Real GDP growth and 
unemployment

%

9

6

3

0

-3

-6

Real GDP growth
Unemployment rate

90

95

00

05

10

Source: Commission services (Eurostat) 

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 
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.  

from  Swedish 

13 

 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 2.2a: Current account decomposition

Graph 2.2b: Financial account decomposition

P
D
G

f
o
%

12

10

8

6

4

2

0

-2

-4

-6

25

20

15

10

5

0

-5

P
D
G

f
o
%

-10

-15

-20

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

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

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 11 12*
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)

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. 

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 

(1)  If  measured  by  market  value,  Swedish  NIIP  would  be 

positive (5.7% of GDP in 2011). 

14 

to  (i) 

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 
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  2.4b).  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). 

(2)  European  Commission,  Current  Account  Surpluses  in  the 

EU (2012).  

(3)  Foreign  assets  are  mainly  denominated 

foreign 
currencies (88% in mid-2012), whereas the majority (58% 
in  mid-2012)  of  foreign  liabilities  is  denominated  in  the 
national currency. 

in 

 
                                                           
 
                                                           
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.3b:Net lending and borrowing by 
sector

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

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

Graph 2.3a:NIIP decomposition

50

0

P
D
G

f
o
%

-50

-100

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*

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)

Source: Commission services (Eurostat)

10

8

6

4

2

0

P
D
G

f
o
%

-2

-4

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 

investment,  but  also  due 

construction 
to  a 
structural  shift  from  manufacturing  to  services.  A 
number  of  constraints  in  the  construction  sector 
prevented it from responding excessively to strong 
housing demand after 2000 (see also section 3.1.2). 
Public  investment  in  construction  has  also  been 
rather  limited,  possibly  as  a  result  of  a  strong 
political  commitment  to  fiscal  surplus  targets. 
Beside  construction,  investment  might  have  been 
also  hindered  by  several  shortcomings  in  the 
market for services (e.g. fixed tariffs for provision 
of  certain  listed  services  or  limited  access  of 

Graph 2.4a: Valuation effects

Graph 2.4b: Decomposition of valuation 
effects

40

20

0

P
D
G

f
o
%

-20

-40

VALUATION  
EFFECTS

30.0

20.0

10.0

P
D
G

0.0

f
o
%

-10.0

-20.0

-30.0

-40.0

97

99

01

03

05

07

09

11

cumulative CA

NIIP, nominal value

Source: Commission services (Eurostat)

2000

2002

2004

2006

2008

2010

2012*

Dir inv, assets
Portfolio inv, assets
Other inv, assets
Fin derivatives (net)
Total net

Dir inv, liab
Portfolio inv, liab
Other inv, liab
Reserves (net)

15 

 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

foreign  service  providers  to  Sweden  until  2011). 
At  present,  the  overall  investment  ratio  have 
already  caught  up  with 
levels,  but 
investment  in  construction  and  housing  as  %  of 
GDP still remains below the EU average . 

the  EU 

should  point 

In  view  of  the  above  arguments,  it  would  be 
difficult to establish that the current account of 
Sweden 
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 
to  be  artificially 
seem 
suppressed, 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 
political 
partners  with 
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.  

social 

no 

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 
from 
continues, 
developing  countries.  Lower  current  account 
surpluses  would  most  likely  be  compatible  with  a 
sustainable  external  position  of  Sweden:  ECFIN 
that  a  balanced  current 
calculations  suggest 
account would be sufficient to bring NIIP close to 
zero by 2025, disregarding valuation effects.  

competition 

growing 

and 

16 

2.3.  COMPETITIVENESS 

AND 

TRADE 

PERFORMANCE 

a 

on 

view 

global 

Sweden's 
Taking 
competitiveness,  it  is  clear  that  the  Swedish 
economy remains one of the most competitive of 
the EU. It is characterised by a high technological 
innovation 
advancement, 
performance,  reliable  and  transparent  institutions 
as  well  as  a  higher  education  and  training  system 
that deliver satisfactory results. 

solid  R&D 

and 

Graph 2.5:Export market share growth 
(% y-o-y)

30

20

10

0

-10

-20

-30

-40

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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

Source: Commission services (Eurostat) 

Nevertheless,  over  2007-2011,  Sweden's  export 
market  shares  (EMS)  for  goods  and  services 
have  continued  to  drop  (Graph  2.5), 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 
the  MIP 
Sweden 
scoreboard 
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%).  

in  both  cases, 
indicator  flashed  (-6%  being 

(-11.9%); 

 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.6a: Evolution of exports market 
shares in goods and services (in % of world 
share)  

Graph 2.6b: 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

Goods

Services

Total goods

Intermediate goods

Fuel

Consumer goods

Capital goods

2000-2001

2010-2011

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

-4

-2

0

2

4

6

Balance of  trade in goods, % GDP

Source: UN COMTRADE (Graph 2.5a), Eurostat COMEXT, Commission services calculations (Graph 2.5b)

Graph 2.7:Export similarity index: China vs. 
EU countries - Partner: World

40

35

30

25

20

15

10

5

0

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

Source: COMTRADE

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 
2.7).  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. 

More than half of the Swedish exports of goods 
are destined to other EU countries, and with the 
the  strong 
euro-zone  crisis,  combined  with 
appreciation of the Swedish krona during the third 
quarter  of  2012  (5%  compared  to  the  second 
quarter  of  the  year),  most  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. 

17 

 
 
 
industries  voiced  concerns  over 

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 
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 
economy. 
Meanwhile,  the  exchange  rate  also  stabilised  to 
some extent. 

the  Swedish 

support 

to 

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 2.8a), 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 
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, 
(iv) 
gas,  steam  and  air  conditioning,  and 
construction have the highest sectoral contribution 
to  total  ULC,  suggesting  that  Sweden  might  be 
dropping behind in terms of its competitiveness in 
these areas. 

indications,  and 

European Commission 

Macroeconomic Imbalances - Sweden 2013 

extent  by 
the  manufacturing 

In  parallel,  Sweden's  net  position  is  somewhat 
compensated  by  a  corresponding  gain  in  the 
export  market  share  for  services  (Graph  2.6a), 
the  on-going 
some 
to 
driven 
servicification  of 
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. 

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 
in 
krona 

substantially 

appreciated 

against 

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

18 

 
                                                           
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.8b:Decomposition of REER 
develoments 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

NEER
REER (HICP)

relative HICP (-)
REER (ULC)

Graph 2.8a:Decomposition of ULC 
developments 

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

8

6

4

2

0

-2

-4

-6

-8

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 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

Source: Commission services (AMECO). Note: Forecasts for 2012-2014

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 
impact  on 
developments (Graph 2.8b). 

immediate 

A new foreign trade and investment promotion 
structure  under  the  name  of  Business  Sweden 
has been created recently through the merger 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  sector  via  the  Swedish  Foreign  Trade 
Association. It is hoped that there will be synergies 
from 
types  of  activities  (promoting 
Swedish  exports  and  attracting  FDI  to  Sweden) 
and  that  the  joint  structure  will  also  improve  the 
efficiency of government funding. 

two 

the 

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  highlighted  by  various 
competitiveness 
by 
international  observers.  For  example,  the  World 
Global 
Economic 
Competitiveness  report  ranks  Sweden  as  number 
four out of 144 countries. The World Bank's 2013 

rankings 

2012-13 

Forum's 

carried 

out 

"Ease  of  Doing  Business"  report  lists  Sweden  as 
the 13:th most favourable country in which to run 
a business (out of 185 countries, but slipping from 
the  8th  place  of  the  2012  edition).  The  OECD 
describes  the  Swedish  innovation  performance  as 
one  of  the  best  in  the  world  (OECD,  2013). 
the  European  Commission's  2012 
Finally, 
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 
the 
unsatisfactory  degree  of  commercialisation  of 
innovative  products  and  counts  among 
the 
countries  that  need  to  raise  their  R&D  intensity 
more  quickly  in  order  to  reach  the  tentative 
national R&D target of 4% of GDP in 2020. R&D 
intensity  has  decreased  from  a  peak  of  4.13%  of 
GDP  in  2001  to  3.42%  in  2010  (1.07%  public  + 
2.35% private), according to Eurostat ( 5). 

terms  of 

in 

(5) 

http://epp.eurostat.ec.europa.eu/statistics_explained/index.p
hp?title=File:Gross_domestic_expenditure_on_R%26D,_2
000-
2010_(%25_share_of_GDP).png&filetimestamp=2012101
6060906  
and 
http://epp.eurostat.ec.europa.eu/statistics_explained/index.p
hp?title=File:Gross_domestic_expenditure_on_R%26D_by
_sector,_2005_and_2010_(%25_share_of_GDP).png&filet
imestamp=20121016060835 

19 

 
                                                           
  
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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 
in  2009-2011  was  on  account  of 
correction 
decreasing 
non-financial 
of 
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. 

indebtedness 

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 2008-2009 
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. 

P
D
G

f
o
%

500

450

400

350

300

250

200

150

100

50

0

Graph 2.9a: Decomposition of debt, non-
consolidated data 

Graph 2.9b: Credit developments 

P
D
G

f
o
%

50

40

30

20

10

0

-10

-20

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Financial corporations
Households
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Source: Commission services (Eurostat). Note: For 2012 preliminary figures on the basis of quaterly data

20 

 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.10a: Leverage ratios, Non-financial 
corporations 

Graph 2.10b: MFI lending to households 

180

160

140

120

100

80

60

40

20

0

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

)

%

(

70

60

50

40

30

20

10

0

P
D
G

f
o
%

95

97

99

01

03

05

07

09

11

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

Debt / GDP
Debt / equity
Debt / assets
Debt / assets, consolidated

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

Source: Commission services (Graph 2.10a), Commission services , ECB (Graph 2.10b). Note: For 2012 preliminary figures on 
the basis of quaterly data

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  2.10b),  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 
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  country.  The 
the 
vulnerability  caused  by  the  substantial  household 
indebtedness is also the reason why this topic, and 
its  relation  to  the  developments  of  the  Swedish 
the 
is  analysed 
housing  market, 
subsequent chapter of this review.   

financial  stability  of 

this  development, 

in-depth 

in 

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 
in 
structure 
property.  As  for  amortisation,      100%  loan-to-
value  mortgages  were  not  uncommon  in  Sweden 
before the crisis. Increasingly, borrowers opted for 
loans  and  banks  were  not 
amortisation-free 
particularly interested in obliging clients to reduce 
their debt.  

towards  debt-financed 

investment 

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 
for  mortgages (6), 
15%  risk-weight 
floor 
compared  to  the  current  6%  in  order  to  reflect  a 
changing  risk  profile.  Through  the  stricter  rules, 
the amount of capital that banks  have to set aside 
to  protect  against  potential  mortgage  loan  losses 
would  increase  sharply.  Although  default  rates 
have  historically  been  very  low  in  Sweden,  the 
FSA argues that caution is necessary. The tougher 
rules  imply  that  an  additional  20  billion  Swedish 
kronor would be locked in as core capital under the 
so called Pillar 2 (Financial Supervisory Authority, 
2012).  However,  to  a  large  extent  Swedish  banks 
have  already  taken  account  of  the  capital  levels 
brought  about  by  the  measure,  which  is  currently 
being  consulted  with  stakeholders.  Another 

(6)  It is necessary for banks to hold a certain amount of Tier 1 
capital on their balance sheets for all loans they issue. The 
risk  profile  of  the  loans  determines  how  much  capital  has 
to  be  set  aside.  So  far,  Swedish  banks'  risk  weights  for 
mortgages  have  been  much  lower  than  those  of  other 
European  banks  (5-10%  compared  to  20-25%).  (WSJ, 
26.11.2012).  

21 

 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

in  Sweden  goes  beyond 

important  step  is  the  foreseen  strengthening  of 
capital adequacy and liquidity requirements for 
banks,  which 
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. 
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. 

In  March  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  feedback  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.  

for 

financial  sector  as  well  as 

High private debt entails considerable risks for 
the 
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 
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 

in 

22 

to 

addition 
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 
sectors  will  be 
individual 
investigated more closely. 

2.5.  HOUSING MARKET DEVELOPMENT  

The  development  of  the  housing  market  in 
Sweden  has  stabilised  over  the  last  couple  of 
years,  after  experiencing  massive  price  hikes 
over  more  than  a  decade.  The  MIP  scoreboard 
indicator  reports  a  1%  price  increase  of  deflated 
house  prices  in  2011.  In  2012,  the  latest  figures 
also  suggest  modest  price  increases,  for  the 
country  as  a  whole  with  a  real  price  increase  of 
roughly 1%.  

in  Denmark 

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 
(see  Graph  2.11b). 
example 
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 
2.11a). 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 

 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.11a:Deflated house prices in the 
Nordic region, 1995Q1=100 

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

Graph 2.11b:House price cycle 

Change from trough to peak (%)

10

0

-10

-20

-30

-40

-50

-60

-70

-80

)

%

(

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

DE

0

BE

IT

50

AT

PT

CZ
EL

HU

FI

LU

SE

100

150

FR

200

250

300

350

MT

SI

SK

PL

ES

RO

NL
UK

DK

BG

EE

IE

LV

Previous 
trough

Source: Sveriges Riksbank (Graph 2.11a), Commission services, ECB, OECD, BIS (Graph 2.11b). 

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 feedback 
loop  resulting  from  a  reduction  in  consumption. 
Moreover,  assets  are  not  evenly  distributed  and 
risk  ending  up 
highly 
insolvent  even  after  a  relatively  modest  price  fall. 
With most mortgages having interest rate terms of 
at most five years, any future interest rate increases 
could  put  additional  strains  on  the  already  highly 
indebted households.   

indebted  households 

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. 

is 

The  Swedish  housing  market 
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 
(Swedish  Construction  Federation, 
population 
2012).  In  2009-2011  the  number  of  households 
increased by 43,000 more than the number of new 
housing 
of  Swedish 
(Confederation 
Enterprise,  2012).  Recent  data  on  housing  starts 
point 
towards  a  continued  decline  for  both 
residential  one-dwelling-buildings  and  multiple-
dwelling-buildings 
housing 
and 
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 

total, 

units 

in 

23 

 
 
 
 
 
 
 
 
 
 
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,  for  both 
single  family  dwellings  and  apartments  (Graph 
3.1). 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.  

Graph 3.1: Evolution of House Price Index and 
MFI Loans for House Purchase

160

0
0
1
=
5
0
0
2

140

120

100

80

60

40

20

0

20

15

10

5

0

-5

-10

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

99Q4 01Q4 03Q4 05Q4 07Q4 09Q4 11Q4

MFI loans for house purchase (% GDP, yoy)
Real House Price Index (2005=100), right axis
Nominal House Price Index (2005=100), right axis

Source: Commission services (Eurostat), ECB, OECD

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). 

Last  year's  review  did  not  conclude  on  a 
possible  misalignment  of  house  prices.  Whereas 
most traditional indicators, such as price-to-rent or 

affordability  indices ( 7),  suggested  a  significant 
overvaluation,  the  adjusted  price-to-rent  ratio  or 
econometric  estimates  found  house  prices  to  be 
close to their fundamental  value ( 8). Due to stable 
nominal prices, affordability ratios have improved 
over the last year (Graph 3.2), 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. 

The  price-to-rent  ratio (9)  has  not  changed 
compared  to  last  year  and  remains  some  34% 
above  its  historical  average  at  the  end  of  2012. 
However,  the  price-to-rent  ratio  adjusted  for  the 
evolution  of  the  user  cost  of  home  ownership 
(fundamental  ratio) (10)  suggests  a  much  smaller 
misalignment  (4% 
if  mortgages  of  five-year 
maturity  are  considered,  and  9%  if  an  average 
mortgage  rate  is  used  as  demonstrated  in  Graph 
3.3).  It  should  be  noted  that  according  to  these 
indicators,  house  prices  have  exceeded 
their 
fundamental  value  since  last  year.  This  could  be 
the  decreasing 
found  counterintuitive  given 
mortgage  rates.  The  reason  is 
that  expected 
inflation  declined  more  strongly  than  mortgage 
rates, resulting in higher user costs.  

the  corresponding 

(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 
long-term  averages  provide 
and 
indicators  of  the  degree  of  over-  or  under-valuation  of 
house prices. Conclusions based on such indicators must be 
treated  with  caution  due  to  the  underlying  assumptions. 
Meaningful comparisons with long-term averages generally 
require  stationary  series.  However,  unit  root  tests  point  to 
non-stationary  affordability  and  dividend  ratios  in  many 
countries. 

(8)  European Commission, 2012(c). 
(9)  In view of the characteristics of the Swedish rental market, 
which  includes  rent  setting  based  on  the  so  called  utility-
value-system  (described  in  section 3.1.3),  the  value  added 
of analysing price-to-rent ratios might be discussed.  

(10)  The  fundamental  ratio 

into  account  structural 
takes 
changes,  such  as  the  development  in  user  cost  of  home 
ownership.  User  cost  reflects  changes  in  mortgage  rates, 
taxation,  depreciation  and  expected  capital 
housing 
gains/losses.  For  further  details  on  the  approach,  see 
Girouard, Kennedy, van den Noord and André (2006).    

25 

 
 
                                                           
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 3.2:Housing affordability indices

Graph 3.3: Price-to-rent ratios (actual vs. fundamental)  

... for mortgages with a five-year maturity

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 most important factors explaining the price 
fifteen  years  are 
increases  over 
last 
the 
fundamental  factors  such  as  an 
increased 
income  level,  low  interest  rates,  and  increased 
population  density  in  urban  areas  (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. 

towards 

In  addition  to  analysing  the  supply  and  demand 
side  reasons  behind,  as  well  as  the  sustainability 
of,  the  price  increases,  the  2012  review  also 
causing 
other 
pointed 
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.   

factors 

26 

Fundamental

Actual

overvaluation

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

... for mortgages with an average maturity

Fundamental

Actual

overvaluation

175

150

125

100

75

50

175

150

125

100

75

50

96

98

00

02

04

06

08

10

12

Source: Sweden Statistics, Commission services (Eurostat)

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.  Nevertheless,  when  looking 
at  the  housing  market  it  also  seems  pertinent  to 
address  some  of  the  supply  side  restrictions 
identified  in  last  year’s  In-Depth  Review  in  more 
detail in this assessment. Therefore, the  focus lies 
on assessing the bottlenecks present in the Swedish 
housing  market  structure,  with  a  special  focus  on 
the  construction  industry  in  terms  of  planning, 
zoning  and  appeal  processes,  as  well  as  the 
specificities of the Swedish rental market. 

 
 
 
 
3.1.1.  Swedish housing market overview 

single-family-buildings (11). 

Sweden  counts  roughly  4.5  million  dwellings, 
split  between  approximately  2.5  million 
apartments  in  multi-dwelling-buildings  and  2 
The 
million 
apartment  segment  is  made  up  of  roughly  1.6 
million  rental  apartments  (63%),  930,000  tenant-
owned  (12)  ones  (37%)  and  a  mere  182  owner-
occupied  condominiums (13)  (Statistics  Sweden, 
2012  (d)).  Corresponding  figures  for  Stockholm 
County,  with  a  population  of  roughly  2.1  million, 
are roughly 970,000 dwellings distributed between 
700,000  apartments  in  multi-dwelling-buildings 
and 
single-family-buildings. 
However,  in  Stockholm  a  majority  of  apartments 
is  a  share 
are 
significantly above the national average. 

(51%),  which 

tenant-owned 

270,000 

some 

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 
3.4).  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 

(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. 

3. In-Depth Analysis of Selected Topics 

properties.  However,  conversions  managed  by 
public housing companies have been a hot political 
issue over the last decade, especially in Stockholm 
which  has  seen  its  stock  of  rental  apartments 
diminish substantially ( 14). Nevertheless, the rather 
far-reaching  sell  out  of  publicly  owned  rental 
apartments  in  Stockholm  show  some  signs  of  a 
slowdown, as in 2011 only 1,740 rental apartments 
were  sold  (Swedish  National  Board  for  Housing, 
Building and Planning, 2012(a)).  

Graph 3.4:Changes in stock of tenant-owned 
and rented dwellings 1990-2011; 1999=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: Sweden Statistics 

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 
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. 

that  were 

topics 

(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. 

27 

 
                                                           
 
 
 
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 3.5: Price development of Swedish 
tenant-owned apartments and one-dwelling-
buildings 2000-2012; 2000=100

declined  slightly  since  their  all-time  peak,  tenant-
owned  apartments  are  still  climbing  (Graph  3.5). 
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). 

300

250

200

150

100

50

0

are 

and 

there 

loans 

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-
introduced  for  new 
value  cap  of  85%  was 
mortgage 
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 
interest  rates 
(standing  at  roughly  3.25%  at  the  beginning  of 
2013) have spurred price developments.  

linked  drops 

in  mortgage 

the 

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 
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 
sentiment 
housing  market 
future 
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 
to  housing 
their  purchasing  power 

related 

about 

(16)  http://www.di.se/#!/artiklar/2012/12/21/makropanelen-

kallare-bostadsmarknad-2013/ 

2000

2002

2004

2006

2008

2010

2012

Tenant-owned apartments

One-dwelling-buildings

Source: Svensk mäklarstatistik, Swedish Board of Housing, 
Planning and Building

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 

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

28 

 
 
                                                           
                                                           
recent 

suggest 

indicators 

investments, 
that 
households'  possibilities  of  buying  real  estate  and 
taking  on  mortgages  improved  during  the  fourth 
quarter of 2012, compared to the previous quarter 
on the back of real wage increases combined with 
low mortgage interest rates and in spite of slightly 
rising prices (Swedbank, 2013 (b)). 

Focussing  on  the  economic  fundamentals,  the 
is  still  experiencing  a 
Swedish  economy 
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 
trouble  deleveraging  at  an 
households 
appropriate  pace  and 
thereby  cause  more 
substantial drops in the long run. It is also the case 
that  with  a  repo  rate  of  1%  following  the 
December 2012 cut by the Riksbank(17), mortgage 
interest rates are unprecedentedly low and possible 
future increases would put strain on households. 

face 

On  the  other  hand,  wage  expectations  are 
rather stable. Real interest rates are also expected 
to stay low for a prolonged period of time making 
the  expected  cost  of  assuming  debt  lower( 18).  In 
addition, at least in the Stockholm area, prices are 
also  spurred  through  the  insufficient  construction 
activity  coupled  with  the  constant  population 
increase. 

However,  price  variations  are  rather  large 
across the country, both as regards one-dwelling-
tenant-owned  apartments.  The 
buildings  and 
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 

(17)  The  repo  rate  was  left  unchanged by  the  Executive  Board 

in February 2013. 

is 

investment.  As  housing 

(18)  The growth of debt is linked to the estimated rate of return 
on 
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. 

3. In-Depth Analysis of Selected Topics 

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. 

at 

should  be  constructed  yearly 

Looking  more 
demographic 
closely 
developments,  data  suggests  that  there  may  be  a 
gap between the population growth and the supply 
of  housing,  a  gap  which  is  exacerbated  in  urban 
areas  and  cities  with  university  colleges( 19).  For 
instance,  during  2006-2011 
the  number  of 
households  increased  by  80,000  more  than  the 
number of newly constructed dwellings in Sweden 
(Confederation  of  Swedish  Enterprise,  2012),  and 
the Swedish National Board of Housing, Building 
and Planning estimates that more than 30,000 new 
to 
dwellings 
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 
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 
in 
achieved 
Stockholm, 2012). 

(County  Administrative  Board 

housing 

bubble 

the 

to 

linked 

To  conclude,  rigidities  on  the  housing  market 
foregone  employment 
may  be 
opportunities  and  hampered  growth.  This  is 
linked to the fact that supply-side restrictions cause 
a  number  of  difficulties  at  different  levels,  as 
find  proper  housing, 
young  adults  cannot 
population  density  increases  in  spite  of  income 

(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). 

29 

 
                                                           
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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  in  other  parts  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 
side 
above-mentioned 
challenges of the Swedish housing market. 

supply 

the 

3.1.2.  Challenges  linked  to  the  construction 

sector 

the  construction  of  dwellings 

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 
3.6). The Swedish construction sector (in particular 
is 
as  far  as 
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). 

investments 

is  expected 

in  2013.  Total 

In 2012, construction of new dwellings dropped 
to  remain 
substantially  and 
in 
depressed 
dwellings’  construction 
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% 
for  2013  predict 
respectively.  Estimations 

is  estimated 

30 

levels 

(Swedish 

unchanged 
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 
the  output, 
preliminary  figures  suggest  that  20,050  housing 
starts  (4,750  units 
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 
than  26,000 
dwellings  was  started  (Statistics  Sweden,  2013 
(b)). 

slightly  more 

in  one-  or 

terms  of 

Graph 3.6:Residential Investment and Building 
Permits

0
0
1
=
5
0
0
2

180

160

140

120

100

80

60

40

20

0

P
D
G

f
o
%

5

4

4

3

3

2

2

1

1

0

95

97

99

01

03

05

07

09

11

Building Permits (2005=100)
Residential Investment (% of GDP, right axis)

Source: Commission services (Eurostat)

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 
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 

to 

 
 
 
 
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 
the  mobility  of  workers,  students, 
limits 
immigrants  etc.  It  is  therefore  important  to  assess 
the  efficiency  of  the  sector  and  whether  there  are 
institutional factors holding back activity levels.  

to 

in 

their 

applicability 

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  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 
across 
variations 
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.  

in 

These  challenges  have  to  some  extent  been 
government. 
addressed  by 
the  Swedish 
However,  substantial  results 
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 
the 
planning  process.  In  a  continued  effort, 
government  commissioned  a  public  inquiry  in 
November  2011  to  assess  how  the  planning 
process  could  be  rendered  more  efficient.  The 

3. In-Depth Analysis of Selected Topics 

clarifying 

appeal  procedures, 

inquiry,  published  in  January  2013,  proposes 
limiting 
cost 
responsibilities  and  increasing  transparency.  The 
increased  predictability  is  expected  to  lower  the 
risks  for  construction  companies  and  investors, 
which in turn is expected to lead to larger housing 
investments,  increased  competition  and  resulting 
lower  prices  (Statens  Offentliga  Utredningar, 
2012:91).  Nevertheless, 
the  proposals  were 
instantly  met  by  opposition  by  the  Swedish 
Association  of  Local  Authorities  and  Regions 
(SALAR),  which  claims  that  by  regulating  the 
process  more  thoroughly,  increased  transparency 
may  well  be  achieved  but  only  at  the  price  of  an 
even increased administrative burden.  

Other  reform  strands  include  a  public  inquiry 
looking into how the municipalities apply the rules 
in  place  on  technical  characteristics'  requirements 
of  the  Planning  and  Building  Law.  The  inquiry 
(Statens  Offentliga  Utredningar,  2012:86)  found 
that  the  unharmonised  application  leads  to 
additional  costs,  which  are  estimated  to  hamper 
construction.  Proposals  brought  forward  include 
limiting  the  possibilities  for  municipalities  to 
introduce  specific  technical  requirements  going 
beyond the common set of rules, and streamlining 
appeal  procedures.  Moreover, 
the  Swedish 
National Board of Housing, Building and Planning 
is  to  assess  how  more  student  housing  and 
dwellings  specifically  dedicated  to  young  adults 
could  be  constructed  through  specific  measures 
such  as  the  introduction  of  more  generous  rules 
relating 
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  levels,  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.  

temporary  dwellings, 

to 

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 

31 

 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

is  of  particular 

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 
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.  

relevance 

is 

to 

by 

the 

face 

voiced 

resources 

  Concerns  about 

the 
The  burdensome  processes  preceding 
issuance  of  a  construction  permit  weight  on 
efficient competition in the  construction sector. 
The  sector  has  traditionally  been  dominated  by 
large,  national  companies  which  have  sufficient 
financial  and  human 
the 
challenges. 
insufficient 
competition  in  the  construction  sector  have  been 
the  Swedish 
also 
previously 
Competition Authority that pointed at deficiencies 
in  public  procurement  practices  and  the  existence 
of  corruption  (Swedish  Competition  Authority, 
to  some  extent 
2011).  This  assessment 
confirmed  in  a  recent  survey,  where  it  was  found 
that 
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.  

four  out  of 

Finally,  a  parliamentary  committee  related  to 
housing  supply  in  urban  growth  areas  is  to  be 
set  up  by  the  government.  The  committee  is  to 

32 

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 
the  autumn  of 
2014 (20). 

in 

to 

an 

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 
and 
predictability,  the  market  might  open  up  for  new 
players,  in  particular  smaller  and  foreign-based 
companies  which  have  so  far  had  a  very  small 
market  share  due  to  the  high  entry  barriers  of  the 
sector.  The  proposed  changes  should  also  involve 
public  procurement ( 21),  where  divisions 
into 
smaller lots, better specified call for tenders and a 
shorter  time  period  from  call  to  submission  and 
outcome  would  favour  a  diversification  of  the 
market actors. 

transparency 

increased 

(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. 

 
 
 
 
 
                                                           
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 3.7). 

Graph 3.7: 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  
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  3.8). 
However,  factors  pertaining  to  the  actual  market 
value  of  rental  leases  (for  example  the  relative 
proximity  to  the  city  centre)  have  not,  until 
recently, been included.  

3. In-Depth Analysis of Selected Topics 

Graph 3.8: Development of rents in Sweden 
2000-2011

1500

1400

1300

m
q
s
/
K
E
S

1200

1100

t
n
e
r

1000

y
l
r
a
e
Y

900

800

700

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

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

Source: Statistics Sweden

the 

the  size  of 

This  has  led  to  landlords  not  being  able  to 
charge tenants market-clearing rents in central 
city  locations  as  compared  to  suburban  areas, 
although 
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 
the  opportunity  were 
if 
actually  rather  rent 
available.  Graph  3.8  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 

33 

 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

through  the  introduction  of  separate  negotiations 
between the Swedish Union of Tenants on the one 
hand, and municipally owned and private landlords 
on  the  other  hand  As  a  result  of  the  new  law  that 
took effect on 1 January 2011, municipally-owned 
housing  companies  (MHCs)  are  henceforth  meant 
to  act  in  a  business-like  way,  striving  to  achieve 
business  aims,  and  should  not  have  a  social 
function but rather be open to all sorts of tenants. 
Given  that  MHCs  are  to  compete  on  equal  terms 
with  private  companies,  behaving  as  any  other 
long-term  private  investor,  the  role  of  these 
companies may be put into question. 

the  utility  value 

Rents  are  still  being  set  according  to  the 
principles  of 
system, 
irrespective  of  the  change  in  legislation,  hence 
not  allowing  any  real  rent 
level  dispersion 
between,  for  instance,  metropolitan  city  centres 
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 
the  rental 
reduces  mobility  on 
substantially 
market. ( 22) As a consequence, most municipalities 
located in urban areas face a shortage of available 
rentals  and  administer  queuing  systems  whereby 
to  be  allocated  an 
future 
apartment,  often  after  having  queued  for  several 
years  (please  see  Box  3.1  for  a  description  of  the 
Stockholm Housing Service).  

tenants  may  wait 

transition 

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 
to  entirely  new  market 
gradual 
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. 

(22)  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’. 

34 

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 
in 
the  supply  side  restrictions  existing 
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). (23)  Looking  at  rental  markets  of  other 
Nordic  countries, 
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  

it  may  be  observed 

(23)  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.   

 
                                                           
                                                           
3. In-Depth Analysis of Selected Topics 

Box 3.1: An outlier at 59°19'46''N 18°4'7''E : Stockholm's rental market - benefits insiders at 
the expense of outsiders

A sub-optimally functioning housing market can have detrimental effects on growth and employment. 
Mobility is hampered as  workers and students may hesitate to take up offers of employment and/or studies 
knowing that they may be faced with a grim housing situation. This is of course a more pronounced problem 
in urban areas, where the costs of buying an apartment are also far above the national average. Debt levels of 
new  mortgage  borrowers  in  the  municipality  of  Stockholm  stand  at  more  than  six  times  their  disposable 
income  (Sveriges  Riksbank,  2012).  A  price  per  square  meter  of  roughly  SEK  58,000  limits  investment 
possibilities. In the present economic  situation, with apparent downside risks on the housing  market, and a 
likely stable price development in the short run, investment decisions tend to be long-term. Persons brought 
to Stockholm to work or study for shorter periods, generally prefer other options. A well-functioning rental 
market therefore seems crucial for the Stockholm region to continue to attract young adults, immigrants and 
people in search of better job prospects or education.  

Changing structure of the Stockholm housing market  

The development of Stockholm county’s housing market over the last couple of decades has mirrored 
that of the national changes in tenant-owned and rented dwellings, but in an even more exaggerated 
way.  At  present,  the  distribution  between  rentals  and  tenant-owned  apartments  is  even  (Graph 1)  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, launch production of new rental dwellings; investments that cannot fully be financed via the 
regulated rents. 

Social considerations 

All municipalities in Stockholm county report that there are too few rental dwellings available, which 
makes  it  especially  difficult  for  young  adults  and  immigrants  to  find  appropriate  housing  (County 
Administrative Board of Stockholm, 2012). Immigrants, and persons with foreign-born parents, are also more 
likely than persons born in Sweden of Swedish origin to have low incomes, creating an additional barrier to 
finding  suitable  accommodation  in  the  Stockholm  area.  In  Sweden,  social  housing,  in  the  meaning  of  a 
separate stock of housing being reserved for low-income households at low rents, has been rejected by the 
legislator.  Instead,  targeted  groups  (notably  pensioners  and  single-parent  households  with  children)  may 
benefit  from  housing  allowances  with  certain  eligibility  criteria  such  as  income,  number  of  children  etc. 
However,  as  a  consequence  of  political  decisions  the  rules  have  become  tougher  and  the  number  of 
households receiving such support has dwindled over the last couple of decades. Another strand of possible 
support for weak households goes via the municipality, and the share of households living on such economic 
support is higher among households with a foreign background. For the Stockholm municipality taken as a 
whole,  the  figures  are  9.2%  for  foreign-born  persons  and  2.2%  for  persons  born  in  Sweden,  but  in  certain 
immigrant-dense suburbs the corresponding share climbs up to 20% (Lind, forthcoming 2013). The difficult 
situation linked to the regulation of the Stockholm rental housing market, which has been further aggravated 
by  population  growth  and  suppressed  construction,  puts  additional  strain  on  integrating  low-income, 
immigrant  households.  The  conversion  from  rentals  to  tenant-owned  apartments  has  also,  to  some  extent, 
created a  shift in the composition of the stock of remaining rentals, as the conversions predominantly took 
place  in  high-  and/or  middle-income  areas  where  tenants  could  afford  to  take  on  mortgages,  whereas  low-
income  households  remained  as  tenants.  Hence,  although  Sweden  does  not  de  jure  have  a  social  housing 
sector, de facto the country, and its capital in particular, may be moving in this direction. 

(Continued on the next page) 

35 

 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Box (continued) 

Graph 1: Distribution of various types of tenure in Stockholm country, 1990 and 2010

%

70

60

50

40

30

20

10

0

1990

2010

Rental dwellings

Tenant-owned apartments

One-dwelling-buildings

Source: Statistics Sweden

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  by  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 estimates suggest that market rents in the city centre 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.  

(Continued on the next page) 

36 

 
 
 
 
 
 
 
3. In-Depth Analysis of Selected Topics 

Box (continued) 

Black market activities: 

Over the last decades the current set up of the rental market has however provoked a substantial black 
market with different characteristics, the most common ones being i) sub-letting without the permission of 
the landlord and at rent levels higher than those of equivalent rentals, and ii) trade with rental contracts.  

There  are  indications  that  subletting  without  permission  takes  place  widely  in  Stockholm.  In  fact, 
Stockholm county's largest housing companies estimate that between 10 and 20% of their total stock is 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 in 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  Stockholm’s  rental  market  is  challenged  by  severe  distortions  resulting  from  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.  

37 

 
 
 
 
 
 
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  3.9a). 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. (25) Nevertheless, debt levels seem to  have 
stabilised  and  in  its  forecasts  until  and  including 
2015, the Riksbank expects unchanged, or slightly 
decreased, debt levels. 

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 
3.9b).  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. 

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

European Commission 

Macroeconomic Imbalances - Sweden 2013 

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. ( 24)  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 
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.  

in  urban  areas, 

let  apartments 

(24)  A very limited surcharge has been allowed for instance in 

cases of furnished apartments etc. 

38 

 
                                                           
                                                           
3. In-Depth Analysis of Selected Topics 

Graph 3.9a: Households'liabilities 

Graph 3.9b: 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

180

160

140

120

100

80

60

40

20

0

I

D
G
%

%

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: Commission services (Graph 3.9a), Sveriges Riksbank (Graph 3.9b)

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%(26), 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, 

(26)  As  mentioned  earlier  on,  the  Executive  Board  decided  to 
hold  the  repo  rate  unchanged  in  February  2013,  although 
two  Deputy  Governors  entered  reservations  against  the 
decision, arguing for further cuts. 

held  back  some  Members  from  arguing  for  too 
substantial cuts. (27)  

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 
(Swedish 
Financial  Supervisory  Authority,  2012  (b)  and 
that  a  vast  majority  of 
2013)  also 
households  would  be  able 
their 
to  honour 
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 

indicate 

tests 

(27)  In  particular,  the  Governor  Stefan  Ingves  has  warned 
against  further  built-up  of  mortgage  debt  in  a  situation  of 
extremely  low  interest  rates.  On  the  other  hand,  Deputy 
Governor  Lars E O Svensson argued that monetary policy 
has little effect on household debt in the short run and (with 
low and stable inflation) no effect in the long run. Hence, 
an  expansionary  monetary  policy  would  not  tangibly 
increase the risks from household debt (see minutes of the 
Executive 
at 
http://www.riksbank.se/en/Press-and-published/Minutes-
of-the-Executive-Boards-monetary-policy-meetings/).  

meetings 

Board's 

39 

 
                                                           
                                                           
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 3.10a:Debt-to-assets ratio: standard vs. 
notional  leverage - Sweden

Graph 3.10b:Debt-to-assets ratio: standard vs. 
notional  leverage, Finland and Denmark

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

Source: Commission services (Eurostat)

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

their  debt 

to  service 

types  of  expenditure  and/or  use  their  savings  to 
in  adverse 
continue 
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 
is 
approximately  ca.  150%  which  is  lower  than  the 
accumulated debt (Graph 3.11). 

figure 

assets 

liquid 

for 

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 
therefore 
particularly sensitive to price changes and adapt by 
this 
changing 
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). 

their  consumption  patterns.  In 

these  areas  are 

in 

40 

Graph 3.11: Households' wealth and debts as 
% disposable income

700

600

500

400

300

200

100

0

e
m
o
c
n

i

l

e
b
a
s
o
p
s
d
f
o
%

i

71 74 77 80 83 86 89 92 95 98 01 04 07 10

Total wealth
Liquid wealth

Real wealth
Debts

Source: Sveriges Riksbank

is  another  aspect  of 

The  distribution  of  debt  between  different 
income  groups 
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 
that 
households' ability to service their debts should be 
rather satisfactory (SEB, 2012).  

suggests 

result 

 
 
 
 
 
 
 
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  3.10).  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. (28)  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. 

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  3.12), 
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).   

The  increase  in  indebtedness  has  been  coupled 
with  a  trend  towards  a  higher  share  of 
mortgages  taken  up  at  variable  interest  rates, 
which  in  the  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 
total 
duration of the mortgage, hence discouraging them 
from altering the conditions of mortgage contracts.  

the 

(28)  For 

the  concept  of  notional 

leverage,  see  Cuerpo, 

Drumond, Lendvai, Pontuch and Raciborski (2013).  

3. In-Depth Analysis of Selected Topics 

Graph 3.12:Debt levels of new mortgage 
borrowers in major urban areas vs. remaining 
parts of the country

700

600

500

400

300

200

100

0

e
m
o
c
n

i

l

e
b
a
s
o
p
s
d
f
o
%

i

Stockholm

Malmö

Göteborg

Other
municipalities

Source: Sveriges Riksbank

to 

tend 

look  at 

In the context of especially the urban areas, but 
also  for  new  borrowers  in  general,  it  is  also 
the  amortisation 
interesting 
behaviour  of  households.  This  group  of 
borrowers 
amortisation-free 
to  prefer 
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 
(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 
their  amortisation 
increase 
pace.  It  is  based  on  factors  such  as  that  high 
indebtedness is not a phenomenon concerning only 
young 
average 
but 
indebtedness level of pensioners is also substantial 
and  stands  at  53%  of  disposable  income,  and  that 
households have become used to seeing real estate 
as  a  virtually  risk  free  investment  which  will 
always  increase  in  value.  Nevertheless,  Swedish 
households  have  experienced  price  drops  rather 
recently  (2007/2008)  and  although  the  housing 
market  seems  to  have  stabilised,  mortgage  loans 
are still associated with a certain level of financial 

to  50-60% 

households 

in  2011 

that 

the 

41 

 
 
                                                           
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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)). 

to 

The  development  has  also  been  scrutinised  by 
the Riksbank, which together with the Swedish 
Financial  Supervisory  Authority  look  into  the 
stimulate 
issue  of  whether  measures 
amortisation  are  needed.  The  Swedish  Bankers' 
Association's  recommendation  that  loans  with  a 
loan-to-value  of  more 
than  75%  should  be 
amortised  down  to  at  least  that  level( 29)  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. (30)  Out  of  the 
four  major  Swedish  banks, (31)  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 
the 
requirement 
recommendation. ( 32)  In  a  recent  survey,  the  FSA 
concludes 
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 

compared 

that 

as 

to 

(29) 

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

(30)  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) 

(31)  SEB, Svenska Handelsbanken, Nordea and Swedbank. 
(32)  http://www.dn.se/ekonomi/fyra-av-fem-banker-sagar-

ingves-forslag 

42 

per  cent.  The  survey  also  shows  that  nine  out  of 
ten  households  with  a  loan-to-value  ratio  above 
75%  amortise.  The  number  of  households  taking 
loans that have a loan-to-value ratio above 85% is 
limited (roughly 11%). However, only four out of 
ten  households  with  a  loan-to-value  ratio  of  less 
than  75%  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 by mid-October 2013. 

tilted 

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 
the 
the  housing  market  and 
affected 
incentives of households towards debt-financing is 
the  drastic  reduction  of  the  property  tax  that  took 
place in 2008 (33), 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 
their  mortgages 
the  size  of 
irrespective  of 
(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 

(33)  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. 

 
                                                           
                                                           
3. In-Depth Analysis of Selected Topics 

the 

interest 

targeting  neither 

measures  to  reduce  the  debt  bias. (34)  In  fact,  the 
Minister  of  Finance  rather  confirmed  that  no 
proposals 
rate 
deductibility  scheme,  nor  the  property  tax,  are 
foreseen,  claiming  that  it  would  risk  provoking 
heavy  price  falls  on  the  housing  market. (35) 
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  preferred  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. 

(34)  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. 

(35) 

The  consequences  of  the  current  system,  and  its 
possible abolition, need to be well understood. The 
system likely has adverse price effects on housing, 
as the deferrals enable tax payers to finance  more 
expensive real estate. Also, it creates other types of 
lock-in  effects,  such  as  the  reluctance  of  home 
owners to sell property and move to a rental unit as 
that  would  lead  to  an  immediate  and  full  taxation 
of  the  capital  gain.  The  link  to  the  level  of 
indebtedness  of  the  Swedish  households  is  also 
worthwhile  to  consider  in  this  context,  as  the 
deferred tax payments constitute an additional debt 
weighing  on  households'  balance  sheets.  The 
downside  risks  for  consumption  are  larger  in  a 
stagnating  market,  as  tax  payers  having  previous 
deferrals  and  subsequently  selling  their  dwellings 
at a loss, are still obliged to pay a certain share of 
the  capital  gains 
initial 
investment. 

tax  related 

the 

to 

In  the  Swedish  context,  consumption  loans  are 
also  increasingly  warranting  some  concerns.  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 
levels  are 
problematic,  in  particular  as  the  text  loans  target 
consumers  with  an  already  weak  standing 
(Swedish  Enforcement  Authority,  2013). 
In 
Finland,  the  government  has  recently  proposed  a 
new  piece  of  legislation  introducing  a  cap  of  the 
reference  rate  plus  50%  effective  interest  rate  for 
consumer credits under EUR 2,000 combined with 
stricter  application  procedures (36).  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 

interest  rate 

that 

http://sverigesradio.se/sida/artikel.aspx?programid=83&arti
kel=5384141 and 
http://www.regeringen.se/content/1/c6/20/72/49/895b99ad.
pdf  

(36)  Approved by the Finnish Parliament in the first reading on 
2013: 
7 
February 
http://web.eduskunta.fi/Resource.phx/pubman/templates/22
.htx?id=5519.  

43 

 
                                                           
 
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 3.13a: Leverage ratios, non-financial 
corporations, Sweden 

Graph 3.13b: Leverage ratios, non-financial 
corporations, euro area 

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

)

%

(
s
t
e
s
s
a

l

a
t
o
t

180

160

140

120

100

80

60

40

20

0

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

)

%

(
s
t
e
s
s
a

l

a
t
o
t

120

100

80

60

40

20

0

95

97

99

01

03

05

07

09

11

95

97

99

01

03

05

07

09

11

Debt / GDP
Debt / assets

Debt / equity
Debt / assets, consolidated

Debt / GDP

Debt / assets

Debt / equity

Debt / assets, consolidated

Source: For Graph 3.13a, Commission services (Eurostat); for Graph 3.13b , Commission services (Eurostat), ECB

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. ( 37) 

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 
to 
grown  by  a  mere  1% 
in  2012,  credit 
it 
corporations  grew  by  3.8%.  Therefore, 
is 
expected 
increase 
marginally as a percentage of GDP in 2012.   

that  corporate  debt  might 

terms  of  consolidated  data,  Swedish 
In 
in 
corporate  debt 
In  2011, 
to 
comparison 
consolidated debt of Swedish corporations stood at 

is 
the  euro  area. 

lower  but  still  high 

(37)  http://www.regeringen.se/sb/d/17003/a/208537 

44 

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 3.14, consolidated debt 
is illustrated by the total of the red and blue areas. 
Due to reasons explained below as well as specific 
issues,  consolidated  data  are  more 
statistical 
appropriate 
the  debt  burden  of 
in  assessing 
Swedish corporations. ( 38) 

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 

(38)  Consolidated data are more appropriate in the Swedish case 
due  to  a  wide  use  of  intra-group  lending  and  also  due  to 
statistical 
in  2004  and 
implausible data for inter-company lending within Sweden 
since 2006).  

issues  (a  statistical  revision 

 
                                                           
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.  

Graph 3.14:Corporate debt, consolidated and 
super-consolidated view

%

180

160

140

120

100

80

60

40

20

0

P
D
G

f
o
%

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

In  this  light,  the  debt-to-GDP  ratio  draws  an 
exaggerated picture of indebtedness of Swedish 
corporations. 
inter-company 
If  cross-border 
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 
3.14). Also, the development of this measure over 
time  would  seem  less  worrying  since  it  has  been 
stable  between  1995  and  2006  and 
very 
accumulation  of  debt  was  limited  only  to  the 
period  2006-08  (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, 

3. In-Depth Analysis of Selected Topics 

confirming  that liabilities  grew  hand in  hand  with 
financial assets/equity. In contrast, the ratios have 
increased  moderately  in  the  euro  area  during  the 
same period. 

Graph 3.15: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)

to 

some  caution 

the  firms'  ability 

However, 
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 
incur 
liabilities.  If  these  effects  are  discounted  for,  the 
leverage ratio (called also "notional leverage" (39)) 
for  Sweden  appears  to  follow  an  upward  trend 
(Graph  3.15).  This  contrasts  with  the  situation  in 
the euro area  where the average  notional leverage 
has  not  diverged  significantly  from  the  standard 
ratio  compared  to  1995.  Second,  it  is  pertinent  to 
look  at  the  maturity  composition  of  assets  and 
liabilities.  Sweden  shows  a  rather  high  and  rising 
share of volatile assets (40) (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. 

Indicators  of  the  capacity  to  repay  do  not 
suggest a clear need for deleveraging. If gauged 

(39)  For 

the  concept  of  notional 

leverage,  see  Cuerpo, 

Drumond, Lendvai, Pontuch and Raciborski (2013). 

(40)  Volatile  assets  include  financial  derivatives,  shares  and 
other accounts receivable/payable (notably trade credits).  

45 

 
 
 
                                                           
 
 
 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Graph 3.16a:Debt-to-gross operating surplus, 
Sweden vs. euro area 

Graph 3.16b:Interest burden, Sweden vs. euro 
area 

1000

900

800

700

600

%

500

400

300

200

100

0

%

25

20

15

10

5

0

95

97

99

01

03

05

07

09

11

95

97

99

01

03

05

07

09

11

Debt / gross operating surplus SE
Debt-to-gross operating surplus EA

Interest payments / value added SE
Interest payments / value added EA

Source: For Graph 3.16a, Commission services (Eurostat); for Graph 3.16b , Commission services (Eurostat), ECB

gross 

operating 

against 
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 
intra-group 
lending. (41)  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. 

large  share  of 

the 

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 
and 
(Cuerpo,  Drumond,  Lendvai,  Pontuch 
Raciborski,  2013). (42)  Typically,  if  the  size  of 
debt  accumulation  over 
is  considered, 
Sweden  appears  in  a  relatively  low-risk  position. 
level,  non-
Indeed,  compared 
consolidated  corporate  debt  as  a  percentage  of 
GDP  has  increased  only  by  some  14  percentage 
points,  which  is  less  than  in  most  other  countries 

the  2000 

time 

to 

(41)  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. 

(42)  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. 

(in  the  euro  area,  debt-to-GDP  increased  by  28 
pps). (43) 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. (44)  or 
Arcand  et  al.,(45)  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 3.17). 

(43)  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. 

(44)  Cecchetti  et  al.(2011)  estimates  that  corporate  debt  above 

90% of GDP is detrimental to growth.   

(45)  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.  

46 

 
                                                           
                                                           
 
Graph 3.17:Company default

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

the  high 

Notwithstanding  the  indications  of  contained 
deleveraging  pressures, 
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 
distinguishing  Sweden 

earlier, 

another 

feature 
is  the  wide  use  of 

3. In-Depth Analysis of Selected Topics 

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. ( 46)  

investors 

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%. (47)  Foreign 
typically 
establish  a  holding  company  in  Sweden  with  a 
small  equity  capital  but  a  large  loan  which  allow 
the holding company to buy a decisive share of the 
Swedish  company  (Sveriges  Riksbank,  2012(b)). 
This  behaviour  can  be  illustrated  by  the  fact  that 
loans  from  parental  companies  account  for  more 
than  60%  of  all  intra-group  lending  from  abroad 
and  have  seen  a  steeper  increase  than  loans  from 
foreign subsidiaries of Swedish-owned companies. 
Given the tax deductibility of interest payments, it 
is  more  profitable  for  foreign  investors  to  hold 
assets  in  Sweden  in  the  form  of  interest-bearing 
loans  to  holding-companies  in  Sweden  and  not  as 

(46)  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 
loans  from  Swedish 
average 
subsidiaries  to    foreign  parents.    Interest  payments  from 
Sweden  are  also  systematically  higher 
interest 
payments  flowing  to  Sweden  from  abroad.  Economic 
commentary, Riksbank, 2012/3. 

interest  rate  paid  on 

than 

(47)  According  to  the  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").  

47 

 
 
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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) (48).  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. 

corporations.  Following 

Finally, escalation of corporate debt in 2003-08 
has been also facilitated by the low-interest-rate 
environment  and  low  perceived  risk  of  lending 
to 
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 

the 

(48)  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".   

48 

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  2006-08  (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 
the 
consumption 
interlinkages between the sectors of the economy, 
high  indebtedness  of  one  sector  tends  to  have 
negative  consequences  for  other  sectors.  Even  if 
the  banking  and  public  sectors  are  regarded  as 
sound,  a  major  need 
for  deleveraging  of 
households  or  non-financial  corporations  can 
change the status of the sector substantially. 

investment.  Given 

and 

3.3.1.  Risks for the real economy 

triggered  by 

Sweden experienced a financial crisis driven by 
over-indebtedness  already  in  the  early  1990s. 
The  crisis  was  preceded  by  a  housing  and  credit 
boom 
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 
these  effects  of 
to  cushion 
policy 
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.  

is  able 

in  terms  of 

Deleveraging  of  the  private  sector  may  also 
leave  permanent  trace 
lower 
potential  output.  The  capital  stock  can  be 
negatively  affected  due  to  a  decrease  in  the 
investment  level  by  deleveraging  companies.  The 
stock  of  investment  often  does  not  reach  the  pre-
crisis level. There may be also permanent negative 
effects  on  the  labour  force  due  to  exclusion  from 
the  labour  market  following  long  periods  of 
unemployment. 

Notwithstanding  the  relatively  low  imminent 
risks  of  deleveraging  suggested  by  various 
analyses discussed earlier in the note, the effects 
of  potential  deleveraging  on  the  real  economy 
should  not  be  neglected.  An  internal  QUEST 
model (49)  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 

(49)  QUEST  is  a  new-Keynesian  dynamic    stochastic  general 
the  European 
  model  developed  by 
(see 

equilibrium 
Commission 
http://ec.europa.eu/economy_finance/research/macroecono
mic_models_en.htm) 

3. In-Depth Analysis of Selected Topics 

would  decrease  output  by  3%  in  the  first  three 
years  and  have  a  negative  permanent  effect  on 
GDP  of  about  1.5%.  The  unemployment  rate 
would rise by 1.7 pps. Consumption would decline 
by 3% and investment drop by 6% within the first 
three  years  after  the  shock.  The  model  also 
predicts  a  prolonged  period  of 
low  housing 
investment.  These  results  are  broadly  consistent 
with the deleveraging experience in Sweden in the 
1990s.  However,  while  the  model  estimates  that 
household consolidation lasts more than  ten years, 
with half of the consolidation happening in the first 
six years, the Swedish experience suggests a much 
faster pace of deleveraging (the main consolidation 
phase  was  completed  in  four  years,  reducing  the 
debt to GDP ratio by 10 pps). 

3.3.2.  Risks for the financial sector 

Compared  to  the  situation  before  the  1992 
crisis, but also in comparison with the other EU 
countries,  the  Swedish  financial  sector  appears 
to  be  in  a  relatively  good  shape.  Swedish  banks 
are well capitalised,  their profitability measured as 
returns  on  equity  has  improved  over  the  last  year 
and  the  share  of  underperforming  loans  is  very 
low, banks' exposure to countries in receipt of EU 
or IMF financial assistance is marginal. However, 
the  financial  sector  continues  to  be  vulnerable  to 
risks  related 
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).  

its  size,  strong 

to 

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. (50)  The 
risks  have  been  also  picked  up  by  the  Financial 

(50)  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. 

49 

 
                                                           
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

Crisis  Committee,  which  was  set  up  by  the 
Swedish  government  in  2011  with  the  task  of 
preventing  and  managing  financial  crises.  The 
the  establishment  of  a 
Committee  proposes 
macroprudential council in Sweden which, among 
other tasks, should "analyse and present proposals 
on  how  to  improve  crisis  prevention"  for  instance 
"risky 
by  developing 
interdependence  and  links  between  players  and 
markets,  for  example,  rules  on  debt 
levels" 
(Statens Offentliga Utredningar, 2013:6).  

that  manage 

tools 

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.  

low 

is  rather 

An  analysis  of  credit  supply  and  demand 
conditions  suggests  that  the  probability  of 
deleveraging 
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 
and 
(Cuerpo,  Drumond,  Lendvai,  Pontuch 
Raciborski,  2013).  The  supply  of  credit 
is 
sufficient (51), facilitated by an easy access by  the 
Swedish  banks  to  cheap  foreign  funding.  This  is 
related  to  the  relatively  high  perception  of  the 
soundness  of  Swedish  banks,  if  measured  by 
capital  adequacy,  return  on  equity  or  the  share  of 
non-performing loans. The risk of a spill-over from 
the  sovereign  debt  is  low,  as  public  debt-to-GDP 
ratio  stands  below  40%  and  sovereign  credit 
default swaps are among the lowest in the EU. On 
the  demand  side,  the  current  risks  are  slightly 
higher  given 
the 
economic outlook and economic sentiment. Higher 
expected 
continued 
uncertainties  about  the  external  development  are 

the  recent  deterioration 

unemployment 

and 

in 

(51)  See  the  Business  Tendency  Survey  by  the  National 

Institute of Economic Research.  

50 

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  1992-93,  the 
government balance 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.  

is 

in 

noticeable 

particularly 

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 
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. 

translates 

the  unlimited 

interest  payments 

the  Swedish  context, 

tax 
In 
for  both 
deductibility  of 
households  and  corporations 
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.  

the 

On 
deleveraging  affects  public  finances  via 

side,  private 

expenditure 

sector 
the 

 
                                                           
automatic 
stabilisers.  Higher  unemployment 
requires more spending on unemployment benefits, 
retraining,  subsidised 
jobs  and  other  social 
  Also,  a  drop  in  confidence  of 
allowances. 
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  back  the  debt 
ratio below 40%. 

3. In-Depth Analysis of Selected Topics 

51 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
Swedish  National  Reform 
assessing 
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. 

the 

Concerning the challenge of high private debt, a 
number of different avenues can be considered:  

recently 

introduced 

Notwithstanding 
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 
to 
consumption and investment, but also to the health 
of  the  financial  sector,  and  in  extremis  to  the 
currently sound public finances.  

levels  pose  a  downside  risk 

taxation 
to 

in  housing 
for  households 

Housing  taxation:  The  analysis  identified  a  clear 
that  creates 
debt-bias 
incentives 
their 
finance 
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. 

the 

reduce 

an  unsustainable 
risk  of 
To 
accumulation of household debt, one avenue could 
be to correct the debt bias in housing taxation by a 
tax 
global  reform  gradually  phasing-out 

the 

time  strengthening  again 

deductibility  of  interest  payments  while  at  the 
same 
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. (52)  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  actual 
implementation of the reforms could be discussed, 
their  content  and  structure  may  already  be 
established  so  that  the  roll  out  is  facilitated  once 
the timing is judged to be appropriate. 

timing  of 

the 

Household 

supervision: 

Financial 
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 

(52)  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 

 
                                                           
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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. 

tax 

inspired 

planning 

advanced 

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 
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. 
tax  planning  entails  non-negligible 
Also, 
amounts  of  foregone  tax  revenues  for  the  state 
budget.  

the 

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 
could  be 
considered,  such  as  a  generally  applicable  cap  on 
the  tax  relief  for  interest  payments.  It  would  not 
only  bring  benefits 
lowering  corporate 
in 
indebtedness, but also higher tax receipts.  

company 

taxation 

in 

in  the  housing 
Concerning  the  challenges 
market,  a  number  of  different  avenues  can  be 
considered: 

54 

shows 

analysis 

The  Commission's 
that 
inefficiencies  still  weigh  on  the  Swedish  housing 
market. These are likely to have significant effects 
on the economy as a whole since they contribute to 
a)  long-term  underproduction  of  dwellings;  b) 
higher prices of tenant-owned apartments and one-
dwelling-building  due  to  lack  of  available  rental 
units. The latter subsequently spills over into a risk 
for  higher  household  indebtedness.  Therefore, 
even though some measures have been undertaken 
recently, further policy actions could be envisaged 
to  improve  housing  supply  as  well  as  market 
efficiency. 

towards  market-clearing 

investment  differs  substantially, 

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 
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 
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 
limiting  upward  price 
housing  market  and 

 
4. Policy Challenges 

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. 

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 
(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.  

incentives 

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 
planning  monopoly.  Low 
have 
predictability 
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. 

potential 

returns 

local 

of 

a 

the 

cost 

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 
responsibilities.  Also, 
clarifying 
municipalities  could  avoid  insisting  on  specific 
technical  requirements  going  beyond  the  common 
set of rules. A more regional view when evaluating 
increased 
municipal 
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 
involvement  of  SMEs  and  foreign 
and 

housing 

needs, 

and 

the 

55 

 
 
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(Statistiska 

Financial 
Swedish 
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Den 
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svenska 

centralbyrån), 
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(Statistiska 

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bostadsrätter 
(http://www.maklarstatistik.se/media/13408/f%c3
%b6rdjupad_statistik_201302.pdf), February 2013. 

Prisuppgång 

för 
2012, 

under 

Financial 
Swedish 
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Supervisory  Authority 
svenska 

Den 

Swedish National Board of Housing, Building and 
Planning  (Boverket),  Bostadsmarknaden  2012-
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Svensk  mäklarstatistik,  Priser  på  bostadsrätter 
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ett 
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(Boverket),  Bostadsbristen  ur 

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Swedish  Competition  Authority,  Konkurrens-  och 
i  byggbranschen,  speech 
upphandlingsproblem 
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(Boverket),  Boverkets 

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och 
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utvecklingen 

av 

av 

Swedish National Board of Housing, Building and 
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57 

 
European Commission 

Macroeconomic Imbalances - Sweden 2013 

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