COMMISSION STAFF WORKING DOCUMENT In-depth review for Sweden Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Sweden, economic policy, fiscal policy, housing policy, indebtedness, interest, macroeconomics, property market, real estate credit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 644 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Sweden Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final}  
 
 
Sweden 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Sweden  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Sweden  continues  to  experience  imbalances.  Vulnerabilities  relating  to  its  real 
estate market and high private debt persist. Real estate prices are high, and have 
been  rising  until  recently.  House  price  increases  have  gone  hand  in  hand  with 
rising private debt. In 2022, against a backdrop of marked tightening in monetary 
and  financing  conditions,  real  estate  prices  started  to  decline  visibly  in  what 
seems to be the start of an unwinding of the accumulated vulnerabilities. Prices 
remain significantly overvalued and are expected to decline further. The turnover 
in the real estate sector has recently declined markedly, and, as a result, demand 
for newly built dwellings has also fallen. The adverse developments have, so far, 
been limited to the construction and real estate sectors, which are now declining 
sharply after years of high growth. As a whole, the Swedish economy is expected 
to  contract  in  2023,  with  the  changes  in  monetary  conditions  affecting  the 
balance  sheets  of  households  and  commercial  real  estate  companies  and  their 
room to consume and invest. The impact of increased interest rates on mortgage 
payments is substantial, due to the prevalence of variable interest rates and very 
long  duration  mortgages.  The  impact  of  changing  conditions  on  the  financial 
sector has been limited; the sector is strong and records high profit margins and 
risk-weighted  capital  ratios,  likely  serving  as  a  bulwark  against  a propagation  of 
the real estate sector problems to the wider economy through the financial sector, 
although  it  is  highly  exposed  to  real  estate.  Policy  progress  has  been  limited.  In 
particular,  the  tax  system  continues  favouring  homeownership  through  low 
recurrent  property  taxation  and  promotes  debt-financed  housing  acquisition 
through  significant  tax  deductibility  of  mortgage  interest  payments.  In  addition, 
the inefficient rental market has seen limited reform. 

 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 

Selected economic and financial indicators (Part 1), Sweden 
Selected economic and financial indicators (Part 2), Sweden 

LIST OF GRAPHS 

Graph 2.1:  Household debt ratio excl./ incl. debt to tenant-owner associations 

Graph 2.2:  Margin between the cost of funds and the interest rate charged to borrowers (FISIM margin) and interest 

excluding FISIM margin, relative to total loans 

Graph 2.3:  Selected graphs, Sweden 

Graph 2.4:  Components of gross fixed capital formation deflator growth and consumer price inflation 

4 

5 

13 
14 

6 

8 

11 

12 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance  Procedure  (MIP),  the  Commission  identified  “macroeconomic  imbalances”  in 
Sweden. (1)  These  imbalances  were  related  to  high  and  rising  house  prices  and  high  household 
indebtedness.  The  2023  Alert  Mechanism  Report  published  in November  2022  concluded  that  an 
in-depth  review  (IDR)  should  be  undertaken  also  this  year  for  Sweden  with  a  view  to  assess  the 
persistence or unwinding of imbalances. (2) The AMR concluded that in Sweden, concerns related to 
persistently  high  house  price  growth  and  high  household  and  corporate  debt  remained.  Nominal 
house  price  growth,  albeit  declining  remained  high,  amidst  an  estimated  overvaluation  of  house 
prices. 

The  Swedish  economy  is  expected  to  contract  in  2023  with  rising  interest  rates  and 
inflation  reducing  private  consumption,  lowering  house  prices  and  slowing  down 
construction  activity  strongly. (3)  The  economy  started  to  feel  the  impact  of  higher  energy 
prices and rising inflation already in 2022, when real GDP growth decelerated to 2.6% after 5.4% 
in  2021.  Despite  limited  direct  trade  with  Russia  or  Ukraine  and  a  high  share  of  domestic 
renewable energy production, Sweden’s electricity prices have increased in line with developments 
in  the  European  electricity  market.  Together  with  a  tightening  of  monetary  conditions,  this  is 
constraining private consumption with a particularly large impact on highly indebted homeowners. 
The  economy  is  projected  to  enter  recession  in  the first  half  of  2023  on  the  back  of  falling  real 
disposable  income,  higher  mortgage  interest  payments,  lower  capital  investments  in  the  wider 
private sector and a weak housing sector. A slight improvement is expected in the second half of 
2023  when  foreign  demand  picks  up,  lower  energy  prices  support  households’  income  and 
investments and the housing market stabilises. Real GDP growth is forecast at -0.5% in 2023 and 
1.1% in 2024. Annual inflation is set to fall to 6.0% in 2023, after 8.1% in 2022. The Riksbank is 
expected  to  hike  interest  rates  one  more  time,  bringing  the  interest  rate  to  3.75%.  Inflation 
expectations  seem  well  anchored  around  the  Riksbank’s  inflation  target  of  around  2.0%,  which 
should support to bring back inflation to the target. Going forward, the main downward risks for the 
economy  are  linked  to  further  and  sustained  declines  in  property  prices  and  in  real  estate 
transaction volumes. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities for Sweden. Vulnerabilities related to housing in Sweden are also discussed in a 
horizontal thematic note that was recently published. (4) The MIP assessment matrix is published in 
the 2023 Country Report for Sweden. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 197. 

(5)  European Commission (2023), Country Report Sweden 2023, SWD(2023) 627 final. 

4 

 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

Private  debt  and  house  prices  remain  at  high  levels.  In  2022,  consolidated  private  sector 
debt  stabilised  at  217%  of  GDP,  following  fast  credit  growth  in  the  preceding  years  and  in 
particular  in  2021.  Credit  to  non-financial  corporations  has  replaced  credit  to  households  as  the 
main driver of new credit to the non-financial private sector. As elevated inflation is set to boost 
nominal GDP, private debt relative to GDP is expected to fall in 2023 regardless of still substantial 
growth in nominal  terms. The recent pattern in household debt growth is mirrored in house price 
developments  as  the  dominant  share  of  household  debt  has  been  used  for  housing  acquisition. 
House prices peaked in nominal terms in March 2022. A year later, they stood 16% lower according 
to the HOX index for house prices in Sweden. In real terms house prices have declined even more. 
Transaction  volumes  also  fell  sharply  over  2022,  indicating  a  broad  correction  in  the  housing 
market (graph 2.3 b and e) with price declines throughout the country.  

Swedish  house  prices  still  seem  overvalued.  On  5  April  2023,  the  Commission  presented  a 
horizontal  thematic  note  on  housing  market  developments,  which  also  covers  Sweden.  It  showed 
that over the last decade, house prices have increased by over 80% in nominal terms, with half of 
the  increase  taking  place  over  the  last  three  years.  This  growth  in  house  prices  has  exceeded 
income growth considerably and accelerated with the pandemic. House price to income ratios were 
over  40%  higher  in  the  third  quarter  of  2022  compared  to  2012,  while  house  prices  were 
estimated  to  be  around  29%  overvalued  with  the  Commission  model  in  2022  (graph  2.3  c).  The 
high valuation of houses is also reflected in the average years of income needed for a person to 
buy 100 square meters of living space. In Sweden, this indicator has risen from 8.4 years in 2009 
to  11.4  years  in  2022.  Recent  decreases  in  house  prices  have  not  been  sufficient  yet  to  offset 
higher  mortgage  interest  rates  and  improve  affordability  sufficiently  to  allow  a  broader  set  of 
potential homeowners to enter the housing market.  

The increase in interest rates laid bare the economy’s short-term vulnerability linked to 
household  indebtedness  and  house  prices.  Household  debt  to  disposable  income  stood  at 
181 %  in  2022,  somewhat  below  its  peak  in  2021.  Until  early  2022,  decreasing  interest  rates, 
however, still led interest expenditures to decline even as household debt grew, falling from 7% of 
income  in  1995  to  2½%  of  income (6)  when  accounting  for  mortgage  deductibility  (Thedéen 
presentation for the Riksdag, 2023). The increase in mortgage rates quickly started to impact the 
debt service burden of households because mortgage rates are fixed for relatively short periods in 
Sweden. The Riksbank (2022)  expects interest  payments of households to rise to 6% in 2025. In 
response to the increased interest burden, households have shortened their interest fixation period 
(Finansinpektionen Mortgage Report 2023, p 22) (7). However, having assumed debt with very long 

(6)  When accounting for mortgage interest deductibility and assuming all mortgagors can subtract 30% of their interest 

payments (ie. stay below the SEK 100,000 threshold). 

(7)  Some two thirds of new mortgages had an interest fixation period of twelve months or less in 2022 and only one in twenty 
had a loan fixation period longer than 36 months. New mortgagors with short interest fixation periods and long maturities 

5 

 
                                                 
 
 
maturity and given the compensation that mortgagors need to pay banks to lengthen their fixation 
periods, this likely exposes households’ budgets to interest fluctuations for the longer term.   

2. 

Assessment of macroeconomic vulnerabilities 

Box 1 How debt of tenant-owner associations affects households 

A particular feature of Sweden’s housing market are the tenant-owner associations (“associations”), 
who  grant  the  use  of  their  apartments  to  their  members,  i.e.  the  tenant-owners.  Each  member 
owns a share in the association equivalent to an apartment. In other words, instead of owning an 
apartment directly, members own a share that gives them the right to occupy the apartment. There 
are about 35 000 registered tenant-owner associations in Sweden, of which about 29 000 own at 
least one building. Altogether, associations own more than 1.1 million apartments out of a total of 
2.6  million  apartments  and  a  total  of  5.1  million  dwellings.  Other  apartments  are  predominantly 
rental apartments, owned by private companies or municipal housing companies. 

Typically,  the  tenant-owner  purchases  a  share  on  the  open  market  and  finances  the  acquisition 
through a bank mortgage. What is notable is that the association itself typically also has significant 
bank debt, taken up at the time when the association was formed and acquired the building from 
the developer. At the point of this first acquisition, the newly formed association sells the shares 
(one per apartment) to its founding members at a total cost that often is lower than the cost of the 
building. This means that a share in the association is itself a leveraged asset title. While the debt 
burden thus increases for new tenant-owners, their debt service burden is softened by a five-year 
amortization holiday in case they buy into a newly produced dwelling. 

According  to  data  from  FI,  the  Swedish  authority  for  financial  supervision,  Swedish  tenant-owner 
associations themselves have debt amounting to on average SEK 6 300 per square meter (figures 
from 2020, up by 7.8% from 2019). Notably, for recently formed associations in (typically) newly 
built  houses,  average  debt  is  more  than  twice  that  of  the  whole  stock:  SEK  13  700  per  square 
meter in 2020, which is 6.2% higher than in 2019. 

Graph 2.1: Household debt ratio excl./ incl. debt to tenant-owner associations 

Source: FI (Swedish financial supervisory authority) 

The  association  finances  interest  and  amortisation  payments  (as  well  as  taxes,  renovations, 
building upkeep, etc) through monthly fees of its members. Any increase in mortgage rates is thus 

for their mortgages face a significant cost if they want to extend their interest fixation period. Tenant-owners of 
apartments face even higher debt service burdens through the debt that their owner associations have assumed (see text 
box and graph 2.1). The debt of the association is not part of the formal amortization requirement and those tenant-
owners that acquire a newly built apartment benefit from an amortization holiday of five years. 

6 

01002003004005006002017201820192020% of gross income of borrowersDebt ratio for newly produced dwellings excl. tenant-owner association debtDebt ratio for newly produced dwellings incl. tenant-owner association debtDebt ratio for existing dwellings excl. tenant-owner association debtDebt ratio for existing dwellings incl. tenant-owner association debt 
 
  
                                                                                                                                                        
2. 

Assessment of macroeconomic vulnerabilities 

felt twice for association member households, as the interest on their own bank mortgage as well 
as  the  interest  on  the  society’s  mortgage  increases.  The  relative  increase  in  the  interest  burden 
coming  from  the  associations  is,  however,  larger  as  neither  the  associations  nor  their  members 
benefit from tax deductibility of the loans assumed by the associations. 

UC, a private credit rating company, surveyed households living in tenant-owner associations that 
were  formed  in  2018  or  more  recently  and  concluded  that  in  a  scenario  of  a  mortgage  interest 
increase  of  2  pps,  71%  would  face  association  fee  hikes  between  5  and  20%.  In  case  of  an 
increase by 3 pps, 46% of households would be expected to pay between 15 and 40% more. (8)  

In addition, higher interest rates, a weak economy and working from home pose risks to 
commercial  real  estate  valuations  and  profitability.  Concerns  have  increased  related  to 
commercial  real  estate  (CRE)  companies  and  their  exposure  to  real  estate  market  developments, 
resulting in a 40% drop in their market values on the Stockholm stock exchange in 2022. This drop 
reflected  mostly  the  increased  leverage,  higher  yield  requirements  and  the  decline  in  property 
prices. For CRE companies having invested in office space, changes in working patterns following 
the  pandemic  pushes  down  demand  and,  thereby,  property  valuations  and  rental  yields. 
Indebtedness has grown over the years and stood at SEK 1.8 trillion in 2022 (FI stability report I 
2023),  representing  a  quarter  of  all  debt  of  non-financial  corporations  and  about  30%  of  GDP. 
Market  financing  has  generally  become  more  difficult  for  CRE  companies  in 2022  and they  have 
had to increasingly rely on bank loans for their funding. Looking at CRE debt maturing in between 
2023 and 2025, Handelsbanken (2022) estimates that some 20% to 25% relates to CRE firms that 
might have difficulties accessing market or bank funding under current circumstances and could be 
forced to sell assets to compensate for any lack of funding. This would be equivalent to a funding 
gap of SEK 20 – 30 bn per year from 2023 until 2025. 

House  prices  are  likely  to  decline  further,  while  the  interest  burden  is  set  to  increase 
with rising mortgage rates, but risks of feedback loops seem contained. Even if Swedish 
mortgagors have short fixation periods for their mortgage rates, not all mortgage rates have been 
reset  since  rates  started  to  increase.  The  Riksbank  (2023,  Feb  monetary  policy  report)  estimates 
that around half of the increase in mortgage rates has so far been passed on to the existing stock 
of  outstanding  loans.  With  the  recent  shift  to  shorter  fixation  periods  and  the  remaining  half  of 
outstanding  loans  not  having  to  be  renegotiated,  further  increases  in  mortgage  rates  would  risk 
putting  disposable  income  and  house  prices  under  pressure  even  more.  At  the  same  time, 
households have generally good buffers. Therefore, it seems unlikely that lower house prices could 
lead to a downward spiral where a sharp drop in demand negatively affects employment, income 
and then again house prices. 

Construction  activity  declines  sharply  after  years  of  higher  output.  High  construction 
activity  helped  to  close  the  construction  gap  between  growth  in  number  of  households  and  the 
number of dwellings (Boverket, 2022). However, newly started construction of dwellings fell to 56 
500 units in 2022 after 68 400 units in 2021 (December prognosis for 2022). Boverket (regional 
outlook) estimates that between 2022 and 2030 571 000 new dwellings need to be built, 73% of 
these in the metropolitan regions of Stockholm, Gothenburg and Malmö. While over time, Swedish 
construction  investment  has  been  relatively  responsive  to  price  increases  -  the  OECD  (2019) 
estimates Sweden’s long-run supply elasticity at 2.01 - the surge in capital costs, in input costs, a 
shortage of cement and a drop in demand for new housing is set to lead to a large deceleration in 
construction activity in the short run.   

(8)  https://www.uc.se/pressartiklar/pressrelease/3219825--Efter-Riksbankens-besked---kraftiga-avgiftsh%C3%B6jningar-

stundar-f%C3%B6r-h%C3%B6gt-skuldsatta-bostadsr%C3%A4ttsf%C3%B6reningar-/ 

7 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

The impact on the financial sector from the adverse real estate market developments is 
limited. Swedish banks have very sound risk metrics with a low share of non-performing loans, a 
solid  interest  rate  margin  and  high  risk-weighted  capital  ratios.  The  exposure  to  real  estate  is, 
however, high with around three quarters of the financial institutions’ lending portfolio linked to the 
real  estate  market  through  mortgages  and  CRE  companies (9).  The  good  financial  buffers  of 
households, owing to strict stress testing of the ability to service debt in adverse scenarios, reduce 
the  risk  of  sharp  increases  in  non-performing  loans  on  household  mortgages.  In  addition,  banks 
benefit  from  earlier  high  growth  in  deposits  that  ensure  low  funding  costs.  Indeed,  the  interest 
margin  and  banks’  profitability  have  increased  as  lending  rates  rose  more  than  the  interest  on 
deposits over the past year. However, this increase in the interest margin started from a low level 
as previously volume rather than margins was the driver of banks’ profits. A challenge for Swedish 
banks  seems,  therefore,  to  maintain  high  profitability  as  credit  volumes  are  likely  to  fall  in  the 
current economic environment (see graph 2.2).  

Graph 2.2: Margin between the cost of funds and the interest rate charged to borrowers (FISIM 
margin) and interest excluding FISIM margin, relative to total loans 

Source: Statistics Sweden 

Developments in commercial real estate require close attention given banks’ exposure. 
Stress tests suggest that a sizable portion of debt owed by CRE companies is vulnerable to adverse 
developments.  Riksbank  (2022)  reports  an  increase  in  bank  lending  to  commercial  property 
companies  from  “just  over”  30%  of  total  bank  lending  to  non-financial  corporations  in  2012  to 
44% in 2021. This increased exposure has led to several analyses of the credit risk associated with 
CRE debt. Recently, the FSA (2022) and the IMF (2023) have estimated the debt at risk in adverse 
scenarios at between 20 % and 35% of all CRE debt (10). This CRE debt could no longer be serviced 
out of net income. In the FSA’s analysis, the credit losses would amount to SEK 45 billion or 4.5 % 
of bank lending to CRE firms. This would roughly equal “the capital banks have set aside for lending 
to the commercial real estate sector”. The analyses show an important heterogeneity among CRE 

(9)  Mortgages to households represented 52% of financial institutions lending portfolio at the end of 2022. Bank lending to 
NFCs represented 38% of the total loans outstanding with CRE companies representing 44 % of banking lending to NFCs 
and the lending to tentan-owners associations 21% (Riksbank, 2023 = presentation Thedeen 31 January). 

(10)   

8 

   
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

companies where the majority of companies will not be forced into fire-sales even if the value of 
their properties shows a significant decline. 

Assessment of MIP relevant policies  

Underlying  causes  of  the  macroeconomic  vulnerabilities  associated  with  private  debt 
and real estate prices remain in place. Policies contributing to macroeconomic vulnerabilities 
have  not  been  addressed  and  the  risk  is  that  these  will  drive  again  a  debt-financed  diversion  of 
house  prices  from  their  fundamentals.  The  tax  expenditures  promoting  debt-financed  housing 
acquisition  and  low  recurrent  property  taxation  have  not  been  addressed.  As  a  consequence,  the 
higher  tax  expenditures  resulting  from  higher  tax  deductions  (due  to  higher mortgage  payments) 
are borne by all tax payers, including those renting and newcomers wanting to buy their first house. 
The  reduction  of  these  tax  expenditures  could  actually  be  designed  in  such  a  way  that  benefits 
newcomers facing difficulties to acquire their first house. One example to clarify the relative impact 
of redesigning tax treatment of housing is if the mortgage interest deductibility would be limited to 
the  value  of  the  first  house  acquired  (with  a  cap  on  that  value  to  avoid  sponsors  leading  to 
inequality in housing opportunities).  

Policy actions have been limited to changes in building permits and some tightening of 
macroprudential  regulation.  Over  the  years,  the  tax  system  has  continued  to  favour 
homeownership  through  low  recurrent  property  taxation  and  promoted  debt-financed  housing 
acquisition.  The  rental  market  saw  limited  reform  and  average  rents  are  still  well  below  market 
rents,  resulting  in  long  waiting  lists  and  a  very  low  vacancy  rate  relative  to  other  EU  Member 
States. These issues have still not been addressed. Some policy was implemented that is expected 
to ease permitting procedures. Over the past year, macroprudential policy was tightened through an 
announcement that the Countercyclical Buffer rate will be raised at the end of June 2023.  

Numerous  inquiries  give  direction  for  other  policy  measures  to  avoid  risks  of 
macroeconomic  imbalances.  A  particularly  appealing  policy  suggestion  with  an  eye  to  interest 
developments  after  this  tightening  cycle  is  to  reduce  the  interest  difference  compensation  that 
mortgagors  need  to  pay  when  moving  to  longer  interest  fixation  periods.  The  government  has 
launched an inquiry that will report on its findings by 23 September 2023 at the latest. For some 
time,  a  need  has  been  identified  to  better  understand  the  assets  and  liabilities  of  individual 
households. Establishing a database with microdata would help in understanding at a granular level 
the impact of policies related to and the distribution of exposure to macroeconomic vulnerabilities 
among the population. The particularly large impact that increasing interest rates have on tenant-
owners  attests  to  a  need  to  include  the  debt  of  tenant-owners  associations  in  borrower-based 
prudential  measures,  i.e.,  by  including  it  in  the  calculation  of  LTV  and  LTI  ratios  to  determine 
amortization requirements. 

Conclusion  

Sweden is facing vulnerabilities relating to its real estate market and high private debt. 
Over the last decade, real estate prices have persistently risen faster than income and rents, driven 
predominantly by supportive financial conditions. The increases in prices have gone hand-in-glove 
with  increases  in  private  debt,  exposing  Swedish  real  estate  value  to  changes  in  monetary  and 
financing conditions. The rapid increase in interest rates since last year’s in-depth review has laid 
bare the economy’s vulnerability linked to household indebtedness and house prices. The changes 

9 

2. 

Assessment of macroeconomic vulnerabilities 

in  financial  conditions  affect  property  valuation  and  directly  impact  the  debt  service  burden  of 
households and the exposure of commercial real estate companies. For potential home buyers the 
increases  in  mortgage  rates  make  housing  less  affordable  and  the  price  declines  increase 
uncertainty,  leading  to  a  fall-out  in  housing  demand.  The  turnover  in  residential  real  estate  has 
declined  and  demand  for  newly  built  dwellings  declined  as  a  consequence.  The  impact  of  the 
adverse developments in the housing market has, so far, been limited to industries directly affected 
by  the  adverse  developments  in  real  estate,  i.e.  construction  and  real  estate  activities.  Strong 
metrics  of  the  financial  sector,  reflected  in  high  profit  margins  and  risk-weighted  capital  ratios, 
serve as a bulwark against a propagation of real estate problems to the wider economy. Still, the 
financial sector is highly exposed to real estate and its profits appear to have increasingly become 
dependent on loan volume rather than interest margins. In the initial phase of the tightening cycle, 
the interest margins have increased and further strengthened the solidity of the Swedish financial 
sector. 

Policy  progress  has  been  limited.  Over  the  years,  the  tax  system  has  continued  to  favour 
homeownership  through  low  recurrent  property  taxation  and  promoted  debt-financed  housing 
acquisition  through  the  generous  tax  deductibility  of  mortgage  interest  payments.  The  rental 
market  saw  limited  reform  and  average  rents  are  still  well  below  market  rents,  resulting  in  long 
waiting lists and a very low vacancy rate relative to other EU Member States. These policy factors 
behind the macroeconomic vulnerabilities still need to be addressed. Through expanding analyses 
of the commercial real estate companies' financial situation, policy makers are increasingly aware 
of the risks. However, beyond a scheduled increase in the counter-cyclical capital buffer banks need 
to  hold  in  anticipation  of  shocks  to  the  economy  in  June  2023  and  a  2020  increase  in  capital 
requirements applying to real estate, no significant macroprudential policy action is yet designed.  

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”   sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Sweden, in line with Regulation 1176/2011. (11) 

(11)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

10 

 
  
                                                 
Graph 2.3: Selected graphs, Sweden 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, Statistics Sweden and European Commission services 

11 

-10-5051015-10-505101520253004Q405Q406Q407Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q422Q4Rate of change y-o-y (%)Rate of change y-o-y (%)b) Real house price and mortgage growthMFI loans for house purchase (y-o-y growth rate)Real House Price Index (y-o-y growth rate), right axis-40-200204060800204060810121416182022% deviation of current pricec) House price overvaluationModel-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.Overall valuation gap8010012014016018020004Q105Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q122Q123Q1(05Q1=100)d) Output price index in constructionOutput price index in construction-202468101211Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q122Q123Q1% of GDP (over last 4 quarters)a) MFI lending (flows) to the domestic private sectordomestic corporate bondsdomestic NFC loansdomestic HH loanstotal lending & corporate bonds acquistions02040608010012014016018005Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q122Q123Q1Building permits -m2 of useful area (2015=100)e) Building permitsResidential buildingsNon-residential buildingsTotalf) Years of income neededto buy 100m %cyhange 2014-2019   
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 2: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Sweden  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Sweden 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Sweden.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (12) 

Data  suggests  that  inflation  in  Sweden  increased  strongly  on  account  of  imported 
inflation  in  2022,  and  domestic  drivers  are  expected  to  remain  subdued  over  the 
forecast  horizon.  In  2022,  as  shown  in  Graph  2.4,  increased  costs  of  energy  and  non-energy 
imports as well as import inflation passed through EU countries contributed strongly to the increase 
in consumer and investment inflation. The contribution from domestic value added prices, namely 
wages  and  profits,  was  limited.  Going  forward,  domestic  inflation  drivers  are  expected  to  remain 
muted. Imported inflation is set to subside in 2023 and to turn negative in 2024. Spill-overs from 
value added inflation in other EU countries is set to sustain higher, particularly investment, inflation 
in 2023 and 2024. 

Graph 2.4: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(12) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined 

through a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of 
the price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until 2022, and energy price assumptions underlying the Spring forecast thereafter. Other goods prices reflect median 
Eureopan prices per industry until 2022, and forecast non-energy goods and service trade prices for 2023-2024. Value 
added deflators are assumed to affect all industries within a country to the same degree. Changes in import prices and 
value added deflators are assumed to affect demand prices with a delay of 7 months for consumption and investment 
inflation, respectively. For a similar analysis using an input-output-based methodology, see “Inflation Differentials in Europe 
and Implications for Competitiveness: Thematic Note to Support In-Depth Reviews” European Commission 2023, 
Institutional paper 198. 

12 

-20246810161718192021222324% change (year-on-year)SE: contribution to domestic GFCF deflator growth-20246810161718192021222324% change (year-on-year)SE: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
Table 2.1: Selected economic and financial indicators (Part 1), Sweden 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. (5) NENDI is a 
subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment (FDI) equity and 
equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding instruments that cannot 
be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 

Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

13 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 3.50.72.52.0-2.25.42.6-0.51.1Potential growth  (1)2.81.72.12.21.92.01.81.61.5Contribution to GDP growth:Domestic demand 2.81.02.60.3-1.55.02.2-1.40.5Inventories 0.2-0.10.2-0.1-0.70.51.0-0.70.0Net exports 0.5-0.1-0.21.80.0-0.1-0.61.60.7Contribution to potential GDP growth (1):Total Labour (hours) 0.50.70.80.60.40.50.50.60.5Capital accumulation 0.70.60.80.80.80.90.90.80.7Total factor productivity 1.50.40.50.80.70.60.40.20.3Output gap (2)1.1-1.6-0.30.2-3.7-0.50.3-1.8-2.1Unemployment rate6.77.97.47.08.58.87.57.78.2Harmonised index of consumer prices (HICP)1.51.91.11.70.72.78.16.01.9GDP deflator 1.51.72.12.52.02.95.75.71.6External positionCurrent account balance (% of GDP), balance of payments6.86.13.45.35.96.54.35.86.2Trade balance (% of GDP), balance of payments6.55.23.54.44.54.62.4..Primary income balance (% of GDP)1.82.61.42.83.53.83.6..Secondary income balance (% of GDP)-1.4-1.7-1.6-1.9-2.1-1.8-1.8..Current account explained by fundamentals (CA norm, % of GDP) (3)0.60.50.20.30.40.50.50.50.4Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-0.5-0.2-0.20.50.40.91.31.41.7Capital account balance (% of GDP)-0.1-0.2-0.10.00.10.00.1..Net international investment position (% of GDP)-12.9-8.9-4.013.59.923.839.8..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-23.0-22.1-17.0-10.2-9.70.0-5.4..Net FDI flows (% of GDP)2.82.51.51.20.71.12.5..CompetitivenessUnit labour costs (ULC, whole economy)1.02.82.81.53.40.22.94.82.8Nominal compensation per employee 3.93.02.62.92.54.32.84.03.7Labour productivity (real, hours worked)2.70.10.92.31.12.70.3-1.50.4Real effective exchange rate (ULC)-0.61.9-0.9-3.90.33.1-5.4-6.8-1.0Real effective exchange rate (HICP)1.00.3-1.6-3.72.63.1-6.2..Export performance vs. advanced countries (% change over 5 years)3.8-5.6-8.3-4.63.75.9...Private sector debtPrivate sector debt, consolidated (% of GDP)151.2190.5194.0200.0212.8214.8208.8..Household debt, consolidated (% of GDP)59.775.184.588.593.792.388.4..Household  debt, fundamental benchmark (% of GDP) (6)49.853.859.662.767.667.267.9..Household  debt, prudential threshold (% of GDP) (6)40.941.347.051.953.554.254.2..Non-financial corporate debt, consolidated (% of GDP)91.5115.4109.5111.5119.2122.5120.5..Corporate debt, fundamental benchmark (% of GDP) (6)50.951.653.555.559.860.160.8..Corporate debt, prudential threshold (% of GDP) (6)55.355.061.163.867.266.065.4..Private credit flow, consolidated (% of GDP) 11.17.87.99.714.416.610.8e..Corporations, net lending (+) or net borrowing (-) (% of GDP)4.72.1-2.0-1.71.90.5-0.51.31.0Households, net lending (+) or net borrowing (-) (% of GDP)0.53.95.26.46.96.14.35.66.0Net savings rate of households (% of net disposable income)4.710.413.115.517.015.913.4..forecast 
    
 
 
 
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Sweden 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 

Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

14 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal10.13.26.92.54.210.13.6..House price index, deflated9.01.55.50.43.38.0-3.4..Overvaluation gap (%) (7)-5.72.919.322.826.233.329.0..Price-to-income overvaluation gap  (%) (8)-7.01.821.327.232.638.334.5..Residential investment (% of GDP)3.73.74.84.74.95.25.2..Government debtGeneral government balance (% of GDP)1.2-0.10.00.6-2.80.00.7-0.9-0.5General government gross debt (% of GDP)45.838.241.935.539.836.533.031.430.7Banking sectorReturn on equity (%).10.011.510.68.110.0...Common Equity Tier 1 ratio.10.119.319.820.820.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).0.61.00.90.80.8...Gross non-performing loans (% of gross loans) (9)..1.21.11.01.00.8..Cost of borrowing for corporations (%)..1.21.51.41.44.2..Cost of borrowing for households for house purchase (%)..1.51.51.41.43.4..forecast