Sweden's shaky housing market: Another bubble ready to burst?

Ilija Batlian is the founder of a company with the hard-to-pronounce name Samhallsbyggnadsbolaget I Norden AB, which translates from Swedish to English as Social Building Company, a real estate fund better known by its acronym SBB.

Batlian was born in Montenegro and moved to Sweden in the 1990s during the Balkan Wars. There, in the Scandinavian country, he earned a degree in economics and a doctorate in demography and elder care planning. He then began a successful political career under the auspices of the Swedish Social Democratic Party. After becoming mayor of a small town in the province of Stockholm, he left it all behind in 2011 to work in real estate.

The company fired him, but Batlian had already realized that his future was in this field, and in 2016 he founded SBB with a big and risky goal - to invest in real estate in the healthcare sector, nursing homes, public schools and even police stations, and then lease these properties to local governments. His risk paid off. In less than a decade, he has built a $13 billion business portfolio. The majority of the company's investments are in the social housing and council property sector in the Nordic countries, which have benefited from a wave of cheap credit. By the end of 2021, SBB had 60 million square meters of real estate, equal to 20 Empire State Buildings.

Today, however, SBB has become emblematic of an industry that is suffering from soaring mortgage prices (due to rising interest rates, which has also depreciated the value of the currency), as well as runaway inflation (which peaked last December at 12.3%, the highest in more than 30 years) and high levels of household debt. After reaching an all-time high in the second quarter of 2022, home prices have begun to fall. "They've fallen by about 12% since then, which means in real terms they've fallen by more than 20%," said Andre Kenningham, chief economist at Capital Economics, a London-based research firm. "There has been a significant rate correction," notes Daniel Kral, a senior economist at Oxford Economics.

The situation, however, is not a burst bubble, analysts say. "Although we may see further declines in the following months, prices will eventually return to 2020 levels," explains Jens Magnusson, chief economist at SEB (Skandinaviska Enskilda Banken AB, a Nordic financial group).

The situation is still worrying, however, because of the high level of family debt. In Sweden (population 10.8 million), becoming a homeowner has always been easier than renting, and mortgage debt accounts for 83% of all household debt, according to the country's financial watchdog. The Swedes are twice as indebted as the Germans or Italians. And real estate accounts for 18% of bank loans, triple that of Spain, according to the Organization for Economic Cooperation and Development (OECD).

Housing prices and debt have been rising since the last financial crisis in response to lower interest rates. For nearly five years - from February 2015 through the end of 2019 - interest rates on loans were negative. Today they are at 4%, which encourages people to buy real estate when the economy is booming.

Prices have started to rise, helped by high revenues generated by the home resale business. "The Swedish market has gone through a classic up and down cycle over the last 15 years," says Kenningham. - "Prices doubled between 2007 and 2022, making it the largest increase among most advanced economies." The picture is even dirtier when you look at household financial obligations. On average, household debt is about 195% of disposable income (after taxes). This figure is worrisome, especially when interest rates on debt are rising. And in a context where the majority of mortgages (60% to 70%) were arranged at variable rates.

"The combination of high household debt and variable loans has made Swedish households and the economy more sensitive to monetary decisions," emphasizes SEB's chief economist. - "It's not that I'm particularly worried about households not being able to repay their loans, but it could significantly reduce other spending, which in turn would contribute to a slowdown in the economy," he says.

S Sweden is predicted to be the only economy in Europe to slip into recession later this year.

The weak real estate market is already affecting the construction sector and, together with growing uncertainty and rising costs, is putting the brakes on investment. "In a good year, we see about 75,000 new housing starts. This year we will be happy if we see 25,000," says Magnusson.

Sweden, a country that has had a controlled rental market since the 1940s but where, on average, you have to wait about 9.2 years to get a home under the program, knows what a housing crisis is. In the early 1990s, after tight restrictions on mortgages were lifted, the market collapsed, causing a major crisis that led to the nationalization of two banks, the bailout of a third (with losses equivalent to 12% of GDP) and the devaluation of the crown. It took the country almost four years to recover from the shock.

At the time, Ilya Batlian, the founder of SBB, had just landed on Scandinavian soil and had no idea of the destiny he would be given three decades later. He probably never envisioned becoming what he is today, nor did he envision the scale of the billion-dollar business he managed to build, whose credit rating has now been downgraded to junk bonds, forcing him to step down as CEO. But it's also Caesar's that belongs to Caesar: Batlian still owns an 8.3% stake in the company and nearly 32% of the votes on the board.