COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Sweden 2014
Date: 2014-03-05
Institutions: European Commission
Subjects: Euro Group (euro area), Sweden, competitiveness, economic growth, financial services, indebtedness, macroeconomics, property market, stability pact













EUR-Lex - 52014SC0090 - EN











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52014SC0090

COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Sweden 2014 /* SWD/2014/090 final */









Results of in-depth reviews under
Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic
imbalances
Sweden continues to experience macroeconomic imbalances,
which require monitoring and policy action. In particular, developments
regarding household indebtedness, coupled with inefficiencies in the housing
market, continue to warrant attention. Although the large current account
surplus does not raise risks similar to large deficits, and is partly linked to
the need for deleveraging, the Commission will follow the developments of the
current account in Sweden in the context of the European Semester. 
More specifically,
household debt has increased again after a period of stabilisation, as the main
contributing factors – low interest rates on mortgages, debt-bias in taxation,
slow mortgage amortisation and limited housing supply – remain in place.
Various indicators of credit supply and demand conditions do not indicate
imminent deleveraging pressures. After stabilising in recent years, house
prices increased again in 2013, driven by favourable demand conditions and
supply inefficiencies. Moreover, rental market inefficiencies, cumbersome
planning procedures and little competition in construction, have also
contributed to the house price dynamics. More stable house prices are needed to
limit private indebtedness and reduce macroeconomic risks, once debt service
costs increase. The recent macroprudential measures are instrumental, but
likely not enough, to reduce macroeconomic risks. In particular, strong tax
incentives for debt financing are perceived as key drivers of house prices.
Higher residential investment would also improve the savings‑investment
balance. As regards the non-financial corporate sector indebtedness the
analysis finds that it does not give rise to macroeconomic risks. Moreover,
recent reforms in company taxation are likely to further reduce the level of
corporate debt by limiting tax minimisation by multinationals.
Excerpt of country-specific findings on Sweden, COM(2014) 150 final,
5.3.2014
Executive Summary and Conclusions 7
1.       Introduction  11
2.       Macroeconomic
Developments 13
3.       Imbalances
and Risks 19
3.1.     Competitiveness
and external position  19
3.1.1.  Competitiveness
and the savings‑investment balance  19
3.1.2.  Net
International Investment Position  30
3.2.     Private
indebtedness: non-financial corporate sector and household indebtedness 33
3.2.1.  Evolution of
indebtedness of the non-financial corporate sector 33
3.2.2.  Factors behind
Swedish corporate indebtedness and reforms undertaken  35
3.2.3.  Evolution  of
household indebtedness 36
3.2.4.  Measures taken
so far and current debate on household indebtedness 40
3.2.5.  Private
indebtedness: assessment of imbalance  42
3.3.     The housing
market 44
3.3.1.  House price
developments 44
3.3.2.  Underlying
market fundamentals 46
3.3.3.  Supply side
challenges: New constructions 49
3.3.4.  Supply side
challenges: The rental market and utilisation of the existing housing stock  52
3.3.5.  Outlook and
conclusions 54
4.       Specific
Topics 57
4.1.     Banking
sector overview   57
4.2.     Credit risk  58
4.3.     Funding risk  60
4.4.     Conclusions 62
5.       Policy
Challenges 63
References 67
LIST OF Tables
2.1. Key
economic, financial and social indicators 17
4.1.     Financial
soundness indicators 58
LIST OF Graphs
2.1.     Contributions
to growth  13
2.2.     Export
market share decomposition  13
2.3.     Decompostion
of REER developments 14
2.4.     Labour
market 15
2.5.     Poverty  15
2.6.     Consolidated
debt decomposition  16
3.1.     Decomposition
of the Swedish current account 19
3.2.     Net
borrowing/lending by sector 20
3.3.     Investment
rates 20
3.4.     Investment
in dwellings 20
3.5.     Non-cyclical
current account 21
3.6.     Decomposition
of the rate of change of ULCs 21
3.7.     Swedish
export market shares: goods and services 22
3.8.     Growth rate
of Swedish export market shares 22
3.9.     Swedish
market shares and the nominal exchange rate  22
3.10.   Revealed
comparative advantage in services 27
3.11.   Revealed
comparative advantage in goods 27
3.12.   Total Swedish
exports by destination as a percentage of Swedish GDP (2011) 27
3.13.   Sweden
imports by geographical origin, as a percentage of trading partner GDP (2011) 28
3.14.   Sweden's
current account balance (excluding investment income) by partner region  28
3.15.   Decomposition
of the Swedish NIIP  30
3.16.   Decomposition
of Rate of Change of the Swedish NIIP  30
3.17.   NIIP by
Sector 30
3.18.   Valuation
effects 31
3.19.   Valuation
effects per financial instrument 32
3.20.   NIIP and FDI
at market and book values 32
3.21.   Decomposition
of y-o-y changes in corporate debt-to-GDP ratios 33
3.22.   Non-financial
corporations debt as % of GDP (consolidated and super-consolidated view) 33
3.23.   Leverage of
NFCs 34
3.24.   Leverage of
non-financial corporations 34
3.25.   Evolution of
credit flows 34
3.26.   Corporate
default rate  35
3.27.   Evolution of
housing prices 36
3.28.   Households'
leverage  36
3.29.   Decomposition
of y-o-y changes in debt-to-GDP ratios, households 36
3.30.   Household
leverage discounting the price evolution  37
3.31.   Loan-to-value
ratio of new mortgage loans 37
3.32.   Discretionary
income for Swedish households 38
3.33.   Stress test
on interest rate  40
3.34.   Stress test
on house price  40
3.35.   Loan-to-value
ratio in the mortgage stock, per cent 41
3.36.   Deleveraging
pressures 42
3.37.   Real house
prices in the Nordic region, Index 2010=100  44
3.38.   Nominal House
Price Index in Sweden and the EU   44
3.39.   Price to rent
and price to income  45
3.40.   Price to
income ratio; index 2000=100  45
3.41.   Price to
income ratio; index 2000=100  46
3.42.   Overvaluation
gap with respect to main supply and demand fundamentals in Sweden  46
3.43.   Distribution
of population by tenure status, 2014, % of total population  47
3.44.   Residential
Investment and Building Permits in Sweden  49
3.45.   Residential
investment in % of GDP  49
3.46.   Rent Control
in the EU27 (quantitative indicators for rent setting) 53
3.47.   Rent to
income ratios, selected countries - Rebased 2000=100  53
3.48.   Rent of newly
built apartments vs existing stock  53
4.1.     Lending to
private sector 57
4.2.     Return on
equity (%) 58
4.3.     Non-performing
loans 58
4.4.     Tier I
capital regulatory ratio  59
4.5.     Tier I
capital leverage ratio  59
4.6.     Loans to
deposits 61
4.7.     Funding
structure of major banks 61
4.8.     Average
funding maturities 61
LIST OF Boxes
3.1.     Balance-of-payment
revisions reduce the Swedish current account surplus. 24
3.2.     Over-indebtedness 39
LIST OF Maps
No table of contents
entries found.
In May 2013, 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 13 November 2013, 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) provides an economic analysis 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 indebtedness of the private sector, and in particular household
indebtedness, continues to constitute a macroeconomic risk. Against the backdrop of rising house prices, household debt, in
particular in the form of mortgages, remains high. At present, credit growth
for mortgage loans is less expansive but still outpaces GDP growth. Corporate
debt is still high but decreasing in a low growth and investment context.
Recent taxation reforms aim at minimising the tax-planning component of
corporate debt and further measures are to be expected. Concerns about the private
sector indebtedness are to some extent mitigated by very moderate default
figures for corporations as well as households but the evolution of credit
flows needs to be monitored, especially once economic growth rebounds.
·       Although house price are not growing extensively since 2010,
inefficiencies in the Swedish housing market continue to imply potential risks
for macroeconomic stability, in particular in case of potential house price
corrections. These inefficiencies, linked to the
structural under-supply of dwellings and the inefficient use of the existing
housing stock, have built up over the course of recent decades and have a
macroeconomic impact mainly via increased household indebtedness. Despite some
recent measures which point in the right direction, the rental market remains
subject to far-reaching regulation through the utility-value based system,
while high transaction taxes reduce homeowners' incentives for selling houses.
The planning and zoning processes for new construction remain lengthy and
opaque; the limited competition among construction and property development
companies further creates upward-bias in house prices. Generous deductibility
of mortgage interest payments from the income tax debt together with low
recurrent property taxes keep fuelling house price developments. Housing issues
are most pertinent in the Stockholm and Gothenburg regions. . 
·       Current account surpluses, though large, continue on a declining
trend as domestic savings moderate. Increasing
residential investment from its comparatively low levels could help improve the
savings investment balance. The decline in the current account balance is
partly explained by a structural decrease in the goods trade surplus, while
service exports, the income balance and a comparatively small energy deficit
have had a counterbalancing effect. From a savings-investment viewpoint, the
large Swedish external surplus is the reflection of the high net savings of the
private sector, the fiscally prudent position of general government and the low
level of residential investment. The Swedish tax system provides incentives for
building up debt (for instance by allowing tax deductibility) as well as
savings (for instance via the pension reform); this is one reason why Swedish
households built up high indebtedness in parallel to high savings. As
households' precautionary savings decrease, baby-boomers retire, corporate
investment rebounds and the government delivers on its planned fiscal stimulus,
domestic net savings are expected to further moderate. Despite continuously
losing export market shares, Sweden remains one of the most competitive
economies in the EU, supported by a generally favourable business environment
and a strong performance in R&D and innovation. Results in basic education
have, however, deteriorated. The net international investment position is
positive when foreign direct investment is estimated at market value and raises
no sustainability concerns.
·       Credit and funding risks in the Swedish banking sector remain
stable, also due to measures undertaken by Swedish authorities. However,
developments in the financial sector and the effectiveness of the applied
measures call for continued monitoring. On the
asset side the key risk of Swedish banks is their increasing loan portfolio to
households, mainly through mortgage loans mirroring the problem of high
household indebtedness. On the liability side, banks are exposed to funding
risks as they finance their operations predominantly on the international
wholesale markets, creating maturity and currency mismatches in their balance
sheets. 
The IDR also discusses the policy
challenges stemming from these developments and what could be possible avenues
for the way forward. A number of elements can be considered: 
·       In order to further promote a sound lending culture and to contain
household debt, a comprehensive reform could be considered that gradually
reduces and/or limits the scope of the tax deductibility of interest payments
while at the same time strengthens recurrent property taxation. Such a reform, including the need to address taxation and
indebtedness, could already now be outlined broadly, so as to allow quick first
steps and a carefully sequenced implementation once the political situation
allows this. In addition, it could also be useful to push for a further
strengthened amortisation culture among borrowers.
·       As regards corporate debt, further ways to reduce the debt-bias in
company taxation could be considered. It also seems
pertinent to make sure that a sound financing framework for companies is put in
place, with a view to investment needs once the low growth and investment
context has been left behind.
·       Focusing on the housing market, the Swedish government has taken
several steps pointing to the right direction. Nevertheless, further additional
steps could be taken. As concerns the rental
market, these could include deregulating rent setting in the sense that
individual tenants and landlords would be able to agree on rent levels and
hence increase the freedom of contract. A first step could be to allow rents of
newly produced rental units to fully reflect tenants' willingness to pay or
that rental prices can be set more freely in case of privately owned rental
units. Eventually, rents of the remaining stock could be adapted. As regards
construction, it would seem that a more strategic, overarching approach to
solve the inefficiencies weighing on the housing market would be useful.
Further streamlining of the planning and zoning processes could be considered.
In particular, these processes could be rendered more efficient by more
standardised building requirements across the country and by decreasing the
extensive zoning and planning requirements. More transparent land allotment
procedures at municipal level could be another priority as well as facilitating
the access to tenders for smaller or foreign developers to increase
competition. Identifying clear mechanisms to incentivise developers to
construct on land which has already been subject to detailed planning could
also be considered. In a similar vein, the incentives for municipalities to
support new constructions could also be re-assessed. 
The suggested measures are interlinked
and reinforce each other: for instance, changes on
the housing market would likely affect household debt development. The
timeframe of their impact could also differ substantially: while for instance
any limitation on the tax deduction would be likely to have short term effects,
a simplified and faster building process would likely impact the housing supply
in the medium term. 
It is crucial to avoid abrupt policy
changes in these areas due to their pivotal macroeconomic impact: gradual
implementation, well-considered timing, wide political and public support and
continuous evaluation of the impact of the measures would be necessary. As discussed in this In-Depth Review, these imbalances have been
built up over a longer time horizon, thus their unwinding cannot take place
overnight. Nevertheless, a forthcoming stronger economic growth period and the
ongoing wide debate in Sweden on these issues could pave the way for further
sound policy actions in these areas.  
On 13 November 2013, the European
Commission presented its third 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 macroeconomic 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 in the sense of
the legislation and what type of follow-up it will recommend to the Council.
This is the third IDR for Sweden. The
previous IDR was published on 10 April 2013 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 undertakes
an economic analysis of the Swedish economy in line with the scope of the
surveillance under the Macroeconomic Imbalance Procedure (MIP).
Against this background, Section 2 presents
an overview of the general macroeconomic developments, Section 3 takes a more
detailed look at main imbalances and related risks. Section 4 gives a closer
analysis of the stability of the financial sector, while Section 5 discusses
policy considerations.
A domestic-demand-driven recovery
Sweden had come out of the 2008/09 sharp
recession with a strong rebound in 2010 and solid growth in 2011. However, GDP
growth has been meagre in 2012 and 2013 in the wake
of the euro-area sovereign debt crisis and slow economic growth among Sweden's
trading partners. GDP growth is expected to pick up gradually from 0.9% in 2013
to 2.5% in 2014 and 3.3% in 2015. 
Unlike previous recoveries, which were
typically export-driven, the main push for future growth is expected to come
from domestic demand. Household consumption is projected
to be the main source of growth, on the back of expected improvements in the
labour market, a low interest rate environment and income tax cuts announced in
the 2014 Budget Bill. The household saving rate, which reached record high
levels in 2012 and 2013 against a background of high unemployment rate and
uncertainties about the euro-area outlook, is expected to decrease once
uncertainty subsides and precautionary savings are reduced in the mid-term.
Fixed capital formation is set to resume
gradually. Linked to the expected recovery in
exports, industrial capacity utilisation is expected to rise, paving the way to
investment outlays in 2014 and 2015. 
Deteriorating exports market share and
rebalancing current account surplus
Despite being one of the most
competitive economies of the EU, as further discussed in section 3.1.1, Sweden
has been losing export market shares (EMS) since 2008. The losses in EMS come from the goods sector whereas the services
sector shows some gains since 2010. Structural factors linked to the
traditional product mix of Swedish exports drive the losses in goods EMS. Paper
products are increasingly losing ground as carriers of information and saw mill
products are facing constraints due to the weak outlook of the construction
sector. Year-on-year swings in EMS growth are also related to fluctuations in
the krona exchange rate, which affect the value of Swedish exports when
measured in euros. For instance, the large drop in EMS witnessed in 2009
correlates with the NEER depreciation depicted in graph 2.3.
Swedish cost developments against those
of its trading partners do not indicate major challenges in terms of
competitiveness. The real effective exchange rate
has appreciated since 2010 due to the strong krona. While unit labour costs
have been growing in line with those of Sweden's trading partners, domestic
prices have been growing more slowly.
Sweden's current account surplus has
been above the indicative scoreboard threshold since 2003. It adjusted from 9.3% to 6% of GDP between 2007 and 2012 and is
expected to adjust further once households' precautionary savings decrease and
investment rebounds. Notwithstanding two decades of positive current accounts,
the Swedish NIIP, while sustainable, remains negative.
The external position and trade performance
of Sweden will be further analysed in 3.1.
Low inflationary pressures 
After having fluctuated around 0.9% in
2012, HICP inflation dropped in 2013 to 0.4% on
account of lower energy costs and contracting prices in the non-energy
industrial goods sector. Given the assumed subdued outlook for energy and the
continued impact of the Swedish krona appreciation, inflationary pressures are
expected to remain low in 2014. Wage developments are expected to contribute to
the low-inflation environment as the 2013 pay settlements, which run for three
years, indicate a moderate rate of wage growth by historical standards. The
current slack in the labour market also points to moderate growth in employee
compensation. Following low inflationary pressure in the economy and sluggish
economic growth, the Riksbank cut the repo rate by 0.25 percentage points to
0.75% in December 2013.
Recovering labour market and stable social
indicators
Despite a recently weak economy,
employment has continued to grow in 2012 and 2013
and is expected to continue growing in 2014 and 2015 on account of a growing
labour force and reforms in the unemployment and illness insurance schemes.
The unemployment rate which has never
fully recovered after the 2008/2009 crisis peaked
at 8.3% in March 2013 and seems to have since stabilised around 8%.
Unemployment is expected to decrease slowly in 2014 and more significantly in
2015 in connection with stronger growth dynamics. 
Although now below the EU average, the
youth unemployment rate is high, 24.1% in November 2013, and climbed from 15%
in 2001. Several factors tend to alleviate concerns about the youth
unemployment rate: a large share of students among the unemployed, high
turnover and short unemployment spells, a temporary expansion in the labour
force and a generational effect. However, even if students are disregarded, the
remaining youth unemployment rate is rather high (11.9% in 2012) compared to
Sweden's peers in terms of labour market performance (from 2.5% in the
Netherlands to 8.1% in Finland). Most of these non-student, unemployed persons
are low skilled people without completed upper-secondary education and young
people with non-EU immigrant background. These (over-lapping) groups appear to
be the most vulnerable. ([1])  
The at-risk-of-poverty or social exclusion
rate (AROPE) has slightly increased since 2010 but remains far below the euro
area average. Furthermore, absolute poverty remains stable at a very low level,
1.3% of total population (7.5% in the euro area).
Domestic debt is mainly a private debt
concern
Consolidated private sector debt has
been rising from 121% of GDP in 1995 to 212% in 2012, a level far above the
alert threshold of 133% of GDP. Following three
years of stabilisation at a high level, Swedish private debt as a percentage of
GDP is expected to increase in 2013 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 –To be updated).  The correction in 2009-2011 was
on account of decreasing indebtedness of non-financial corporations which
generate about two thirds of total private debt. On the other hand, household
debt, which accounts for the remaining third, has not reduced and has remained
stable at around 81% of GDP in 2009-2011 before increasing to 83.6% in 2012. 
To complete the picture, financial corporations also contribute significantly
to the country's debt with 98.8% of GDP in 2012. 
On the other hand, public debt stands at
a relatively low level of around 40% of GDP. The
decline in the government debt-to-GDP ratio over the previous years was
reversed in 2013, on account of a one-off additional borrowing of SEK 100
billion to strengthen the currency reserves of the Riksbank. Taking into
account the 2014 budget and its focus on improving household disposable income
through tax cuts, the deficit is expected to reach 1.5% of GDP in 2014 and debt
to tick up before falling back in 2015. Private indebtedness will be further
analysed in section 3.2.
Housing market still under pressure
Although the Swedish housing market has
been stable in the recent past, it remains a potential source of instability, despite some recent measures.  In the medium term, raising interest
rates and tightening of credit conditions would most likely negatively impact
on the demand for mortgages. However, the strong tax incentives for housing
coupled with supply imbalances on the market will likely further push house
prices upwards. House prices need to stay on stabilisation path to avoid
driving private indebtedness further, to avoid overheating and abrupt
volatility that could renew concerns on imbalances and of macroeconomic risks. 
Recent government measures are agreed to
be pointing to the right direction, albeit their
impact is perceived to be small in the short term. Further measures would be
needed to address the growing inefficiencies on this market.
3.1.      Competitiveness
and external position
3.1.1.   Competitiveness
and the savings‑investment balance
Large external surpluses slowly
decreasing as the savings-investment balance moderates
Swedish current account surpluses,
though large, continue on a declining trend. Sweden
started posting large current account surpluses in the mid-1990s following the
deep economic and financial crisis which had broken out in the beginning of the
1990s and which caused the collapse of the fixed exchange rate system, a sharp
depreciation of the krona and the beginning of an export-led recovery process.
In the three years to 2012, the Swedish current account surplus marginally
breached the 6% threshold of the MIP scoreboard. Surpluses have been on a
declining trend since 2007 when they reached 9.3% of GDP (Graph 3.1), and are expected to continue declining
to less than 6% of GDP by 2015, according to the Commission 2014 winter
forecast([2]).
The decline in the current account balance is partly explained by a
structural decrease in the goods trade surplus, while service exports, the
income balance and a comparatively small energy deficit have had a
counterbalancing effect. Net Swedish exports of
goods have declined substantially since the mid-2000s in connection with (i)
the increased importance of the services sector in the Swedish economy, (ii)
heightened competition from emerging, goods export-oriented economies and (iii)
the on-going trend towards servicification([3]). This trend was accompanied by increasing net service exports
which, however, have not been sufficient to prevent the overall trade balance
from decreasing as a share of GDP. It should also be noted that the Swedish
trade deficit in energy products is remarkably small for a non-oil producing
country, which is the consequence of its extensive use of renewable hydropower
sources and nuclear energy. At -1.7% of GDP in 2012, the Swedish energy trade
balance is well above the EU average of ‑4.7%, contributing to explain
the continued high external surpluses.
While the overall trade balance has been on
a slow decline, the foreign income balance has been improving over the past few
decades, turning positive in 2003. This evolution is linked to the continued
strengthening of Sweden's net international investment position, as discussed
in the next subsection. Current transfers have delivered a steadily negative
impact, reflecting Sweden's foreign aid and net positive contributions to
international organisations such as the EU, as well as workers' remittances([4]). As is usually the case in developed countries, the capital
account plays a residual, negative role.
Domestic savings remain high, but are
edging downwards. From a savings-investment
viewpoint, the large Swedish external surplus is the reflection of the high net
savings of the private sector, the fiscally prudent position of general
government and the low level of residential investment. The relatively high
saving rate of Swedish corporations observed from 2002 to 2010 was partly due
to the comparatively high net savings of the financial sector which have
contributed to the high capitalisation levels of the Swedish banking sector
(see Section 4). Corporate savings have since begun moderating (Graph 3.2). As global demand picks up, it is
likely that previously delayed investment decisions begin to materialise,
thereby contributing further to this trend. Swedish households increased their
precautionary savings in connection with the 2008 international financial
crisis. However, as the crisis subsides, households are likewise expected to
moderate their saving behaviour. It should be noted that high corporate and household
savings are also a consequence of pension and other reforms introduced in the
1990s, which included a move towards a defined contributions pensions scheme.
As the population ages and the baby‑boomers retire, an increasing segment
will begin dis-saving, thereby contributing to further decrease the external
surplus. Sound budgetary frameworks and fiscally prudent positions have meant
that public finances have been close to balance or in surplus during most of
the past 15 years. However, the 2013 Budget Bill entailed a small fiscal
stimulus, which was reinforced in the 2014 Budget Bill. This partly accounts
for the moderate government deficits depicted in Graph 3.2 during the 2012-2015 period.
While overall investment levels compare positively with EU peers,
residential investment is strikingly low. After
starting from comparatively low levels in the 1990s, Swedish investment rates([5]) increased rapidly, reaching 20% of GDP in 2008. The economic and
financial crisis meant a marked decline in investment in many EU countries
which, however, was comparatively moderate in the case of Sweden. Over the five
years from 2008 to 2012, Sweden invested more than a reference group of EU
countries experiencing large current account surpluses (Germany, the
Netherlands and Denmark). According to the latest available annual data, the
2012 Swedish investment rate was higher than the one for both the euro area and
the group of surplus countries (Graph 3.3).
Swedish investment in dwellings, however, has been persistently low,
both when compared with the investment rates of the euro area and of surplus
countries (Graph 3.4). The sub‑optimal residential
investment performance of Sweden is closely linked to restrictions and
inefficiencies in the functioning of the Swedish housing market, as detailed in
Section 3.3. Alleviating these constraints would help to balance the Swedish
savings‑investment position.
Price developments are contributing to moderate the trade balance
surplus. As seen in Graph 2.3, the REER has
appreciated significantly since 2010 due to the strengthening of the Swedish
krona. This development is partly the reflection of a safe haven effect, linked
to the aggravation of euro area tensions in 2010-2011, although fundamentals
continue to suggest the possibility of further appreciation([6]). The sustained strength of the krona is expected to continue to
weigh down on the trade balance over the Commission's forecast horizon. In
fact, the lagged pass-through of the increases in the REER means that the
actual current account outturns have likely overestimated the strength of the
underlying "non-cyclical" current account in recent years (Graph 3.5). It should also be noted that the
effects of a negative output gap in the Swedish economy largely offset the
effects of a negative cyclical position in the majority of its trading partner.
This is depicted in Graph 3.5, where the income‑adjusted current
account is seen to have remained close to the actual current account since
2010. Finally, as regards ULCs, their growth has been more dynamic in
Sweden in the past two years than in the euro area, marking a reversion from
the pronounced productivity‑driven decrease in ULCs witnessed in 2010
(Graph 3.6).
Statistical revisions have reduced the current account surplus for
2010-13. In September 2013, the Swedish statistical
office announced it was revising some items of its balance of payments data,
which effectively corrected downwards the Swedish current account surplus. This
statistical revision is explained in detail in Box 3.1 and is the main factor behind the
decrease in the current account indicator of the MIP scoreboard from 6.6% of
GDP in the 2012 edition of the AMR, to 6.2% of GDP in the 2013 edition.
Declining export market shares
notwithstanding the large external surplus
Swedish export market shares (EMS) have
sustained significant losses since 2007, with goods exports continuing to lose
ground to international competitors. In the five
years to 2012, Swedish EMS shrunk by 19%, breaching the 6% decrease threshold
of the MIP scoreboard indicator. As seen in Graph 2.2 and further evidenced in
Graph 3.7, goods exports have long been the driver
of the secular decrease in EMS, while service exports have been significantly
more dynamic. The strength of services, however, has not been sufficient to
offset the EMS losses in goods, not only because EMS gains in services have
been comparatively moderate, but also because goods exports still represented
approximately 70% of all Swedish exports in 2012.
The evolution of the EMS is affected by a structural decline, and
short-term fluctuations linked to exchange rate movements and the cyclical
position of the EU. Increasing competition from
emerging, export-oriented economies has meant a structural decline in the EMS
of many advanced economies, including Sweden's. Notwithstanding the fact that
Swedish exports have grown on average 6% per year in the past 16 years, they
have been outpaced by world export growth of 8% (Graph 3.8). The weak economic performance of
important EU markets in the wake of the international financial crisis has also
contributed to curb Swedish export growth. Finally, exchange rate movements
also affect market share measurement (Graph 3.9). For instance, a depreciation of the
krona has the short-run effect of reducing the value of Swedish exports when
measured in a common currency and an opposite long-run effect of supporting
market shares via increased price competitiveness.
The co-existence of a large current account surplus with declining
market shares can be understood as a consequence of several factors, including
a moderate level of imports, the importance of the income balance and the
relative growth rate of goods exports. As discussed
in European Commission (2012), "as for other large-surplus countries,
subdued imports [in Sweden] appear to have been more important than exports in
explaining the stronger current account surplus". In fact, the growth rate
of imports in Sweden and other EU countries experiencing large current account
surpluses was comparatively low in the boom period before 2008. This was due to
a domestic demand that was less expansive than in many other EU countries,
something which is partly the result of restrictions in the housing market. As
previously mentioned, a comparatively high degree of energy sufficiency has
also long helped to curb imports. These factors have contributed to support the
current account, but have no effect on EMS. Likewise, the income balance has
boosted Swedish surpluses, but is of no concern from the EMS viewpoint. When
taking together the income balance and the (negative) current transfers
balance, they are seen to have added 1.2% of GDP to the current account on
average from 2007 to 2012. Finally, Swedish goods exports increased by 9.1%
from 2007 to 2012 in euro terms, while world goods exports increased by 40%
over the same period, implying large EMS losses which are of a higher magnitude
than the effects that the sluggish Swedish growth rate of goods exports has had
on the current account.
 (Continued on the next page) 
 Box (continued) 
A highly competitive business
environment, but educational performance is sliding
International assessments rank Sweden
consistently among the world's most competitive economies. In the 2013-14 edition of the Global Competitiveness Report([7]), Sweden ranked 6th out of 148 economies, and third in
the EU, equalling or beating the average of its reference group of
"innovation-driven economies" in all of the 12 competitiveness
"pillars" considered in the report. Particularly strong performances
are noted in the fields of macroeconomic environment, innovation, institutions,
financial market development and technological readiness. The most problematic
factors pointed out by survey respondents were restrictive labour regulations
and tax rates. Likewise, in the 2014 edition of the World Bank's Ease of Doing
Business report([8]), Sweden
ranked 14th out of 189 countries and 4th in the EU. The
only comparatively weak points noted were related to starting a business and
taxation. Swedish institutions enjoy, furthermore, one of world's lowest
corruption perceptions according to Transparency International's index([9]), where Sweden ranks third out of 177 countries, and second among
EU countries. However, in terms of regulatory environment, Sweden's performance
is less remarkable when compared with rich-world economies. According to the
latest 2008 data, Sweden ranked 15th out of 35 OECD countries in the
integrated product market regulation indicator. According to this indicator,
the level of regulatory restrictions in Sweden was only slightly lower than the
OECD average.
Sweden's performance in R&D and
innovation is particularly strong. At 3.4% in 2011,
Sweden displays the second highest expenditure in R&D as a percentage of
GDP in the EU, according to the auxiliary MIP scoreboard indicator. Sweden
ranks first among EU countries in the Commission's composite indicator of
innovation output, showing a strong performance in three of the four indicator
components (namely, in patents, employment in knowledge-intensive activities
and employment in fast-growing firms of innovative sectors)([10]). The share of high-tech products in exports, a factor which is
also considered in the composite indicator, has been broadly stable at 14%
since 2001. This figure is similar to that of the largest EU economies
(Germany, France and the UK) and higher than that of the other EU Nordics
(Denmark, Finland)([11]). Sweden is,
likewise, the highest ranking member state in the Innovation Union scoreboard([12]), heading a group of four EU countries deemed as innovation
leaders.
However, results in basic education have
deteriorated. Sweden performed lower than the OECD
average in all three educational categories (mathematics, reading and science)
considered in the latest (2012) evaluation of 15- and 16-year olds of the
Programme for International Student Assessment. This represents a sharp drop
when compared with the first study (2000), where Swedish pupils outperformed
most other countries. This negative evolution has happened despite Sweden's
comparatively high investment in education. According to the European
Commission's Education and Training Monitor([13]) "general government expenditure on education as a share of
GDP was 6.8% in 2011 compared to the EU average of 5.3%, (…) one of the highest
levels of public expenditure per student in the world."
Export profile specialised in
services and selected industrial products
Sweden has a revealed comparative
advantage([14]) in
services other than transportation and tourism. It has generally no revealed
comparative advantage in goods exports, with the exception of
machinery/electrical products, metals and, notably, wood and wood products (Charts 3.10 and 3.11). Productivity in services is
particularly strong. Commission analysis([15]) shows that Swedish multifactor productivity in market services was
already high in 1995 and that it continued to grow at a robust average rate of
2.9% per year until 2007. Examples of particularly dynamic sectors include
business services, computer and information services and R&D. Goods exports
include traditional products, such as pulp, paper, saw mill products, iron and
steel, as well as more innovation-driven products such as general and
special-purpose machinery, car parts, pharmaceuticals and communication
appliances. The very important pulp and paper industry is, however, under
increased pressure as paper declines as a communication medium.
Intra-EU trade represents an important
share of Swedish exports. In 2012, 57% of Swedish
goods exports were destined to EU markets. There are several EU countries among
the most important trade partners, although Norway, the main export partner,
and the USA also represent very import extra-EU markets for Sweden (Graph 3.12).
Benign external dynamics, with
limited spill-over effects
With the exception of constraints linked
to the housing market, no policies seem to be in place that could significantly
depress internal demand and unduly boost external surpluses. As regards the government sector, the 2014 Budget Bill envisages a
moderate fiscal stimulus which, among other measures, will improve households'
disposable income through tax cuts. According to the Commission 2014 winter
forecast([16]), the new
budgetary measures imply that the government will run a small structural
deficit in 2014 and 2015. As regards monetary policy, the Riksbank cut its
reference rate by 25bp in December 2013, to 0.75%, and the krona exchange rate
has long been allowed to float freely. As new prudential instruments for
stabilising the housing market are made available to the authorities, it is
expected that interest rate policies can be aligned even more closely with
domestic demand dynamics. Finally, as regards salaries, wage-setting is carried
out by the social partners and ULCs have grown above euro area rates in the
past two years. However, the constraints in the housing market discussed in Section
3.3 can contribute to lower residential investment, thereby increasing net
savings and, concomitantly, the external surplus. As mentioned in European
Commission (2012), "the driver of differences in investment between
surplus and deficit countries thus was construction; (…) construction
investment in the euro area periphery (and most new Member States) exceeded
that of surplus countries by several percentage points of GDP. Sweden, Germany,
Belgium, the Netherlands and Denmark displayed the lowest construction
investment rates in the EU. This is relevant for understanding the relative
growth of tradable and non-tradable sectors and external positions of
countries."
The spill-over effects to other EU
countries from a boost to Swedish demand would likely be limited and
geographically concentrated. In 2012, the size of
the Swedish economy was equivalent to 4% of euro area GDP. As a comparison,
Germany represented 28% and the Netherlands 6%. The relatively small size of
the Swedish economy means that the potential spill-over effects from an
increase in internal demand are likewise small. Furthermore, given the
geographical profile of Swedish imports and their importance in partner
economies, the benefits from a boost to internal demand are likely to be concentrated
in the Baltic area and Nordic countries (see Graph 3.13). Finally, it should be noted that
Sweden derives its surplus from its trade relations with non-euro area
countries. As depicted in Graph 3.14, Sweden has maintained a trade deficit
with the euro area since 2007.
Overall external dynamics and the
sizeable current account surplus appear to be largely benign. As previously seen, lower expected domestic savings, price effects
from the appreciation of the krona and on-going competition from emerging
economies imply that Sweden's external surplus is expected to decrease over the
coming years. Coupled with the recent statistical revisions discussed in Box 3.1, this means that the current account
scoreboard indicator of the MIP is expected to fall below the 6% threshold in
the medium term. The relatively small size of the Swedish economy, the
geographical profile of its imports, the fact that it maintains an external
deficit with the euro area and the freely-floating regime of the krona
highlight the limited potential of the Swedish economy for contributing to the
external rebalancing processes that are underway in several euro area member
states. Sweden can, however, benefit from an improved savings-investment
balance by tackling underinvestment in residential construction. Ensuring high
standards in basic education would help support high competitiveness levels in
the long run.
3.1.2.   Net
International Investment Position
A negative but sustainable international
investment position
Sweden displays a moderately negative
net international investment position (NIIP). It
remained broadly stable at around -10% of GDP from 2008 to 2012 and is
estimated to have improved in 2013 on the back of a sizeable current account
surplus and favourable valuation changes (Graphs 3.15 and 3.16).
In the past decade, the composition of
net external assets was dominated by investment in equity securities. Other positive foreign net asset positions are the result of
Sweden's longstanding role as a net foreign direct investor, the strengthening
of central bank reserves and the increase in the value of the loans granted
abroad in recent years (counted as "other investment"). Since 2010,
debt securities are the only instrument displaying a negative net position,
which is largely due to the sizeable bond issuance by Swedish banks placed
abroad.
In fact, the banking sector is the
institutional sector driving the negative NIIP (Graph 3.17). Debt securities issued by
Swedish banks accounted for nearly ¾ of total Swedish debt securities held
abroad by year-end 2012([17]) and,
according to Special Data Dissemination Standard (SDDS) data from the World
Bank, by mid-2013 the external debt of Swedish banks made up 59% of total gross
Swedish external debt. The possible implications of the funding strategies of
Swedish banks for financial stability are discussed in Section 4. 
The external position has been slowly improving and raises no
sustainability concerns. At -10% of GDP in 2012,
the Swedish NIIP is well within the MIP scoreboard threshold of -35%.
Persistent current account surpluses, which are projected to continue in the
medium term, have contributed to slowly improve the NIIP, although to a lesser
extent than could be expected, as will be discussed. According to Commission
projections, in the absence of large valuation changes, Sweden is expected to
close its negative NIIP position over a 2-year horizon for a range of
reasonable macroeconomic scenarios. The currency composition of the NIIP is
also generally favourable, with the majority of liabilities being denominated
in Swedish krona.
The income balance has improved in
tandem with the NIIP and turned positive already in 2003, offering further
cushioning to the current account. Although the
NIIP is moderately negative, this has not prevented Sweden from deriving a net
positive income flow from its external position. As will be discussed, this
result is related to an underestimation of the true market value of the NIIP.
Also, Sweden's net assets are mainly composed of equity investments, which
typically have a higher yield than the debt securities which dominate Sweden's
net liabilities (Graph 3.15). 
Valuation losses have slowed the
improvement in the external position
Sweden's international investment
position falls significantly short of what could be expected from a two-decade
long accumulation of current account surpluses. The
Swedish current account has been in the black since 1994 and has posted large surpluses
during most of this period. As shown in Graph 3.18, the continuous accumulation of
surpluses should have automatically improved the NIIP to more than 50% of GDP
by year-end 2012. The difference between this theoretical value and the actual
value can be attributed to valuation effects associated with the underlying
external assets and liabilities.
In fact, erratic valuation changes have
become a major driver of the NIIP, as can be observed in Graph 3.16. This is a common feature of advanced
EU economies. In Sweden's case, it is linked to the large increase in gross
external assets and liabilities which began in the 1990s in the wake of
financial liberalisation reforms. The large size of the external financial
stocks and the asymmetric composition of assets and liabilities render the NIIP
more sensitive to exchange rate and asset price movements. In fact, the vast
majority of Swedish external assets are denominated in foreign currency while
most liabilities are denominated in Swedish krona. Likewise, Swedish
liabilities are largely exposed to the performance of the domestic market and
to domestic interest rates([18]), while
assets are significantly exposed to price movements in international markets.
The appreciation of the krona, the
relative performance of the Swedish stock market and a decrease in domestic
interest rates can help explain the adverse valuation effects. As depicted in Graph 3.4, valuation effects have been particularly
relevant since 2002. From that year to 2012, the krona appreciated
approximately 20%, contributing to decrease the value of Swedish foreign assets
when measured in krona. Also during the same period, the Swedish stock market
outperformed the wider EU market([19]) which would tend to increase the value of Swedish equity
liabilities (embodied in the Swedish stock market) more than the value of
Swedish equity assets held in the EU. Finally, Swedish interest rates decreased
markedly from 2002 to 2012, hiking the prices of Swedish bond liabilities.
As expected, the volatility in valuation
effects stem mostly from portfolio investment in equity and debt securities (Graph 3.19). This is both a consequence of
the relatively large share that these assets represent in total gross external
assets and liabilities as well as consequence of the fact that these financial
instruments are marked to market and thus subject to volatile price changes.
The gross amounts of other investments and foreign direct investment (FDI) are
also sizeable. However, the former are largely made up of loans and deposits,
which are not typically subject to large valuation changes, while FDI data from
Eurostat is mostly reckoned at book value. Central bank reserves and financial
derivatives represent comparatively small exposures and have had a residual
impact on valuation changes.
The accounting of FDI at book value is
an important factor explaining the underperformance of the Swedish NIIP. When
measured at market value, the net impact of FDI valuation changes is much more
favourable. Eurostat publishes the FDI component of
the NIIP valued mostly at book value because FDI investments are often not
listed in the stock market. The Riksbank, however, calculates estimates of the
market value of FDI by adjusting its book value on the basis of the trend
price-to‑earnings ratios prevalent in listed companies([20]). As can be seen in Graph 3.20, when estimated at market value, net
FDI assets are much higher, increasing the NIIP from -10% to 8% of GDP in 2012.
Overall, the Swedish external position
presents no concerns from a macroeconomic stability viewpoint. The moderately negative Swedish NIIP is sustainable and continues
to move towards a positive balance. When FDI is estimated at market value, the
NIIP is seen to have been in positive territory already since 2006.
3.2.      Private indebtedness: non-financial corporate sector and
household indebtedness
This section analyses the recent evolution
of non-financial corporate sector and household indebtedness to assess the
sustainability of the current private debt level as well as the level of
deleveraging pressure. It also probes into the measures taken so far to curb
the trend in private debt and the current debate in Sweden on these issues.
3.2.1.   Evolution
of indebtedness of the non-financial corporate sector 
Consolidated corporate debt ([21]) amounted to 128% of GDP in 2012, far above the euro area average
(80.9% of GDP). This level is lower than its peak
in 2009 by 15.5 percentage points. The correction is likely to have continued
in 2013 as the contribution of credit flows to the debt-to-GDP ratio has turned
negative since Q4-2012. This evolution of corporate credit flows is mainly due
to the fact that economic growth has been weak in 2012 and 2013 which has made
some companies wait with new investments.
A large share of corporate debt takes
the form of cross-border intra-group loans which entail lower risks than other
types of borrowing. Cross-border intra-company
loans increased markedly over the past decade before decreasing since 2009
(from 53% of GDP in 2009 to 41% in 2012). As explained in the previous reviews,
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 lower risks than
ordinary loans from banks or from other corporations. Multinational companies
typically cover net debts in one country by net assets in affiliates in another
country.
In this light, the debt-to-GDP ratio
draws an exaggerated picture of indebtedness of Swedish corporations. If cross-border intra-company lending were deducted from the
consolidated data, Swedish corporate debt would be below 90% of GDP in 2012.
Also, the development of this measure over time would seem less worrying since
it has been stable between 1995 and 2006 and accumulation of debt was limited
to the period 2006-2009. Furthermore, a part of this accumulation has already
been corrected, partly due to less generous rules on tax deductibility as
further detailed below.  Given the drawbacks of the debt-to-GDP indicator in
the Swedish context, 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 gross debt-to-assets (51% in 2013) in Sweden is
slightly below the euro area average (54%). The gross debt-to-equity ratio
(55%) is even further below the euro area average (69%). 
Moreover, debt to deflated financial
assets has stabilised since 2009, indicating that no further accumulation has
occurred for corporate debt. When regarding growing
assets as a mitigating circumstance for mounting debt, some caution is needed
as valuation effects can lead to an overestimation of the firms' ability to
incur liabilities. These valuation effects are unstable and tend to evaporate
in bust periods whereas the liabilities will not be deflated. If these effects
are discounted for, the leverage ratio (called also "notional leverage"([22]) grew faster for Sweden between 2006 and 2008 but appears to have
stabilised since 2009 (Graph 3.24). 
Since 2009, corporate credit flows have
been below 2% or even negative which moderated the evolution of corporate
debt-to-GDP ratio (Graph 3.25). Furthermore, since Q1 and Q2 2013,
the evolution of corporate debt to GDP has turned negative (Graph 3.21) which would indicate that not only
there is no more build-up of corporate debt above the level of deflated assets
since 2009 but that some deleveraging is taking place since Q1 2013. As
explained below, this deleveraging seems driven by new rules on interest deductibility
leading to a decrease in intra-group loans from abroad motivated by tax
planning reasons.
3.2.2.   Factors
behind Swedish corporate indebtedness and reforms undertaken
As developed in the 2013 review, the higher
level of corporate debt in Sweden can be explained by several country-specific
factors, in particular, a long period of easy access to credit and a strong
presence of multinational companies coupled with the set-up of company
taxation. 
The strong expansion of corporate debt
relative to GDP in 2006-2009 has been facilitated by the low interest rate
environment and low perceived risk of lending to corporations. Following the economic slowdown in 2001-03 related to the bursting
of the IT bubble, interest rates remained at very low levels for several years.
This spurred high demand for credit by Swedish companies. Low interest rates
coincided with a rather lenient lending attitude by Swedish banks towards both
corporations and households. In view of a long period of a low rate of company
defaults, the banks may have underestimated the risks associated with lending
to corporations. This led to a strong expansion of credit to corporations in
2007-2008 (annual growth of credit flows above 14%). Still today, there are
concerns that banks may assign in their internal risk assessment models too low
risk weights to loans to the corporate sector. This is further developed in
chapter 4. 
Another feature distinguishing Sweden is
the wide use of borrowing from foreign affiliates of the same corporate group,
a phenomenon which is motivated by the set-up of company taxation in Sweden. The generous tax deductibility of interest payments has given an
incentive to Swedish companies to finance their investments with debt rather
than equity and invited an aggressive tax planning by multinationals operating
in Sweden ([23]).
The government has taken some measures
to limit the most far-reaching tax minimisation practices by multinational
corporations. In 2009, tax provisions 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). However, as was the case before, interest payments are tax deductible if
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 the debt
has been undertaken for "sound commercial reasons".   These measures,
combined with the reduction of the corporate income tax rate from 26.3 to 22%
at the beginning of 2013, are aiming at eliminating a large share of corporate
debt which is solely driven by tax avoidance motives, in particular the
intra-group loans from abroad. 
According to the Swedish Tax Authority,
multinationals have started adjusting to the new rules already in 2012, taking a more conservative approach to tax planning. In this
light, intra-group loans have decreased already by SEK 80 billion from 2011 to
2012 (Graph 3.22) which represent a 5% decrease and are
expected to decrease further in 2013. However, the concept of “sound commercial
reason” remains ambiguous and its interpretation might lead to court cases.
The use of the deductibility of interest
payments on corporates’ external loans as a tax planning tool is currently
investigated. About 10-15% of external loans are
estimated to be solely driven by tax planning considerations. The corporate tax
environment incentivises corporations to incur both internal and external debt
for tax planning purposes, and promotes a debt versus equity bias in the
financing of corporations. Moreover, the Tax Authority estimates that out of
SEK 90 billion revenues from corporate taxes, SEK 4-5 billion are foregone in tax
revenues due to aggressive tax planning. In order to analyse the issues
relating to corporate taxation further, a corporate tax committee has been set
up by the government. This committee's mission is to propose tax incentives to
stimulate the availability of risk capital, to propose increased tax incentives
for research and development and to make proposals for a more comprehensive
corporate tax system, if possible replacing the current interest deduction
limitations and the debt-bias against equity. Its report is due in June 2014. 
To conclude, corporate debt relative to
GDP is still high but decreasing in a low growth and investment context. Moreover, balance sheet indicators suggest a healthy financial
situation for non-financial corporations. Recent taxation reforms are aiming at
decreasing the tax-planning component of corporate debt and further
investigations to render the corporate tax environment more neutral are
on-going. The evolution of credit flows needs to be monitored, especially once
economic growth rebounds.
3.2.3.   Evolution 
of household indebtedness
Household debt stands at more than 83%
of GDP, or 158% of gross disposable income in Sweden in 2012. The lion's share of household debt is made up of mortgages, the
build-up of which has gone hand in hand with rising housing prices over the
last 15 years (Graphs 3.27 and 3.28). At present, credit growth for
mortgage loans is less expansive but still amounted to 3.3% in 2012 and still
outpaces GDP growth (Graph 3.29) driving the household debt-to-GDP
ratio further upward. The jump in households' debt-to-GDP ratio observed in
2009 is explained by the sharp recession that occurred in Sweden that year (-5%
real GDP growth) which made real growth an additional contributor to the debt
to GDP built up (Graph 3.29).
 
Despite the upward trend observed in
household debt-to-GDP ratios, the debt-to-total assets or leverage indicator
remained flat indicating that both debt and assets
have increased in the same proportion. However, an assessment of debt
sustainability should also take into account valuation effects, particularly on
the asset side, given that it is much more volatile than debt instruments,
especially in a downturn when indebtedness (stock) adjustments tend to last
longer on average. Against this background, filtering for valuation effects in
both financial and non-financial assets yields the concept of notional leverage
(i.e. debt to notional or deflated assets), which represents a better indication
of the ability of households to incur liabilities ([24]). As can be seen in Graph 3.30, households' debt has increased faster
than households' notional assets. The existing gap between the actual and the
notional leverage ratio, which mainly accumulated during the 2002-2008 period,
allows defining an upper-band of potential deleveraging pressures which would
amount to 20 pp. in 2011.
The sharp increase in mortgage lending over
the last 20 years has gone hand in hand with several trends which can render
households less financially resilient ([25]):
·       Between 2002 and 2010, the loan-to-value ratio of new mortgages has
increased from 59% to 71% ([26]). This trend was curbed after the
introduction of a 85% loan-to-value cap in 2010. 
·       In parallel, the actual repayment periods as well as the share of
unamortised loans have been growing.
·       Variable interest rate loans ([27]) have become predominant making households more sensitive to
interest rate changes ([28]). Mortgage rates used to be reset every
five years to the current market rate. However, since the 1990s, fixed interest
terms have gradually been shortened. 
·       Possible income loss due to unemployment or sickness has become more
significant. Since the 1990s the unemployment and
sickness insurance schemes have changed and an increasing number of people are
reaching the unemployment benefits payment ceiling, which has not been
increased since 2002.
The stress tests of the Financial
Supervisory Authority (FSA) performed in the 2013 mortgage market survey ([29]) highlight the macroeconomic risk on consumption and therefore on
banks' lending to non-financial corporations while it sees only limited risks
that banks will experience major loan losses on mortgages. The FSA analysed several contagion routes. 
Firstly, based on FSA calculations of
households' discretionary incomes ([30]), 9% of the households in the 2012 mortgage sample have a deficit
(i.e., a negative discretionary income) and one out of five has less than SEK
3,000 to live on. These results are higher than the data reported by the banks.
The discrepancy in the calculation of discretionary income by banks and the FSA
will be further investigated by the FSA.
Secondly, a loss of income or an increase
in interest rates, considered to be currently at historically low levels, would
mean that households' budget for consumption of items other than housing costs
would decrease. The FSA estimates that an increase of the interest rate by five
percentage points would increase the number of households in deficit by 5% and
up to 9% if these households are required to simultaneously amortise the part
of their loan with the highest loan-to-value (LTV) ratio. 
Finally, a fall in housing prices could
lead households to seek to restore equilibrium in their balance sheets by
increased savings which would also have a negative impact on consumption. A
stress test shows that if prices were to fall by 15%, around 11% of the
households would face a negative equity. 
These effects on consumption would affect
non-financial corporations and in the longer-run could affect the level of
losses in banks' lending to non-financial corporations.
The combination of high indebtedness, high
loan-to-value ratios and more variable interest rates means that households are
more vulnerable in terms of interest rate risk and income risk. Following
changes to the Swedish welfare system, the impact of such risks is nowadays
less mitigated through social safety nets and would probably affect
consumption.
3.2.4.   Measures
taken so far and current debate on household indebtedness
Over the last few years, several measures
have been taken by the FSA, the Swedish Bankers' Association and the Government
to curb the upward trend in households' debt and improve households' financial
resilience as well as banks' stability. Moreover, as described in Chapter 4,
the government has clarified the allocation of macroprudential supervision
responsibilities by allocating them to the FSA.
The FSA has adopted an incremental
approach to set the conditions for a gradual household debt deleveraging
process with the introduction of a mortgage cap,
the increase of risk weight floors on mortgage loans, and an agreement with the
Swedish Bankers' Association to promote an amortisation culture:
·       The 85% LTV cap on mortgages implemented since 2010 has proven
effective in breaking the upward trend in LTV increase since 2002. This cap decreases the risk for households of being exposed to
negative equity in the event of a fall in house price. As shown in Graph 3.31, the LTV ratio on new loans reached a
peak in 2010 and decreased below 70% since. Moreover, the share of mortgages
having a LTV above 85% has decreased (Graph 3.35). This cap seems to have a normative
effect as 12.5% of the new loans have an LTV of exactly 85% (27% for the
age-group below 26 years old), i.e. without choosing the still possible option
to take an additional and, thus, unsecured loan.
·       Early 2013, the risk weight floors applied to mortgage loans were
introduced at 15% ensuring that banks hold more equity given the credit risks present in their mortgage activities. This
is further analysed in chapter 4.
·       With the support of the Swedish Bankers' Association, the FSA is
promoting an amortisation culture. Since 2010, the
Swedish Bankers' Association recommends that loans with a LTV above 75% are
amortised to this level. Furthermore, in October 2013, the FSA issued a
recommendation that banks should provide customers with individually tailored
amortisation plans ([31]). According
to the recommendation, a discussion between the mortgage company and the
borrower about amortisation should take place before the final amortisation
plan is proposed. Also, this plan should be in the best long-term interest of
the customer. The objective is to allow households to make a decision about
amortisation by having the banks clearly showing how amortisation affects a
household's finances in the long-run. However, this recommendation is so far
not legally binding as the Consumer Credit Act needs to be amended by the
Government for the FSA to be able to implement a regulation in the Banking and
Financing Business Act and it does not make amortisation as such compulsory.
The Swedish Bankers' Association has endorsed this recommendation and is
working with banks to develop a template for the individual amortisation plan.
It is foreseen to enter in use mid-2014. In a recent memorandum ([32]), the FSA takes note that since 2010, repayment periods for
top and unsecured loans for new borrowers have decreased but due to very long
repayment periods on bottom loans the aggregate debt ratio is still held up. In
addition, figures on net amortisation (i.e. gross amortisation minus new loans)
suggest an overall increasing indebtedness.
In November 2013, the Government has
proposed a new regulation on fairer rules for repayment of mortgages ([33]). Due to its construction the current
model could be extremely expensive for a customer who wants to repay his fixed
rate mortgage. The new regulation has two main components and is intended to be
implemented by 1 July 2014:
·       The Government proposes a new model for the calculation of interest
rate compensation for the banks, corresponding to
the actual costs for the bank. According to the proposal, the interest rate
compensation would be calculated on the basis of the mortgage bonds market
instead of the government bonds market. A lower interest rate compensation
would facilitate the possibility for the consumer to switch banks and thus
increase the competition in the market. 
·       The proposal limits the creditor's right to ask for the repayment of
a mortgage in a situation where the value of the security for the loan has
decreased as a result of a general downturn in the housing market. From a financial stability perspective, this measure restricts the
banks' option to transfer the risk of a general market fall to the household
sector. This measure might incentivise the banks to further increase the
soundness and sustainability of their credit issuing practices. 
Despite all these measures, household
debt to GDP is still rising which keeps the debate on further measures to be
implemented quite intense. While the FSA and the
Government seem to be willing to follow an incremental approach allowing for
time to assess each measure before implementing new ones, the Riksbank expresses
more concerns about the situation and has adopted a cautious approach regarding
its monetary policy arguing that it takes time for the macroprudential tools to
be fully operational. Moreover, the Riksbank is in favour of the risk weight
floor on mortgage loans to be increased gradually to 35% and points out that
countercyclical capital buffers would probably have been activated if such a
regulation had been in place nowadays ([34]). The FSA ([35]) is
reviewing the discretionary income calculations made by banks during the credit
assessment to prevent unsound credit issuing practices and has announced a
further increase to 25% of the risk weight floor on mortgage loans. This
announcement is further described in chapter 4.
Finally, all stakeholders agree that, even
if the measures implemented so far are improving households' financial
resilience and banks' stability, they are not solving the fundamental
structural problems on the housing market that also influence household debt. This question is further discussed in 3.3. 
3.2.5.   Private
indebtedness: assessment of imbalance
Private indebtedness in Sweden is high.
However, as shown on Graph 3.36 ([36]) Sweden benefits currently from limited deleveraging pressures. Overall loan demand and supply pressures used in Graph 3.36 are composite indicators. On the loan
demand side the willingness of households and non-financial corporations to
take more debt is proxied by the consumer confidence and economic sentiment
indicators; unemployment rate and house price evolution are also included in
the set of variables. The loan supply indicator includes variables assessing
financial soundness (e.g. change in overall non-performing loans, Tier 1
capital ratio and banks' return on equity) ([37]), and indicators addressing the link between sovereigns and the
banking sector (e.g. the sovereign CDS spreads, banks' exposure to high risk
foreign claims).
Under this favourable loan supply and
demand environment, deleveraging could occur through moderate yet positive
credit flows. This is currently happening for
non-financial corporate debt where credit flows, growth and inflation are
contributing to some deleveraging (Graph 3.21).
This trend is not yet observed for
household debt where the contribution of credit
flows to debt is more important than growth and inflation effects (Graph 3.29). Moreover, the improvements to
disposable income included in the 2014 general government budget might
translate into further housing investments and debt build-up. This points to
the fact that despite the measures taken so far, the conditions for high
household credit flows are still in place: low interest rates, tax incentives
through the mortgage interest payment deductibility and a low supply of new
housing.
Even though the probability of credit
losses on Swedish mortgages seems low at the current juncture, macroeconomic
risks exist. The combined structural evolutions
over the last 20 years of higher household indebtedness, larger proportions of
variable mortgage rates, higher loan-to-value ratios, low amortisation and
changes to the unemployment and sickness insurance make households less
financially resilient than before the 1990s crisis. When the expenses of
households increase, for instance via higher interest burden due to increased
mortgage rates, or their income decrease, for instance in case of unemployment,
this most likely will lead to reduced consumption implying lower demand for
goods and services. This would have a negative impact on non-financial
corporations, which can result in credit losses in other parts of the banks'
loan portfolio.
To conclude, while no imbalance is
identified regarding corporate indebtedness, the evolution of corporate debt
needs to be monitored, in particular once companies will see increasing
investment opportunities. In contrast, the analysis demonstrated that Sweden
still experiences a macroeconomic imbalance concerning households'
indebtedness. To address it, further policy measures are necessary notably in
the field of housing supply and taxation, to remove the debt-bias shifting
households' preferences towards home ownership. 
3.3.      The
housing market
3.3.1.   House price developments
During the last two decades, the Swedish
housing market has been characterised by a steady and sharp price growth. According to OECD housing data, since 1994 Q1 (beginning of the
recovery after the burst of the property bubble in the early 90s in Sweden),
nominal house prices increased by more than 205%, while real house prices
increased by 128% in Sweden until 2013 Q3 (compared to the European average of
80% and 25%, respectively)([38]). 
House prices in Sweden weathered well
the crisis that started at the end of 2008. Real
house prices corrected in 2009 but sharply rebounded in 2010 reaching new
record levels. Between 2008 Q4 and 2013 Q3, real house prices increased by 7.3%
while the European average declined by 7.7% for the same period. Sweden has not
experienced a large correction in house prices such as the one that took place
in, for example, in Denmark: house price developments have been relatively smooth
without abrupt volatility. 
Relatively stable house prices
positively affected household confidence and consumption thereby softening the
impact of the recession on the economy. Since 2010,
house prices remained relatively stable: nominal house prices increased by 4%,
while real prices decreased by -0.5% between 2010 Q1 and 2013 Q3. Accordingly,
the Commission's Alert Mechanism Report scoreboard indicator has not shown
year-on-year growth rates of deflated house prices above the 6% threshold since
2010([39]). 
Last years' IDRs showed that though some
indicators pointed at an overvaluation (for instance affordability and dividend
ratios), others suggested a development in line with underlying fundamentals. They also concluded that the Swedish housing market is
characterised by several inefficiencies which could impact the underlying
fundamentals driving house price developments.  
House prices are fuelling private
indebtedness and can have an important impact on consumption, economic
performance and financial stability. Therefore, a
detailed analysis of the main challenges is necessary to avoid the building up
imbalances that could impede future growth. It seems important to closely watch
house price developments as, especially when in combination with favourable
credit conditions, they could lead to risks of overheating.
Several different indicators are used to
assess whether house prices are in line with their fundamentals or whether
there is a significant misalignment. Traditional
indicators, such as affordability (price-to-income) and dividend
(price-to-rent) ratios suggest that house price levels are above their
long-term average. In theory, these ratios tend to revert to their long-term
average. Therefore, the positive gap between the latter and the actual value
provides an indication of a potential overvaluation at the magnitude of 15-30%.

Conclusions on potential overvaluation
based on these indicators have to be considered with caution due to their
simplifying assumptions ([40]). Most importantly, long term trend lines based on historical
averages cannot capture any possible structural shifts (for instance, a change
in the cost of home ownership) or altered fundamentals (such as lower mortgage
rates or lower taxes) which might justify higher prices than the historical
norms. The price to rental ratio can also overestimate valuation gaps in
Sweden, as rental prices are highly regulated and on average set below market
prices. On the other hand, the graph underlines the main trends delineated
above: house prices are not growing excessively since 2010, but rather switched
to a stabilising path.
When looking at the price to income
ratio([41]),  following a correction after 2007 and a bouncing back in
2010, the ratio is remained at a higher level than the euro area or OECD
average. House prices compared to the disposable income are on a moderate
downward trend since 2010, not showing the same sharp correction as other
countries facing a house price bubble. The ratio reached its nadir around 1996
in Sweden following the burst of the property bubble in the early 90s. It then
recovered and moved along the euro area average until the onset of the crisis.
Then it spiked moderately compared to the euro area average, because of the
collapse of the housing market in other EU Member States and because of the
abolition of taxation of wealth, changes to property taxation and withdrawal of
direct subsidies in 2005 that had their full impact on house prices by 2007. 
An econometric model developed by the
Commission services ([42]) seems to
confirm the above finding. The model suggests that
house price levels in Sweden have been correcting back to their main supply and
demand fundamentals since the peak of 2007 and follow a correction cycle in
line with past cycles. As depicted in the graph below, Swedish house prices
went through a long and intensive boost period between 1996 and 2007 compared
to their main supply and demand fundamentals. Since 2007, a downward correction
is taking place with prices converging back to their fundamental levels. 
In summary, when compared to their
fundamentals, Swedish house prices have been stabilising and correcting since
2010 at a moderate pace, easing immediate concerns of an overheated house
market. The fundamental indicators do not suggest
growing imbalances; rather we can witness a stabilisation period where house
prices slowly converge to their fundamental values. However, in light of the
high level of private indebtedness, it seems important to continue the
stabilisation path; otherwise, house prices could pose a risk for the
macroeconomic stability of the country.
3.3.2.   Underlying
market fundamentals
House price developments need to be
analysed together with the underlying fundamentals and with other potential
inefficiencies on the housing market, as these factors provide necessary
insights on future house prices developments.
Distorted fundamentals or serious structural imbalances on the market could
revert the current stabilisation path and drive prices above their fundamental
values, thereby renewing concerns of growing imbalances on this market.
Furthermore, distorted fundamentals would bias upwards the fundamental value
for house prices and overvalued fundamentals could underestimate the
misalignment of house prices.
Key facts about the Swedish housing
market
For a population of 9.5 million, Sweden
counts roughly 4.5 million dwellings, divided between approximately 2.5 million
apartments in multi-dwelling-buildings and 2 million single-family-buildings. 
The apartment segment consists of roughly 1.6 million rental apartments (35% of
the total housing), 0.95 million tenant-owned([43]) ones and a mere 566 owner-occupied condominiums (Statistics
Sweden, 2013a).
The main trends regarding the structure
of the housing market, as explained in last years' IDRs, have continued in 2013. Tenant-owned apartments are continuously gaining in popularity
causing an increased level of new constructions and the conversion of rental
apartments. The high growth in the number of tenant-owned apartments over the
last decade has also been coupled with the highest price increase for dwellings
of this type of tenure. 
The rental market([44]) has a pivotal importance on the Swedish housing market. Approximately 40% of the Swedish population is living in rented
dwellings, which is slightly higher than the EU average. The proportion of
rental units has been steadily decreasing in the last decade, in particular as
regards private rental units.
Price variations on the housing market
are significant across the country. The main urban
centres, in particular the Stockholm region, witnessed higher price increases
than any other region. In Stockholm city, prices can be several times higher
than in other areas of the country([45]). While a higher income level can explain part of the differences,
other Stockholm-specific features seem to drive up the prices in this area
(high demand due to demographic and economic factors and restricted supply). 
Main drivers of the house price increase

House prices have been primarily fuelled
by favourable fundamentals of the economy. The
following section will assess these drivers and whether particular risks can be
identified in the short term.
A steadily rising population and rising
population per dwelling in some major cities([46]) increase demand for residential property. House price increases were particularly strong in the urban areas
of Sweden, mainly in Stockholm and Gothenburg([47]). Population has grown the most in Stockholm, accounting for
roughly half of the population growth of the entire country (Swedish National
Board of Housing, Building and Planning (2012))([48]). 
The economic fundamentals of the country
have been particularly strong, withstanding most of the negative impact of the
crisis. Sound economic policy led to stable and
increasing household confidence, while low inflation, low interest rates and
favourable tax measures implemented by the Swedish government kept increasing
the disposable income of households (see Section 3.2 above). The high share of
variable mortgage interest rates translates Riksbank's rate cuts to lower
monthly mortgage payments([49]). The
economic fundamentals are expected to further ameliorate in the short term (in
line with the European Economic Forecast - Winter 2014) indicating a continued
increase of disposable incomes. 
Credit conditions proved to have been
highly favourable in recent years. The availability
of amortisation-free mortgages allows low monthly payments, which were further
decreased by the record low mortgage interest rates (as a result of the
Riksbank repo rate cuts)([50]). Recent
initiatives of the Swedish authorities started to tighten these trends
considering the growing risk on financial stability. The macroprudential
measures introduced by Swedish Financial Supervisory Authority seem to have a
normative impact on the market as regards LTV ratios (Swedish Financial
Supervisory Authority, 2013c). However, these macroprudential measures are
expected to only marginally push up the total interest costs for mortgage
borrowers, therefore their impact on demand will likely stay limited (National
Institute of Economic Research, 2013). 
Taxation conditions create incentives
for households to purchase their own houses. The
Swedish tax system offers a generous deductibility of mortgage interest
payments from the income tax. At the same time, following the reform of
property taxation, the recurrent property taxes have been substantially reduced
and have in practice ceased to counterweight the effect of the tax relief on
mortgages. The possibility for home owners to make tax deduction from their
income tax for house renovation has been introduced in 2008 providing
additional incentives for home ownership vs. renting (Swedish Property
Federation et al, 2013). As a result, Sweden has one of the highest tax
incentives in the EU for home ownership.
In addition to the above demand-side
factors, several other supply factors contributed to the steady growth of house
prices fuelling potential imbalances in this sector.
Lack of sufficient housing supply, in
particular in the main urban areas, is translated into particular sharp price
increases. Investments in the housing sector have
been significantly lower than in other European countries, causing increasing
house shortages mainly in urban areas. The under-supply of housing can result
in significant welfare loss. Swedbank (2013) estimates that the absence of
growth in housing could cost SEK 21 billion p.a. over the next 20 years. A
study by Jahnson and Lundberg (2013) estimated that prices on the Swedish
housing market today are roughly one third higher than if constructions had
developed in the same way as in Finland over the past 15 years.  On the other
hand, since housing investment in Sweden was low for a long period, the risk of
a substantial downturn of house prices is limited (National Institute of
Economic Research, 2013). 
Distorted incentives can prevent
efficient use of the existing housing stock thereby further bolstering house
price increases. Two main reasons can be identified
for such a lock-in effect. Firstly, due to highly regulated prices, rental prices
and market prices could deviate substantially. Such a deviation causes
excessive demand on the rental market, fuelling house price increases in
substitute segments (such as tenant-owed apartments). Secondly, existing
housing taxation does not support mobility. Following the 2008 tax reforms,
property taxes have been decreased sharply([51]), while transaction taxes have been changed resulting in
substantially higher taxes paid by the seller (22% of the capital gains). As a
result, homeowners' incentives for selling houses have been reduced.
The lack of sufficient housing implies
social and economic constraints on growth. Housing
shortage seems to have become a widespread phenomenon across Sweden: 43% of
municipalities report a shortage of housing and 85% of them report a shortage
of rented apartments (Swedish National Board of Housing, Building and Planning,
2013c). Lack of sufficient supply is particularly pertinent in the Stockholm
and Gothenburg regions, which experience a large population inflow resulting in
an excessive waiting list for rental apartments([52]). Insufficient housing supply in particular affects vulnerable
groups (immigrants, students, new entrants to the labour market) that do not
get access to adequate housing thereby hampering labour mobility.
In light of the information above, the
supply side of the housing market merits a more in-depth analysis of the reasons for low construction activity and of the imbalances
on the rental market. Accordingly, the analysis is divided in two main sections:
(1) potential constraints on new investments; and (2) the utilisation
of existing housing stock focusing on the rental market.  
3.3.3.   Supply
side challenges: New constructions
Despite continuous and almost
uninterrupted growth of house prices and steadily growing demand for housing,
construction activity in Sweden remains subdued and persistently below other EU
countries. As depicted in the graph below, since
its peak in 2007 (when policy changes explained in Section 3.3.1 triggered a
peak in construction activity), residential investments are on a decreasing
trend. 
From 2002 to 2013, housing investment
amounted to 3.2% of GDP on average in Sweden, while the corresponding figure
for the EU28 stood at 5.4% of GDP. Increasing
demand in the housing sector is not matched by an increased level of new
construction activity. As a result, Sweden has built up a considerable
investment gap in the housing sector([53]).
The high proportion of a reported
housing shortage shows the insufficiency of the existing stock. On the one hand, the population per dwelling has been decreasing
continuously in the last 10 years in Sweden. Thus, the existing stock of
housing might be sufficient to satisfy the housing needs of the population. In
addition, the relative underinvestment in this decade might only compensate for
the relative overinvestments in the decade before([54]). On the other hand, although population per dwelling has been
decreasing in the last decade in Sweden overall, it goes up in the main urban
areas. More importantly, the population per dwelling ratio does not explain
other fundamental factors contributing to increased demand such as increasing
incomes and decreasing cost of home-ownership. 
The main inefficiencies holding back
stronger growth of new constructions are explained below. 
The particularly long and complex
planning and zoning process increases building time and uncertainty. From
the idea until the newly constructed building can be occupied, some 20
different steps have to be taken (County Administrative Board (2013)). In
addition, appeals can be launched against the construction plan in several
stages of this process. All these administrative barriers could render the
process extremely long, up to even 8-10 years, compared to, for instance, the
average 3 years in Germany (Hüfner and Lundsgaard (2007), Ministry of Social
Affairs (2013), Müge Adalet McGowan (2013)). 
Local municipalities have the planning
monopoly in Sweden. They impose different
standards and requirements resulting in a fragmented market with different
requirements across the country. 
Local municipalities have a core role in
construction, since most of them own a large share
of the land eligible for construction (for instance, Stockholm owns 70% of the
land), while at the same time they are overseeing the planning process (County
Administrative Board, 2013). However, municipalities do not have (financial)
incentives to support construction activities. Tax revenues increase, if at
all, only moderately and in the mid-term, while increased residential
construction will entail public infrastructure investments to be financed by
the municipalities.
The remaining land for construction is
mainly owned by large construction companies. Since
the value of the land is increasing at a higher pace than the value of new
housing, large construction companies can "wait-and-see" by
initiating only limited new constructions and rather capitalising on rising
land prices (Swedish Competition Authority, 2013). 
In addition, the sale of land for
construction is not always conducted in a transparent manner. Possible investment projects are often discussed bilaterally
between a few established stakeholders excluding other potential developers.
Accordingly, the Swedish Competition Authority suggests that municipal land
sales may need to be regulated, municipal land should be sold mainly through
tenders, and that the sale/transfer of land rights of the land that is about to
be developed, should occur earlier in the planning process (Swedish Competition
Authority, 2013).
Construction costs have kept rising and
now count among the highest in an international perspective, driven by large
increases in land costs.  Construction costs are
now much higher than in other peer countries, such as Finland, impeding
constructions (Hüfner and Lundsgaard, 2007), in particular regarding rental
dwellings where prices do not reflect market prices due to the regulations.
Although the rental prices for new constructions can be set high and more in
line with their real market value for 15 years, a recent study of the Swedish
National Board of Housing, Building and Planning (2013b) argues that the relatively
low rents for attractive homes still help to keep the housing construction
depressed. Property developers plan on a longer timeframe than 15 years in
accordance with the amortisation period of housing units. Therefore 15 years of
more realistic rents do still not give sufficient incentives to build new
rental units.
The structure of the construction market
is characterised by weak competition as four major companies dominate the
market. Entry barriers on the market are high
deriving among other factors from the extensive ownership of land, exclusive
contacts with local authorities, and complex and diverging building
requirements across the country. As a result, the market tends to disfavour
small companies and discourages competition (Swedish Competition Authority,
2013). 
Construction subsidies in Sweden are
exclusively used for the construction of dwellings for the elderly. However, due to the high constraints on certain segments of the
market, in particular for student housing and affordable housing, additional
support might be necessary. 
The Swedish government has taken several
steps to strengthen the market signals in this sector, to let supply respond
more effectively to demand and to tackle the above referred constraints on the
housing market in order to speed up the construction of new houses. 
Most importantly, the government has taken
several efforts to streamline and shorten the planning and zoning requirements,
for instance, by initiating several amendments to the Planning and Building Law
(Plan- och bygglagen). To speed up the assessment of appeals, the 2013 Budget
provided additional resources for processing appeals at the county
administrative boards. As a result, the planning process became faster (reduced
on average to 6-7 years according to the industry experts), and will be further
simplified and shortened according to the most recent government proposals
(Ministry of Social Affairs, 2014).
A legislative proposal relating to the
responsibility of municipalities for the provision of housing has entered into
force since 1 January 2014, 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 ("Bostadsförsörjningslag"). 
In 2013, the Swedish government revised the
construction standards, known as Eurocodes. These standards had to be purchased
from the standardisation body SIS at a cost that was perceived to be significant
for small companies, i.e. can potentially restrict competition. From 1 July
2013, these standards are accessible for free. 
In order to build more student housing and
dwellings specifically dedicated to young adults, more generous rules relating
to temporary dwellings have been introduced, lowering requirements in terms of
the standard of the dwellings. The proposal on temporary dwellings for students
will come into force on 1 July 2014. Since this special segment of housing is
mainly built for social reasons, and typically not provided by the sector on
market terms, additional measures are experimented to overcome the bottleneck
in this specific segment. Municipalities started to offer the possibility to
rent land for longer terms to incentivise construction of student housing,
thereby decreasing the construction costs. In addition, the government plans to
grant a subsidy of SEK 50 million to promote the construction of housing for
young people([55]).
Several further initiatives are
currently being discussed or finalised to boost new constructions by reducing
the existing high administrative burden. For
instance, a review of the planning process is under way to further cut red
tape. The Swedish National Board of Housing, Building and Planning is currently
working to limit the possibility of municipalities to introduce specific
technical requirements going beyond the common set of rules and to streamline
appeal procedures (Statens Offentliga Utredningar, 2012:86). Another review has
been commissioned to avoid diverging interpretations of existing legislation
linked to noise levels in construction and housing.
There is a general consensus among
stakeholders that all these steps are pointing to the right direction, albeit
their impact is perceived to be small in the short term. Further measures would be needed to increase the responsiveness of
the supply side to demand.
In the longer term, large infrastructure
projects planned in the Stockholm region can also have significant impact on
raising supply. An agreement was signed in 2013 to
extend metro lines in Stockholm which could involve the construction of 78.000
additional homes until 2030 (County Administrative Board of Stockholm, 2013).
From the low levels of 2012,
construction activity strongly rebounded in 2013 in particular in the last
quarter of the year according to the preliminary
estimates of Statistics Swedish. In 2013, the number of dwelling starts in
newly constructed buildings increased by 28%, although there is a wide
diversity behind the overall growth figure([56]) (Statistics Sweden, 2014c). The dynamically increasing number of housing
permits and the increasing confidence index for building and manufacturing
suggests that growth in the construction sector might continue at an increasing
speed in the near future, driven by the Stockholm region and by the construction
of multi-dwelling buildings (National Institute of Economic Research, 2013). 
It would be premature to see whether
there is a trend change in construction and whether the investment gap in this
area will decrease. If the construction level remains
suppressed the low level of housing supply and strong demand pressures will
further capitalise into housing prices, in particular in the main urban areas. 
3.3.4.   Supply
side challenges: The rental market and utilisation of the existing housing
stock
A well-developed and efficient rental
market providing a viable alternative to ownership plays a balancing role by
alleviating house price pressures and smoothing housing market dynamics. This is especially the case when it proves to be an affordable
platform for young and low-income households, providing them with a viable
alternative to a hasty first step into the 'property ladder'.
The Swedish rental market in certain
areas is characterised by growing structural imbalances, in particular, in dynamically growing urban areas. Such
ineffectiveness can be witnessed in the long waiting queues for rental
dwellings, low turnover of rental units, a developing black market (for
instance, sub-letting without the permission of the landlord and at rent levels
higher than those of equivalent rental units, or trade with rental contracts)
and suppressed construction of rental units (Lind, 2013).  
Market inefficiencies are primarily
attributed to the high level of rent control.
Sweden is characterised by one of the highest levels of rent control among the
EU Member States ([57]).Rent levels
are negotiated between the Swedish Union of Tenants (Hyresgästföreningen)
and the housing companies. Rental prices are based on 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, and also factors
in renovations or increases of quality undertaken in the dwelling. 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.
On the other side, rental apartments located in relatively unattractive municipalities
with limited employment opportunities, may nevertheless have high rents if they
are of a high standard (Statens offentliga utredningar, 2012:86).
The rental prices resulting from these
negotiations could greatly vary across municipalities. For instance, in some areas rental prices are considered to
reflect the market prices (such as the Malmö region), in other areas, a
significant gap has opened up between them. In general, the rent to income
ratio has been decreasing sharply in Sweden, much sharper than in other EU
countries.
The difference between market based and
regulated rent levels is apparent in light of the easing of some conditions for
newly constructed rental apartments. Landlords of
newly constructed rental units may charge rents departing from the utility
value system, on the condition that they get the agreement of the Union of
Tenants. As depicted in graph below, the rent for newly built apartments is
considerably higher than for the existing stock.
Wide divergence between actual and
market rents triggers excessive demand for rental units and creates a lock-in
effect since existing tenants would not want to give up their favourable
conditions for renting the apartment. Inefficient
use of the existing rental units could, thus, also contribute to the supply
side constraints of housing. A recent report of the Swedish National Board of
Housing, Building and Planning (2013b) argues that a welfare loss at the
magnitude of SEK 10 billion per year stems from inefficient rental market, while
only relativity limited welfare loss can be attributed to a lack of new
constructions. The report argues that most of the loss can be attributed to the
Stockholm and Gothenburg cities (SEK 8.3 billion and SEK 1.7 billion,
respectively) where the rental market is characterised by the largest
inefficiencies due to their large deviation from the market price([58]). By contrast, in other parts of the country, where rental prices
are more in line with the market prices and/or not characterised by excessive
demand for rental units, the potential welfare loss and the underlying
inefficiencies are much more marginal. The study also argues that as a result
of such inefficiencies, an undersupply of 40.000 rental dwellings has been
accumulated in the country (out of which 27.000 in Stockholm). 
Increased demand for rental units,
however, is not met by increased supply: on the contrary, the number of rental
units is decreasing the most where faced with the strongest demand. Between 1990 and 2012, the stock of apartments has increased by
more than 500.000 but for rental apartments it increased by a mere 1.650 units,
(Mattson-Linnala et al (2013)). The overall stock of rental dwellings has been
decreasing steadily since 1997, by roughly 5%, from 1.746.490 apartments to 1.653.347
apartments in 2012. This decrease can be attributed to government incentives
for home ownership, conversion of rental units to tenant-owned apartments ([59]), demolition of existing stock and limited new rental dwelling
constructions. Again, the decrease has been uneven. Whereas in some parts of
the country the number of rental units even increased (such as Uppsala or
Örebrö), the number has decreased by almost 20% in Stockholm (Swedish National
Board of Housing, 2013b).
The insufficient supply on the rental
market creates a pressure on other type of housing
as well, most notably on tenant-owned apartments (which are the closest
substitute in urban areas) further intensifying their price increase. A recent
paper argues that if Sweden did not apply the utility value system for the
rental market, house prices would likely be lower, and private indebtedness in
2013 would have reached 157% of the disposable income instead of the current
level of 172% (Evidens, 2013).
The Swedish government has taken several
steps on the rental market to tackle the above referred shortcomings. 
The government started to relax rules to
allow tenant-owners to demand rents that would make private letting profitable.
In principle, private lettors can charge prices outside the utility value
system([60]) subject to
the agreement of the housing cooperative association. These changes entered
into force on 1 February 2013 and there are some expectations of rising rent
levels for privately let apartments in urban areas, in particular in Stockholm
city.
As of 1 February 2013, private renters are
also involved in the rent setting negotiations. Despite some initial
expectations, however, this has not led to different rental price setting in
privately owned dwellings due to the opposition of the Tenants' Union and
subsequent legal challenges.
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 aims at better
reflecting the location of the apartments in the utility value setting, thereby
increasing the rental prices for the most attractive areas. However, the model
has been challenged by the Swedish Tenants' Union at the Rent Tribunal, which
rejected the model. The decision of the Rent Tribunal has been appealed by the
Swedish Property Federation; thus, further legal disputes are expected.
The impact of these recent initiatives
cannot yet be fully assessed. In light of the forthcoming elections,
considering the sensitivity of the rental market issues, no new measures are
expected in this field this year.
3.3.5.   Outlook
and conclusions
In the absence of major macroeconomic
turbulences or government interventions, further price increases are expected
on the housing market in the near future driven by favourable demand
conditions. In the medium term, increasing
construction levels, higher repo rates and the introduced macroprudential
measures would dampen house price increases, but other favourable demand
factors (most notably favourable taxation) and supply inefficiencies will
provide further strong upward pressure on house prices.
Housing market developments in Sweden,
in particular the absence of a house price crash, have so far contributed to
limit the negative impact of the crisis by sustaining private consumption. The relatively low level of construction also suggests that the
risk for sharp house price adjustments is relatively small (National Institute
of Economic Research, 2013). On the other hand, house prices need to further
stabilise to avoid driving private indebtedness further, to avoid overheating
and abrupt volatility that could renew concerns on imbalances and of
macroeconomic risks. The renewed growth of private indebtedness in 2013 driven
by mortgage loans in this sense raises some concerns([61]). 
Besides macroprudential measures, other
effective measures are likely to be necessary to keep house price developments
on the stabilisation track. In particular, the high
levels of tax incentives are perceived as key drivers of housing prices.
Accordingly, limiting the strong drive from tax incentives is perceived as a
more effective measure in curbing demand than, for instance, macroprudential
ones (see for instance Kuttner and Shim (2013)). Rebalancing the current low
level of property taxes could also help to stabilise demand (see for instance
Johannesson-Linden and Gayer (2012)), while lower transaction taxes could help
to have more transactions and a better use of the existing stock. 
Addressing the supply side constraints, including the most pressing rental market inefficiencies and
supporting new constructions (e.g. by supporting the building of housing for
special sub-segments, notably students dwellings, affordable houses, rental
houses) could further smoothen house price dynamics and could ease imminent
economic and social constraints on a shorter term. 
A wide debate is currently taking place in
Sweden involving all major stakeholders in this area to analyse the main
challenges of the housing market. The analyses and the debate resulting from
these wide discussions could pave the way for further initiatives to tackle
these issues on the housing market. 
4.1.      Banking
sector overview
Sweden has a large banking sector whose
total assets amount to about 400% of GDP. The
banking market is dominated by four large groups, Nordea, Svenska
Handelsbanken, SEB and Swedbank, which together have about 70% market share in
terms of loans or deposits. The level of foreign ownership and public ownership
in the banking sector is relatively low. On the asset side, high and increasing
exposure to households, mainly through mortgage loans, is the key credit risk
of Swedish banks. It mirrors the problem of high household indebtedness
analysed in chapter 3.2. On the liability side, the banks are exposed to
funding risks as they finance their business predominantly on the international
wholesale funding markets, creating significant maturity and currency
mismatches in their balance sheets. Analysis of these key risks constitutes the
focus of this chapter. 
The Swedish banking groups, together
with Danske Bank and the Norwegian DNB, dominate the financial sector in the
Nordic-Baltic region. Total foreign exposure of
Swedish banks amounts to 158% of GDP (and about half of their total lending)
and is mainly directed towards Denmark, Finland, US, Germany and UK. Exposure
to troubled euro area economies is marginal. Exposure to the Baltic countries,
which corresponds to about 10% of GDP, plays a relatively minor role in Swedish
banks’ balance sheets (accounting for around 5% of the loan book). At the same
time, these banks constitute main pillars of the Estonian, Latvian and
Lithuanian financial sectors ([62]). Hence,
soundness of Swedish banks is fundamental to financial stability in the whole
region.
Loans constitute about 55% of banking
sector assets. Traditionally, Swedish banks were
financing domestic enterprises, facilitating expansion of the export-oriented
industry. Currently, corporate loans make up 17% of the balance sheet, down
from 22% ten years ago. In recent years, loans to households have been gaining
share relative to loans to non-financial corporations on the back of higher
growth rates (Graph 4.1). Mortgage loans amount to 21% of the balance sheet,
compared to 18% in 2004. This change in balance is linked with the growing
household indebtedness and increasing house prices (see Chapter 3).
Deposits account for only 30% of the
banking sector liabilities. Due to their large size
relative to the Swedish economy – and the local savings – Swedish banks are
bound to rely extensively on market funding, for the most part foreign. This
also results from the traditional saving patterns in Sweden, with a low share
of savings held as bank deposits and a high share placed in investment funds,
pension funds and insurance products. Since market financing tends to be more
volatile, the funding risk is one of the focuses of this chapter.
The capital adequacy of banks measured
by standard regulatory ratios is high, with an
average Tier 1 ratio ([63]) at 11.2%
(Table 4.1). However, the leverage ratio, which shows the relation of capital
to total (non-risk weighted) assets, is relatively low. This is linked with the
issue of risk weights applied by Swedish banks, which is examined below in the
context of credit risk analysis. 
Swedish banks feature good profitability
that they were able to maintain despite the crisis.
The average return on equity (RoE) amounts to 11.3% and the return on assets
(RoA) to 0.5% (Table 4.1), putting the Swedish banks on top of EU peers (Graph
4.2). The high average asset quality, testified by the low non-performing loan
ratio, is the key factor behind banks’ profitability. It is also supported by
high cost-efficiency. The average cost-to-income ratio of the sector is below
60%. 
The financial supervisor (FSA) is
responsible for macro-prudential policy. Following
internal debate on the organisation of macro-prudential supervision, the
government decided in August 2013 to grant responsibility for macro-prudential
oversight to the FSA, thus concentrating micro- and macro-prudential tools in a
single authority. However, the Riksbank and the Ministry of Finance will remain
involved in the areas of their competencies, not least through participation in
the Financial Stability Committee established by the government decision in
December 2013 ([64]). 
4.2.      Credit
risk
Lending rates are positive but much
below the pre-crisis levels. In 2009-2010, banks
deleveraged temporarily the Swedish corporate sector, while housing loans were
decelerating. The year-on-year growth of credit to corporations as of October
2013 amounted to 1.3% and to households’ to 4.9%, in which mortgage loans grew
by 5.3% (Graph 4.1) ([65]). 
The crisis dented banks’ asset quality. Non-performing loan (NPL) ratios peaked in 2009 but have declined
since (Graph 4.3), except for the Nordea group due to its losses on the Danish
exposures and the shipping portfolio. By September 2013, NPLs were decreasing
in all banks. The major banks maintained various levels of loan loss provisions
to cover impaired assets. The coverage ratios ranged from 40% to 130%.
The high and increasing exposure to the
household sector is the main credit risk of Swedish banks. While the financial soundness indicators (Table 4.1) present a
sound picture of the banking system, they are by their nature backward looking
and do not fully capture the inherent risks. A slump in households’ disposable
income or an external shock could translate in deteriorating asset quality of
the Swedish banks (see Chapter 3 for more detailed analysis). The possible
overpricing in the Swedish property market poses a risk to banks’ balance
sheets through a shrinking value of collateral of mortgage-backed loans. This
would put some borrowers in negative equity ([66]), which for banks could increase losses on foreclosures and create
funding problems, in particular linked to the use of covered bonds ([67]).
The banks are required to hold capital
buffers to cover unexpected losses resulting from a tail scenario. At the request of the FSA banks have been increasing their capital
adequacy ratios. The Tier 1 ratios of the major banks increased from about 6%
to 8% in 2007 to 10% to 12% in 2013 (Graph 4.4). However, the share of Tier 1
capital in the total balance sheet of banks (leverage ratio) remained stable or
slightly declined in the medium term (Graph 4.5). This means that capital held
by banks grew at similar pace as their balance sheets. Further analysis reveals
that the increase of capital adequacy ratios resulted from the decrease of
risk-weighted assets (RWA) relative to total assets of banks, called RWA
density ([68]).
The shrinking RWA density is a specific
concern for Swedish banks. It has resulted from the
growing share of mortgage exposures, which are characterised by generally low
risk weights, in total assets. On the other hand, the particularly low risk
weights applied by Swedish banks in their internal risk assessment models
(about 6% on average), justified by long historical data series without
defaults, dating back to mid-1990s, magnified the impact. These factors
prompted the Swedish FSA to take corresponding measures. 
Sweden has advanced the full
implementation of Basel III capital requirements.
Ahead of the 2019 universal deadline, Swedish banks are required to hold 10%
Core Equity Tier 1 ratio (CET1) as of 2013 and 12% CET1 as of 2015. 
In order to address the concerns about
the capital adequacy calculation, the FSA introduced a 15% floor on risk weights
on mortgage exposures in May 2013. The floor was
introduced in the framework of the supervisory review (the Pillar 2 process)
following analyses and discussions with various stakeholders. It translates
into increased capital requirements on top of the regulatory minimum. The
add-on ranges from 0.3% Common Equity Tier 1 ratio for Nordea and 0.5% for SEB
to 1.4% for Handelsbanken and 2.2% for Swedbank ([69]). In 2013, banks' actual capital adequacy ratios were above the
Pillar 2 requirements including the add-ons.
In November 2013, the Riksbank
recommended that the risk weight floor is raised further to 25%. The FSA may turn it into a supervisory requirement once the
CRD4 ([70]) is
implemented in Sweden, which is foreseen for mid-2014. The increase of the risk
weight floor is communicated as an alternative to higher counter-cyclical
capital buffers. The central bank has also recommended that banks report
quarterly their leverage ratios in accordance with CRR ([71]) definition.
Some other initiatives have been launched
to contain risks stemming from private sector indebtedness (see Chapter 3.2). In 2010, a 85% loan-to-value (LTV) ratio was
imposed on mortgage lending in Sweden in order to encourage more cautious
credit risk assessment by banks and responsible borrowing by consumers. Since
2010, the Swedish Bankers' Association recommends that loans with a LTV above
75% are amortised to this level. More recently, the FSA recommended that banks
present to their customers individual amortisation plans (IAP) to promote the
long-term benefits of amortisation. 
The effects of the recent FSA
initiatives have to be monitored. The impact of the
new risk-weight floors on mortgage exposures on the banks' capital adequacy
ratios and RWA density should be immediate but the long term effect of limiting
mortgage credit growth remains to be seen. So far, the effect of the floors on
loan pricing has been limited due to the competition in the market.  The
undesired effects of the floors might include an increase of risk-appetite on the
part of lenders and down-ward revisions of risk weights on corporate exposures
in banks internal models ([72]). The FSA plans to monitor the effectiveness of the recommendation
through its impact on the actual amortisation levels and take further measures
if necessary. 
4.3.      Funding
risk
The Swedish banking sector is characterised
by a high share of market funding in its liabilities, complementing the deposit
funding. Customer deposits constitute about 40% of total funding (excluding
equity and derivatives). For this reason, Sweden has one of the highest
loan-to-deposit ratios in the EU (Graph 4.6). It demonstrates the high degree
of the banking sector leverage and its potential vulnerability to market
shocks. The remaining 60% of funds are raised on the wholesale financial
market. The wholesale market funding of Swedish banks is also linked with
currency risks as banks issue the bulk of their debt abroad. About 60% of the
major banks market funding is denominated in foreign currencies ([73]), mainly US dollars and euros. 
The average maturity of market funding
instruments held by the banks was increasing in recent years. Market funding is split between short and long term as per
maturities of the financial instruments. Their shares were quasi-equal in the
past few years, but the share of long term funding increased significantly in
2013 (Graph 4.7). This trend is confirmed by analysis of maturity structure of
the large banks' funding in 2012 and 2013. The share of instruments with
maturities of 4 to 6 years and above 7 years increased in their total funding,
while the share of instruments with maturities below 3 months dropped (Graph
4.8). This is likely a result of both the Swedish authorities' actions and the
favourable market conditions for issuing long-term debt in the Nordic
countries, which were regarded by international investors as a safe haven
during the sovereign debt crisis in the euro area. 
Swedish banks benefit from low funding
costs linked with low risk premia charged by investors. It is related to
high ratings and low CDS spreads of the main Swedish banks, supported by the
triple-A rating and low CDS spreads of the sovereign. The low funding costs
contribute to the banks' high profitability. In 2013, yields on the banks' long
term bonds rose in line with global market trends. Improving market conditions
in the euro area, in particular a better risk assessment of banks in the
distressed countries following the 2014 asset quality review and stress test
conducted under the Single Supervisory Mechanism, may in the future diminish
the "safe haven" advantage enjoyed so far by the Swedish banks.
 
In 2011, the Riksbank recommended that
major banks should reduce their structural liquidity risks and approach the
minimum level of 100 per cent in the Net Stable Funding Ratio (NSFR) ([74]). Banks have started to adapt their
funding structure in the wake of the 2008 financial crisis extending the
average maturity of their funding instruments. From 2013, the FSA requires
banks to abide by the minimum Liquidity Coverage Ratio (LCR) ([75]). As per September, banks complied with the requirement, reporting
LCR between 114% and 147%. However, there were concerns that the average LCR
ratios mask insufficient LCRs for Swedish kronas ([76]). Pending the final definition of the NSFR, the Riksbank reports
its own proxy structural liquidity measure, according to which banks on average
are below the 100% minimum, despite progress from 74% in 2008 to 92% in 2013. 
In November 2013, the Riksbank recommended quarterly reporting of NSFR and LCR
in Swedish kronas ([77]). The FSA
considers making the NSFR binding once its final definition is set at the EU
level.
In 2012, the Riksbank decided a 30%
increase of its foreign exchange reserves. An
amount of SEK 100 billion was added to the existing pool of SEK 314 billion.
The motivation to increase the reserves was inter alia to provide a
backstop for banks' growing demand for liquidity in foreign currencies. The
amount was estimated on the basis of liquidity stress tests carried out for the
four major banks and was funded by the National Debt Office. The strengthening
of the Riksbank's foreign reserves complements its recommendations aimed at
reducing the liquidity risks. Currently, the government in agreement with the
Riksbank and the FSA envisages transferring the costs for maintaining the
additional reserves to banks in proportion to the foreign currency exposures in
their liabilities. The objective is to incentivise banks to reduce their
currency risk.
4.4.      Conclusions
The level of credit risk and funding
risk in the Swedish banking sector remains stable.
The funding risk is linked to the persistently high share of market and foreign
currency funding and the credit risk manifests itself in the increasing private
sector indebtedness. These risks are inter-related with a potential to
reinforce each other in case some tail scenarios materialised. Problems in the
Swedish housing market might trigger risk aversion of foreign investors and
lead to problems in bank funding. On the other hand, funding problems might be
transformed by banks into limited credit availability, which in turn might
suppress economic growth with a negative impact on the housing market.
The Swedish authorities have been taking
appropriate actions to address the key risks relating to financial stability. These measures include the high capital adequacy requirements, with
due attention paid to the impact of risk weighted assets density, the 85% cap
on loan-to-value ratios, the recommendation for individual amortisation plans,
the advanced implementation of the Basel III liquidity ratios and the increase
in foreign exchange reserves, with the plan to make banks share the costs.
Whereas some of these measures have already proved to be effective (the LTV
cap), others (concerning risk weights, amortisation and liquidity) still have
to yield the expected improvements. 
Developments in the financial sector and
the effectiveness of the applied measures call for continued monitoring. A decrease in the credit risk levels would be visible in a lower
private indebtedness level, lower numbers of new amortisation-free loans and
longer average maturity of mortgages as well as adequate capital buffers held
by banks. For funding risks, the progress may be measured by the evolution of
the average maturity of bank liabilities as well as banks' compliance with the
regulatory liquidity ratios (LCR and NSFR) and requirements (funding of the
currency reserve).
The analysis in this report indicates that
macroeconomic developments in the areas of private debt and the housing market
are the main challenges in Sweden. The report also analyses some issues linked
to the sustainability of the Swedish economy, such as the current account
surplus and Sweden’s export market shares (EMS).
It should be recalled that these challenges
were identified under the MIP in the first and second IDR and relevant policy
responses were reflected and integrated in the country-specific recommendations
(CSR) issued for Sweden in July 2013 (CSR 2 and CSR 3). The assessment of
progress in the implementation of those recommendations will take place in the
context of the assessment of the National Reform Programme and the Convergence
Programme under the European Semester. Against this background, this section
discusses different avenues that could be further envisaged to address the
above challenges.
The challenge of high private debt: Possible
policy avenues
Over the last years, Sweden has introduced
a number of measures aiming at reducing the high indebtedness of the private
sector (including both households and corporations). Nevertheless, the unfavourable
situation remains and further reforms would be desirable in order to address
the high debt levels which constitute a risk to macroeconomic developments,
primarily through potential consumption and investment effects. This risk was
reflected in the Council's CSR 2 in July 2013, urging Sweden to continue to
address risks related to private debt and to foster prudent lending.
Promoting sound
lending practices to households and reviewing taxation issues
Since the last IDR, signals that the
amortisation behaviour of households is shifting have strengthened. The LTV-cap
at 85% seems to have been effective in limiting households' exposure to
mortgage debt, and banks are gradually becoming more consistent in requesting
amortisation. The increased risk weight floor to 15% may also have some effect.
Notwithstanding these positive shifts in lending practices, additional tools
may be needed. 
Many households take unsecured loans at
higher interest rates to top off the mortgage loan and young people find
themselves having to rely on their parents to finance the remaining 15% with
their assets as the underlying security. Hence, a look at the global
indebtedness of households needs to be taken. The FSA's signals of further risk
weight increases and possible amortisation requirements should self-regulation
fail could be seen in this perspective. It could also be useful to push for
more amortisation than as is currently the case. In addition, one should be
observant on the net lending of households. Sound underwriting practices can be
further promoted. Banks may also be requested to base lending on real repayment
ability rather than on the potentially volatile value of the underlying asset,
taking into account actual, and not only presumed, living expenses when
assessing the residual income. While a recent government proposal should
decrease the charges paid by a consumer in case of earlier repayments of
mortgage loans, it remains costly for borrowers to switch between fixed and
variable mortgage rates. 
Last year's analysis regarding the
debt-bias in taxation creating incentives for households to finance their
investment in housing through debt rather than own savings remains valid. The
Swedish tax system continues to offer generous deductibility of interest
payments on mortgages. At the same time, property fees are very low and cannot
counterweigh the effect of the tax relief on mortgages. Due to the reduced
relative price of debt financing, households often prefer 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 and could be addressed via a global reform gradually reducing the tax
deductibility of interest payments while at the same time strengthening recurrent
property taxation. As regards the tax deductibility of interest payments, the
government could consider a reduction in the deductible rates or limit the
maximum deductible amounts. Reducing the scope of tax deductibility might be
also considered: for instance tax deductibility of interest rate payments could
be limited to amortising mortgage loans. Although reforming taxation away from
the current debt-biasing structure may be sensitive, it seems appropriate to
clearly address the link between the current debt-bias
and households’ indebtedness at the present moment, and take some concrete
steps towards a phased-in implementation of a reformed taxation system.
Although the housing market appears to have
regained in stability, reforms in this area obviously need to be carried out
gradually and transparently, not to unintentionally feed nervousness in the
housing market. It may be opportune to attempt to enshrine the need to address
the debt bias in taxation and indebtedness already at the present moment, in
order to be prepared for a sequenced roll out.
Addressing
corporate indebtedness
Resulting from the analysis in section 3,
it seems that although corporate indebtedness remains high in Sweden, the
characteristics of the indebtedness do not appear to give rise to macroeconomic
risks. When assessing corporate indebtedness in Sweden, it is relevant to focus
on consolidated debt (or even super-consolidated as described in section
3.2.1). This is because a combination of generous tax deductibility of interest
payments and a historically relatively high corporate income tax in Sweden has
inspired advanced tax planning by multinational companies and foreign owners of
Swedish companies, driving up total indebtedness in particular in the form of
intra-group loans from abroad. However, even when considering only consolidated
figures, the tax deductibility has traditionally made it more beneficial also
for Swedish, local companies to finance their investments with debt rather than
equity. 
Swedish authorities have taken some steps
to counteract the tax minimisation practices of multinational companies. The
corporate tax, reduced from 26.3% to 22% in January 2013, is now more in line
with the EU average (ca. 23% in 2013). Moreover, tax deductibility of
intragroup interest rate payments was capped. Since the 2013 accounting year,
only "sound business reasons" are acceptable grounds to maintain the
deductibility under certain, rather strict conditions. However, the lack of
precision in the formulation of the new rules may result in many companies
being uncertain about the amended "sound business reasons" test and
its applicability. Court proceedings in relation to this matter cannot be
excluded. 
The so-called investor's deductibility
introduced as from December 2013, is not expected to substantially shift the
balance away from debt-financing on the aggregate level. Nevertheless, the
measure, which gives individuals acquiring shares in a new or expanding SME the
possibility to deduct half of the amount of the purchase up to SEK 650,000 per
person and year, can be of importance for start-ups and innovative SMEs.
Within the debt segment, the observed
corporate bond financing trend calls for continued monitoring. Having sprung
from the contraction in traditional bank lending during the financial crisis,
it has given rise to structural changes affecting the debt portfolios of
corporations. While naturally not shifting the debt/equity balance, bond
financing diversifies the funding structure of corporations and decreases their
reliance on traditional bank loans, with banks having to compete with bond
financing on larger deals.
Summing up, it remains hence to be seen
whether the above-mentioned changes will eventually have a decisive effect on
corporate debt. In any case, the on-going governmental inquiry on corporate
taxation due in June 2014 will certainly address the issues of debt/equity
neutrality and other aspects of the Swedish corporate tax system. In this
context, further ways to reduce the debt-bias in company taxation could be
considered, such as a generally applicable cap on the tax relief for interest
payments.
The Housing market challenge: Possible policy
avenues
The structural inefficiencies linked to
under-supply of dwellings have been built up over the course of decades. They
have macroeconomic impacts mainly via increased household indebtedness due also
to a lack of available rental apartments. Naturally, the unrelenting demand,
which is not met by housing supply, has created a strong upwards pressure on
property prices. House price developments have gained momentum over the course
of the last year and started to climb again. The development of apartment
prices has been even more pronounced, in the wake of a strong urbanisation and
immigration trend. Particular pressure is being put on Stockholm County to
accommodate the new arrivals. 
The macroeconomic risks associated with
housing market inefficiencies were reflected in the Council's country-specific
recommendation (CSR) 3 in July 2013, asking for continued reforms of the rent
setting system, promotion of competition in the construction sector and
improvements to the planning, zoning and appeal processes. In spite of some
recent reforms in this area, a more overarching perspective is desirable when
addressing the housing market shortcomings and policy avenues along the lines
presented below could be appropriate.
Rental market
As demonstrated in last year's in-depth
review, an important factor underlying the inefficient housing market in Sweden
is the regulated rental system which limits supply and pushes house prices
upwards as consumers are left with limited options. During many decades, rents
have been set according to the so-called utility value system, which does not
reflect households' real willingness to pay and effectively subsidises the rent
for rental units in attractive city locations, limiting the profitability of
developing the supply. Most municipalities located in urban areas face a
shortage of available rental apartments and administer queuing systems for
allotting tenancies. But the number of rental units is decreasing rather than
meeting demand, especially in the greater Stockholm area. A gradual move
towards market-clearing rents would enhance the functioning of the rental
market and create incentives for developers to invest.
The rental market has seen some limited
reform over the latest years. Restrictions on private letting of tenant-owned
apartments have been eased since February 2013 and this has to some extent
contributed to increasing supply. Such rental contracts may be signed on more
market-based terms, but are still subject to the agreement of the housing
cooperative.
There have been several governmental
initiatives suggesting the need to reduce the negative effects of rent
regulation, e.g. through a public inquiry explicitly calling for reforms (SOU
2012:88), a parliamentary committee set up in 2013 to address ways in which to
promote construction and through a report on the rental market and the
efficiency losses of the utility-value based system published by the Swedish
National Board of Housing, Building and Planning in November 2013. However, in
spite of these initiatives, no decisive legislative proposals have come
forward. To allow market forces to establish an optimal supply of rental housing
at an adequate price, several additional steps might be taken.
These could include deregulating rent
setting in the sense that individual tenants and landlords would be able to
agree on mutually acceptable rent levels and hence increase the freedom of contract.
A first step could be to allow rents of newly produced rental apartments to
fully reflect tenants' willingness to pay. Eventually, rents of the remaining
stock could be adapted.
Housing supply
On the supply side, the analysis has also
identified several factors that hold back property development in a market
basically controlled by a limited number of construction and property
development companies. Protracted and opaque zoning and planning processes at
the municipal level demotivate all but the biggest and most well-established
companies from engaging in negotiations at the local level. The practice of
municipalities to pose additional, disparate technical requirements in addition
to the rules applicable on the national level constitutes effective barriers to
entry for smaller and/or foreign companies.
Municipalities currently lack sufficient
incentives to allow construction, as new housing is linked to infrastructure
and child care investments that are primarily to be borne by the incumbents.
They represent a local planning monopoly and face no direct consequences when
projects are delayed or fail to materialise. Construction companies also
hesitate to invest in rental units due to the reasons outlined above. They may
also choose to wait to develop land in their possession and for which they
already have building permits, in the hope that prices of tenant-owned
apartments will continue to climb. The land may in fact be more valuable as an
option for future developments. Finding clear incentives for municipalities and
construction companies seems therefore to be a priority.
The Swedish authorities have taken several
positive steps to address these inefficiencies, for instance through a recent
governmental proposal in view of facilitating construction of housing for
students and young people through changes to the Planning and Building Act,
through a governmental initiative to ease the requirements of the standard
procedures proceeding building permit approvals, through a review of the rules
governing noise levels with a view to facilitate construction as well as
through a governmental proposal aiming at limiting the possibility for
municipalities to pose additional, technical requirements going beyond national
rules, etc. The additional funds allotted in the 2013 budget for speeding up
appeals' procedures also seems to have given some effect at the level of the
county administrative boards. 
Nevertheless, these initiatives do not seem
sufficient to address the current challenges as the fundamental issues linked
to the rent-setting system as well as to the construction barriers have not
fully been challenged by them. It would seem that a more strategic, overarching
approach to solve the inefficiencies weighing on the housing market would be
useful, in addition to individual measures targeting specific but limited areas
thereof. On the detailed level, further streamlining of
the planning and zoning processes could be considered. In particular, these
processes could be rendered more efficient by more standardised building
requirements across the country and by decreasing the extensive zoning and
planning requirements. More transparent land allotment procedures at municipal
level could be another priority as well as facilitating the access to tenders
for smaller or foreign developers to increase competition. Identifying clear
mechanisms to incentivise developers to construct on land which has already
been subject to detailed planning could also be considered. In a similar vein,
the incentives for municipalities to support new constructions could also be
re-assessed. 
The measures highlighted in this In-Depth
Review are interlinked and reinforce each other.  Furthermore, the timeframe of
their impact could also differ substantially. Avoiding abrupt policy changes in
these areas is crucial due to their pivotal macroeconomic impact: gradual
implementation, well-considered timing, wide political and public support and
continuous evaluation of the impacts would be necessary. These imbalances have
been built up over a longer time horizon, thus their unwinding cannot take
place overnight. Nevertheless, a forthcoming stronger economic growth period
and the ongoing wide debate in Sweden on these issues could pave the way for
further sound policy actions in these areas.  
Andrews, D., Caldera-Sánchez, A. and
Johansson, Å., Housing Markets and Structural Policies in the OECD, OECD
Economics Department Working Papers No 836, 2011.
Blomberg, G. and Falk, M., How do large
current account surpluses co-exist with a weak international investment
position?, Riksbank Economic Review 2006:1.
Börestam, A. and Schmiedel, H., Interchange
Fees in Card Payments, ECB Occasional Paper Series No 131, September 2011.
Caldera Sánchez, A. and Johansson, Å., The
price responsiveness of housing supply in OECD countries, OECD Economics
Department Working Paper No 837, 2011.
County Administrative Board of Stockholm,
(Länsstyrelsen i Stockholms län), Läget i länet: bostadsmarknaden i
Stockholms län 2013 (Stockholm County Housing Market 2013), Report 2013:14,
2013.
Cuerpo Caballero, C., Demertzis, M.,
Fernández Vilaseca, L., Pontuch, P., Assessing the dynamics of house prices
in the euro area, Quarterly Report of the Euro Area, 4/2012.
Cuerpo Caballero, C., Drumond, I., Lendvai,
J., Pontuch, P., Raciborski R., Indebtedness: Deleveraging dynamics and
macroeconomic adjustment, European Economy - Economic Papers 477, 2013.
European Commission, Current account
surpluses in the EU, European Economy 8/2012.
European Commission, Developing an
indicator of innovation output, Staff Working Document, No 325,
13.09.2013a).
European Commission, Education and
training monitor 2013, Vol. 1, 2013b).
European Commission, European Economic
Forecast, Autumn 2013c).
European Commission, European Economic
Forecast, Winter 2014.
European Commission, Innovation Union
Scoreboard, 2013d).
Evidens, Om hushållens skuldsättning och
bostadsmarknaden (On household debt and the housing market), Market
research, December 2013.
Hüfner, F. and Lundsgaard, J., The
Swedish Housing Market – Better Allocation Via Less Regulation, Economics
Department Working Paper, No 558, OECD, 2007.
International Monetary Fund, Balance of
Payments Manual, 1993.
International Monetary Fund, Sweden–Staff
Report for the 2013 Article IV consultation, 2013.
Jahnson, D. and Lundberg, J., Fördelningseffekter
av utbudsrestriktioner på bostadsmarknaden, (Distribution effects of supply
restrictions in the housing market), The Reform Institute, September 2013.
Johannesson-Linden, Å. and Gayer, C., Possible
reforms of real estate taxation: Criteria for successful policies, European
Economy - Occasional Papers 119, October 2012.
Kuttner, K and Shim, I., Can
non-Interest Rate Policies Stabilise Housing Markets/ Evidence from a Panel of
57 Economies, BIS Working Papers No 433, November 2013. 
Lind, H., Social housing in Sweden,
Social Housing in Europe, London School of Economics, forthcoming.
Lind, H., What is Happening on the
Housing Market, SNS Analys No 10, March 2013b).
Mattsson-Linnala, S., Lind, H., Weiss, L.,
Bengtsson H., Så ökar vi bostadsbyggandet (The way to increase housing
construction), Premiss Förlag 2013. 
Ministry of Social Affairs, En effektivare
plan- och bygglovsprocess (A more effective planning and building permit
process), Government Official Reports (SOU) 2013:34, 7 May 2013.
Ministry of Social Affairs, Nu blir det
enklare att bygga (Now it will be easier to build), Debate article of 13
February 2014.
Müge Adalet McGowan, Housing, Financial
and Capital Taxation Policies to Ensure Robust Growth in Sweden. OECD
Economics Department Working Papers No 1024, 2013. 
National Institute of Economic Research
(Konjunkturinstitutet), The Swedish Economy, December 2013.
Peterson Institute for International
Economics, Estimates of Fundamental Equilibrium Exchange Rates, Policy
Brief No 13-29, November 2013.
Statens Offentliga Utredningar (Swedish
Government Official Reports), Ökat bostadsbyggande och samordnade miljökrav
– genom enhetliga och förutsägbara byggregler (Increased housing and coordinated
environmental requirements - through consistent and predictable building
regulations), 2012:86.
Statistics Sweden, (Statistiska
centralbyrån), Sharp decrease in conversion of rental dwellings,
Nr 2013:137, 30 May 2013. 
Statistics Sweden, (Statistiska
centralbyrån), Financial Market Statistics December 2013, 2014a.
Statistics Sweden, (Statistiska
centralbyrån), Real estate prices up to and including December 2013:
Increasing house prices, Nr 2014:6, 13 January 2014b. 
Statistics Sweden, (Statistiska
centralbyrån), Large increase in dwelling starts in new constructions,
Nr 2014:39, 20 February 2014c.
Stockholms stads bostadsförmedling
(Stockholm Housing Service), Bostadsförmedling i Stockholm AB: Köstatistik
för bostadskön (Housing Service in Stockholm: queue statistics), December
2013. 
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Sveriges Riksbank, The Swedish
retail-payment market, Riksbank Studies, June 2013.
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inquiry into the risks in the Swedish housing market, 2011.
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12-11920, 21 May 2013b).
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March 2013c).

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(Finansinspektionen), Risks to financial stability and individual households
in Sweden associated with household indebtedness and amortisation behaviour,
Memorandum (Author: Robert Boije), Ref. 13-11430, 1 October 2013d).
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housing crisis from a marketing perspective), Rapport 2012:18, 2012.
Swedish National Board of Housing, Building
and Planning (Boverket): Are house prices driven by a housing shortage?
Market report, February 2013a).
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kunskapsunderlag (The housing shortage and the rent setting system -a knowledge
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of housing is lacking?), 2013c).
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([1])  ECFIN Country Focus, Sun spots on the
Swedish labour market? Pavlína Žáková, May 2013
([2])  European Commission (2014).
([3])  Servicification refers to the increased use of services in
productive processes, as well as the increased (cross-) selling of services to
customers.
([4])  According to Eurostat data, from 2000 to 2011 immigration flows
into Sweden have been, on average, twice as large as emigration outflows.
([5])  Defined as gross fixed capital
formation divided by GDP (current price data).
([6])  See Peterson Institute for International Economics (2013) and International
Monetary Fund (2013).
([7])  World Economic Forum (2013).
([8])  World Bank (2013).
([9])  Transparency International (2013).
([10]) European Commission (2013a).
([11]) 2011 data
([12]) European Commission (2013b).
([13]) European Commission (2013). [Education
and training monitor 2013 - Volume 1]
([14]) The symmetric revealed comparative
advantage indicator shown in Charts 3.10 and 3.11 is an indicator of specialisation of a
country's exports relative to the world. The indicator ranges from -1 to +1.
Values greater than zero imply specialisation of the country in the
corresponding sector.
([15]) See European Commission (2012), Table
4.2.
([16]) European Commission (2014).
([17]) Statistics Sweden data (financial accounts by counterpart sector).
([18]) Part of the domestic stock market capitalisation is
"owned" by foreign investors, and therefore counted as an external
liability for accounting purposes. Additionally, domestic bond prices co-move
with domestic interest rates.
([19]) As measured, e.g., by the Euronext
index.
([20]) See Blomberg, G. and Falk, M (2006).
([21]) Consolidated
data are more appropriate than non-consolidated in assessing the debt burden of
Swedish corporations due to a wide use of domestic intra-group lending. 
([22]) For the concept of notional leverage,
see Cuerpo et al. (2013).
([23]) These tax minimisation practices are
further detailed in last year's Review, p47.
([24]) See Cuerpo et al. (2013) for
more details on the methodology to filter assets from their valuation effects.
([25]) FSA, Memorandum, 21/05/2013
([26]) FSA, Swedish Mortgage Market 2013
([27]) In practice loans with interest rate
adjustments every third month.
([28]) Sveriges Riksbank (2011), The
Riksbank's inquiry into the risks in the Swedish housing market
([29]) FSA, The Swedish Mortgage Market 2013
([30]) Discretionary income is the income net
of housing costs and subsistence costs.
([31]) FSA memorandum 2013-11-14.
([32]) FSA Memorandum 2013-10-01, FI Dnr
13-11430
([33]) Prop 2013/14:44 of 7 November 2013.
([34]) Swedish Council for Cooperation on
Macroprudential Policy: Minutes, 1 October 2013.
([35]) FSA, Memorandum 2013-11-14.
([36]) The methodology to construct the
indicators of overall loan supply pressure and overall loan demand pressure is
explained in Cuerpo et al. (2013).
([37]) The financial soundness indicators are
further elaborated in chapter 4.
([38]) Only Norway and New Zealand  reached
higher real house price growth rates from the OECD countries in the same
period.
([39]) The AMR scoreboard is available at: http://ec.europa.eu/economy_finance/indicators/economic_reforms/eip/sbh/
([40]) Mean-reversion properties are not
confirmed by empirical evidence in several countries.
([41]) Nominal price increase is of little
information given the general increase in prices and income. So-called real
series compare house prices with the consumer price index (CPI), but it is
still a limited measure. First, the CPI is not the best price index to compare
to house price inflation: monetary policy keeps overall inflation low and
stable, and hence relatively independent from the long and deep housing cycle.
Second, nominal prices are not corrected for quality increases, which can be
substantial in this sector. In short, even if the price to income ratio also misses
the corrections for quality, it is probably one of the best indicators to assess
house price level developments.
([42]) A Vector Error Correction Model has
been estimated for Sweden, using a system of five fundamental variables; the
relative house price, total population, real housing investment, real
disposable income per capita and real long-term interest rate. For further
details see Cuerpo C., M. Demertzis, L. Fernández, P. Pontuch (2012).
([43]) 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 the inhabitants do not own a particular apartment and decisions regarding
more substantial renovations and sub-letting of particular apartments have to
be taken at collective level.
([44]) Rental dwellings are mainly owned by
private landlords and public housing companies and the distribution is fairly
even between them. A very small share is also owned by the Swedish state,
counties and directly by municipalities.
([45]) The average property price for a one-
or two-dwelling building during the fourth quarter of 2013 was nearly SEK 2.2
million in Sweden, SEK 2.8 million in Greater Malmö and almost 4 million in
Greater Stockholm (Statistics Sweden, 2014a).
([46]) According to a paper of Sweden's
National Board of Housing, increasing incomes and population/dwelling ratio can
account for more than half of the total increase in house prices between 1996
and 2011. For more details, see Swedish National Board of Housing, Building and
Planning, 2013a. 
([47]) In contrast, the third major
metropolitan centre of Sweden, Malmö did not experience the same level of house
price increases in the last decade. During the early 2000s, many Danes chose to
move to the Malmö region, as the newly constructed Öresund bridge enabled
easier commuting to Copenhagen, and benefitted from the lower level of house
prices in Malmö compared to Copenhagen. However, Danish house prices have been
falling sharply since 2007, reaching 2003 levels, and the migration flow has
reversed putting downward pressure on house prices in the Malmö region (Swedish
National Board of Housing, Building and Planning, 2013a). 
([48]) 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. The population of the
Stockholm region has increased by more than 20% in the last 10 years, due to
favourable demographic factors, internal migration and a growing number of
refugees.
([49]) Riksbanks' repo rates stayed at 4.75%
in September 2008, and stands at 0.75% in January 2014.
([50]) The repo rate has been decreased to a
record low of 0.75% on 17/12/2013 (and the Riksbank's timing of initial
tightening has been postponed until 15-1Q).
([51]) 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 SEK 6,512 (or roughly
EUR 700, a very low ceiling that would apply to the vast majority of houses),
which drastically reduced the taxation of housing. 
([52]) Currently more than 430.000 people are
waiting for a rental apartment in Stockholm
and the average waiting time could be more than 10 years (Bostadsförmedling I
Stockholm AB, 2013).
([53]) According to OECD estimations, Sweden
has built up an investment gap in the construction of dwellings of SEK 1,500
billion compared to OECD average (Hüfner and Lundsgaard, 2007).
([54]) On average, 42,000 dwellings were built
annually from 1980 to 1990, while this figure more than halved in the next
decades (based on Statistics Sweden figures).
([55]) A summary of the government initiatives
are available at: http://www.regeringen.se/sb/d/14867.
([56]) Most of the growth can be attributed to
the Stockholm region where, for instance, dwelling starts in newly constructed
buildings increased by 70% in 2013 compared to 2012. By contrast, construction
activity in the Goteborg stayed flat (+1% growth) and decreased in the Malmo
region (-22%), while the rest of Sweden outside the three main metropolitan
areas experienced 18% growth regarding new dwellings compared to the same
period of 2012. Regarding dwellings types, the growth has been driven by
multi-dwelling buildings with an increase of 36% in 2013 compared to the
similar period in 2012. 
([57]) For further details on the methodology
considering the degree of flexibility in setting rental levels for new
contracts and the definition of the rental updating methods within tenures, see
Cuerpo C., M. Demertzis, L. Fernández, P. Pontuch (2012).
([58]) The model developed in the paper
assumes that the difference between rental prices and market prices in
Stockholm could be at the magnitude of 68% and of 25% in Gothenburg, while in
the rest of the country this figure stays within the magnitude of 5%.
([59]) The number of rental dwellings that
were converted to tenant-owned dwellings declined in 2012 (4.216 dwellings)
compared to 2011 (7.100) and 2010 (about 20.000). Since 2000, approx. 160.000
rental dwellings have been converted to tenant-owned dwellings in the country.
Of these, 72% or about 115.000 are in Stockholm (see Statistics Sweden (2013a)).
([60]) 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.
([61]) In December 2013, loans to households
increased at an annual rate of 4.9% primarily driven by mortgage loans to
households (Statistics Sweden, 2014b).
([62]) Following introduction of the Single
Supervisory Mechanism in the euro area (November 2014), the ECB will become a "host"
supervisor for the Finnish, Estonian and Latvian subsidiaries of the Swedish
banking groups. Formally, the ECB will be subject to the coordination powers of
the Swedish lead supervisor. However, it may become a relatively stronger counterpart
in the colleges of supervisors than its national “host” predecessors.
([63]) Tier 1 regulatory capital to risk
weighted assets.
([64]) The FSC will also include the FSA and
the Swedish National Debt Office. The first of its official semi-annual
meetings is foreseen for June 2014. The establishment of the FSC formalises
inter-institutional cooperation on financial stability and crisis management
dating back to 2005.
([65]) ECB
consolidated bank balance sheets in local currency.
([66]) Situation whereby the value of a loan
exceeds the value of the house.
([67]) The declining collateral value would on
the one hand force banks to replenish the collateral pools that secure covered
bonds with additional good quality loans and on the other hand could result in
an increase of covered bond prices and thus the banks' funding costs.
([68]) It is a matter of a denominator effect,
given that the Tier 1 ratio equals Tier 1 capital divided by RWA.
([69]) Sveriges Riksbank (2013) Financial Stability Report 2013:2
([70]) Capital Requirements Directive 4 introducing
Basel III in the EU
([71]) Capital Requirements Regulation
introducing Basel III in the EU
([72]) Similarly to mortgage exposures, banks
base their models on historical data showing very low default levels. A number
of banks are currently revising their Internal Rating Based models.
([73]) Sveriges Riksbank (2013) Financial Stability Report 2013:2
([74]) The Basel III Net Stable Funding Ratio
(NSFR) seeks to calculate the proportion of long-term
assets which are funded by long term, stable funding. Detailed features of the
NSFR are still being calibrated: an EU consultation was
launched in January 2014. The 100% minimum will be binding
by 2019.
([75]) The Basel III Liquidity Coverage Ratio
(LCR) requires banks to hold liquid assets sufficient to cover cash outflows
over a 30 day period. The minimum coverage is 100%. The Basel III / CRD4 foreseen
enforcement deadline for the EU Member States is 2015.
([76]) See Riksbank Financial Stability
Report 2013:2 for more details.
([77]) On top of its prior recommendation to
report LCRs for USD, EUR and all currencies mixed.