Corporate Research
27 March 2017
Contents
Nordic housing bubble?
1
The Nordic housing markets: An introduction
2
Interview: The benefits of lower house prices
6
Supply and demand: Buildings and people
11
Interest rates: The game changer
15
Interview: It is not all about interest rates
18
Central Stockholm's hot real estate market
23
Mortgage regulations: Sweden leads the way
24
Tax rules: Mortgage interest subsidy phase-out
28
Price differences: By country, region and type
33
Accommodation costs: High prices affordable
36
Interview: Big correction unlikely without shock
40
Screening: Which companies are exposed?
45
Disclaimer and legal disclosures
50
Nordea Markets
Corporate Research
27 March 2017
Equity Research
Nordic housing bubble?
Nordic house prices are high, but for good reason
In the past ten years, national average house prices have risen 71% in Norway, 59% in Sweden, 17% in Finland, and 3%
in Denmark. Prices in Finland have been moderated by the country's weak domestic economy, while Denmark suffered a
home-grown housing market correction in 2007, from which it has now almost recovered. Price increases have
accelerated in the past few years, undoubtedly fuelled by ultra-low interest rates. There are powerful drivers behind the
buoyant Nordic housing markets. Population growth, further boosted by migration, supports demand, which has also
increased owing to many years of limited newbuilding. The most potent driver, however, has been the combination of
growing disposable income for households and record-low mortgage interest costs. General living expenses have grown
more slowly than incomes, while interest costs have actually fallen, giving households more room than ever to afford
expensive homes.
Should we fear the worst?
A rise in interest rates would not necessarily be a problem, if rates rise because of a growing economy. The real bear
scenario for housing markets would be a rather sudden, sharp interest rate spike caused by an unexpected major event.
Shaken consumer confidence and higher rates could also push down house prices and raise accommodation costs, hitting
private consumption and economic growth.
Who might be affected?
We screen listed Nordic companies in the real estate, construction and banking sectors for exposure to Nordic housing
markets. Sticking to bigger market cap companies, the most exposed are Balder, Lundbergföretagen and Wallenstam in
real estate, JM among home builders (Bonava is less Nordic), and Nobia in the 'others' category (Byggmax and Inwido
have greater exposure but are both small). Among the major banks, Danske Bank and Swedbank are the most exposed,
with ~65% of their lending in mortgages, while SEB has the lowest exposure at 24%.
Views from the experts: The homebuilder, the mortgage lender and the economist
We interview Johan Skoglund, CEO of leading homebuilder JM, Klas Danielsson, CEO of mortgage lender SBAB, and
Nordea macroeconomist Andreas Wallström and ask for their views on whether or not we have a potential Nordic
housing bubble.
Nordic house prices 1970-2016, indexed to 1970 = 100
3,000
2,500
2,000
Sweden
1,500
Denmark
Norway
1,000
Finland
500
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1970
0
Source: OECD and Nordea Markets
Markets
IMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT
Corporate Research
27 March 2017
The Nordic housing markets: An introduction
In this report, we look into the nature and state of the Nordic housing markets, along with the listed
companies in the Nordic countries with direct exposure to them. We start by reviewing where these
markets are today, in a historical context and compared with each other.
A universal interest: Homeowners
care about property values; tenants
care about rent levels
A topic of interest for everyone
Few economic topics are of such universal interest as the housing market.
It affects us all. We all need somewhere to live and this carries a cost,
whether we own our home and pay interest on our mortgage or whether
we are tenants and pay rent to a landlord. Those of us who own our homes
have exposure to – and hence great interest in – its value. Tenants are
interested in where rental rates may be heading next, which is of course
related to property prices.
Buildings cannot be moved, so
housing markets are inherently local
Like any market, the housing market is ultimately driven by the balance
between supply and demand, but both can be heavily influenced by
cyclical as well as structural factors. One specific feature of the housing
market is that it is local. Houses and apartments cannot be moved. They
are stationary. And it takes time to construct new buildings, so local supply
shortages or surpluses can be reflected very strongly in house and flat
prices and rents. Similarly, it can take a long time for demand to catch up
with an accumulated excess supply of local housing.
The housing market is affected by the
economy, but more directly driven by
factors such as funding costs,
regulations, tax rules and
households' disposable incomes
We are all affected by the economy, consumers, companies and industries
alike. Some are affected more, others less. The housing market is also
influenced by the economy, although it is not necessarily always strongly
correlated with traditional macroeconomic metrics such as GDP growth,
industrial production or private consumption. Very generally, housing
demand depends on the size of the population needing accommodation in
relation to available supply, city by city, region by region, and country by
country. On top of this, there are influences from funding cost levels
(mortgage interest rates), regulations (for example, of rent levels, building
permits, mortgage loan-to-value caps and mortgage amortisation), tax
rules and households' disposable incomes.
Nordic house prices, indexed to 1970 = 100
3,000
2,500
2,000
Sweden
1,500
Denmark
Norway
1,000
Finland
500
2015
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
0
Source: OECD and Nordea Markets
Nordic residential property prices
have risen 15-25x in 45 years
Nordea Markets
So, where are Nordic house prices today from a longer historical
perspective? Since 1970, national average house prices have risen 20-25x
in Sweden and Norway, and 15x in Finland and Denmark. These numbers
look dramatic, but must be seen in the context of a starting point with far
higher inflation and interest rates 45 years ago.
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27 March 2017
Prospectuses from apartment viewings in Central Stockholm
The highest priced apartments in Stockholm on website "Hemnet"
Source: Hemnet
The last big housing boom in the
1980s was the most extreme in
Finland and Sweden, less so in
Denmark and Norway
The paths to today's house prices have been different in the various
countries. In the last real estate boom in the Nordic region in the late
1980s, the housing market in Finland reached greater highs than its Nordic
neighbours. Sweden came in second, with a less extreme housing boom
than Finland, while Denmark and Norway had more moderate housing
market peaks.
The bubble built on deregulationdriven loose credit, beneficial tax
rules and pent-up demand burst
when defending the ERM led to
interest rate spikes in the early 1990s
Back then, the Nordic housing markets were certainly helped by pent-up
housing demand from limited newbuilding in prior years. But markets
were also greatly pushed by credit market deregulation and favourable tax
rules, which resulted in a severe hangover when central banks started to
raise policy rates to fight inflation in the early 1990s. In the case of
Finland, Sweden and Norway, this led to interest rate spikes when these
countries tried to defend their respective unilateral exchange rate pegs to
the Euro's predecessor, the European Currency Unit (ECU), in late 1992.
Denmark maintained its peg, but joined the other European Exchange Rate
Mechanism (ERM) members in letting the band around the peg widen in
1993.
So, the last really major housing slump in the Nordic countries was around
25 years ago. It hit Finland and Sweden hard, left Denmark and Norway
much less shaken and was exacerbated by an interest rate shock when the
ERM came under attack.
The post-IT boom equity market
collapse of 2000-02 and the global
financial crisis of 2008-09 had very
limited impact on Nordic housing
markets
Nordea Markets
Since then, the bursting of the IT bubble when equity markets plunged in
2000-02 did not have much impact on the Nordic housing markets. The
global financial crisis of 2008-09 did take its toll, albeit much less so than
during the home-grown crisis of the early 1990s. The greatest victims were
the opposite of those who suffered most in the early 1990s crisis: Denmark
and Norway experienced substantial declines in residential property prices,
while Sweden and Finland suffered no more than a blip.
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These differences in housing market performance have persisted. Denmark
has not quite bounced back to pre-crisis house price levels and Finland is
slightly above, while Sweden and Norway have soared 50-60% above
previous price peaks. It is important to remember that these numbers are
national averages and that house price trends vary among cities and
regions.
The Nordic housing markets are
national, with major differences
between the four countries
Once again we emphasise that there is no single Nordic housing market.
There are four different national markets, each impacted by local tax rules,
regulations, demographics and the local economy. Just as the four Nordic
economies are quite different, the Danish, Finnish, Norwegian and
Swedish residential property markets can each live a life of their own,
from time to time quite independently of each other.
Before examining the various key drivers for the Nordic housing markets
– and where they stand today – in the following sections of this report, we
take a look at how residential accommodation differs between the Nordic
countries.
Forms of housing in the Nordic countries
100%
6%
16%
90%
29%
80%
70%
4%
36%
44%
60%
Other
50%
Rental housing
40%
80%
71%
Owner occupied housing
64%
30%
50%
20%
10%
0%
Denmark
Finland
Norway
Sweden
Source: The Nordic Council of Ministers and Nordea Markets
Nordic home ownership is greatest in
Norway at ~80%, and lowest in
Denmark at ~50%
In terms of home ownership, Norway stands out, as 80% of dwellings
there are owned. This figure includes properties being rented out by their
owners, but they are owned by individuals or by entities controlled by
individuals. The share of rental housing in Norway is very small, far below
the other Nordic countries. In both Finland and Sweden, about one-third of
homes are rented and two-thirds owned by the occupants. Denmark is split
roughly 50/50 between owned and rented properties.
Most Norwegian landlords are
private individuals or entities
controlled by them
Norway also stands out in having a very small corporate or institutional
rental sector in housing. Most landlords are private individuals or entities
controlled by them, while the other Nordic countries have a greater
prevalence of corporate, municipal or other public housing landlords.
In Denmark and Norway, apartments
are directly owned by occupants; in
Finland and Sweden they are owned
indirectly through co-ops or
associations
There are also things to note about the nature of home ownership in the
Nordic region. Direct ownership of houses and apartments exists in all
four Nordic countries, but is miniscule for apartments in Finland and
Sweden. While Danes and Norwegians directly own the apartments they
live in, Finns and Swedes own them indirectly, through housing cooperatives or associations. The tenants possess the right to occupy their
apartment, while the association owns the building (and owns or leases the
land it stands on). Tenants pay their funding costs on any mortgages they
have for the apartment, and in addition they pay a monthly fee to the
association, which covers maintenance and running costs, property taxes
and any other applicable costs for the building.
Nordea Markets
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Corporate Research
In the following sections, we review
the key drivers for the Nordic
housing markets
27 March 2017
Now that we have reviewed where Nordic house prices in general are at
from a historical context, the nature of Nordic home ownership and the
differences between the Nordic countries in these respects, we consider
where the Nordic housing markets could go from here. We will also
explore the key drivers for these markets:
 Supply and demand for housing
 Mortgage interest rates
 Mortgage regulation
 Tax rules: deductibility for mortgage interest costs, and capital gains
taxation
 Housing price differences between apartments/houses/regions
 Accommodation costs (interest costs versus disposable incomes)
We will discuss each of these items in detail.
Nordea Markets
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Interview: The benefits of lower house prices
We interview Andreas Wallström, Chief Analyst at Nordea Markets Sweden, on the current state of Nordic
housing markets, how they have reached their current highs and whether there is a risk of a market
correction, what could trigger it, and how it would affect economies. Nordea Macro Research expects
stagnating house prices across the Nordic countries in 2017-18, but a moderate year-on-year rise in 2017
for Norway as prices settle at high levels.
KK: In October 2015, you wrote a much-noted report about
accommodation costs in Sweden being at record lows, despite recordhigh house prices. Since then, house prices have risen further to new
all-time highs. What are the main reasons for the 20-year house price
rally in Sweden? Is it all about low interest rates?
AW: I would say that the most important factor absolutely is
accommodation costs, which have fallen significantly since the financial
crisis due to lower interest rates. But we have also had strong economic
growth over the past 20 years, which has made household incomes rise.
KK: You often hear experts argue that the low level of housing
construction in Sweden over the past 20-25 years is an important
explanation for the price increases. Do you agree?
AW: That was an argument you often heard until a couple of years ago.
Since then, housing investments have soared. High population growth in
combination with low construction will increase prices. Those are basics
of demand and supply. But I would also argue that it's quite difficult to
estimate the demand for houses based on population growth. Take
immigration growth as an example – it has boosted Swedish population
growth, but is unlikely to affect house prices much in the coming years.
KK: If you compare Sweden's housing market to its neighbouring
countries, the Norwegian housing market seems to be the most similar
to the Swedish market, at least if you look at the house price
development over the past few years. Why is that?
The most important drivers behind
high house prices are low interest
rates and rising household incomes
AW: Norway is similar to Sweden in some aspects. First, it has had
declining interest rates, just as in many other countries. Second, it has had
good economic growth, just like Sweden. And lastly, it has had high
population growth over the past few years. But, unlike Sweden, there is a
much more significant buy-to-let market in Norway. In Sweden, that
phenomenon is still very unusual. The speculation-driven market in
Norway has pushed house prices in a way that we have not seen in
Sweden. That is also one of the main reasons we've been quite confident in
saying that we don't have a housing bubble in Sweden.
KK: During the financial crisis in 2009, Denmark's housing market
was hit hard, while the housing markets in the other Nordic countries
were barely affected at all. What was the reason for the price fall in
Denmark, and why didn't we see similar price drops in the other
Nordic countries?
AW: The price decline in Denmark actually started a couple of years
before the financial crisis. Therefore, I wouldn't say that the real estate
housing markets were affected that strongly by the financial crisis – the
correction was already underway. Prices started to drop in 2006-07 and the
decline persisted for two to three years, reaching a total plunge of around
20%. Reasons included too loose credit policies and a soaring buy-to-let
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market. It was common to buy a second or third apartment to take an even
larger bet on the housing market, just as we've seen in Norway. This ran
out of steam when interest rates started rising before the financial crisis,
and turned into a deep plunge during and after the crisis.
KK: Were there also tax reasons behind the buy-to-let market in
Denmark?
AW: I believe there were. Interest-only (IO) loans, with no amortisation of
debt, which were introduced in 2003, had also become very popular. All of
these factors spurred optimism that eventually reversed and, when it did,
the price fall was dramatic.
KK: If you look at total debt in relation to disposable income, the
Danes have high leverage compared with their Nordic neighbours and
internationally. Why?
AW: When you look at leverage in relation to disposable income, you have
to take the national welfare system into account, particularly pension
benefits. One factor that all Nordic countries have in common is a
generous pension system. International studies have shown that inhabitants
in countries with generous pension systems tend to be more leveraged
compared with people in countries with less generous pension systems.
That is fully rational, as households that will have a fair compensation rate
at retirement don't need to hurry to pay off their debt.
KK: Finland appears to be the Nordic country where price increases
have been most modest and owners there seem to be the most keen to
repay their loans. Why is that?
AW: Could it have anything to do with typical Finnish national character?
Joking aside, I would say that it is the other Nordic countries and the
Anglo-Saxon countries that stand out. The Finnish approach to
amortisation is much more similar to the continental European attitude,
where the preference for amortisation is high. Annuity loans are also very
common in Finland. Some years ago, there were discussions about
introducing annuity loans in Sweden, but it never happened.
Macroeconomists don't usually like annuity loans as they encourage
people to amortise more in a low interest-environment, which is typically
during a recession. That is not rational from a macroeconomic perspective.
In a recession, you should encourage households to consume; not the
opposite.
The Finnish preference for annuity loans may have to do with the fact that
they generally do not care much about stabilisation policy. I've seen
several examples of this. I was working at the Swedish Ministry of
Finance in 2003 when the Swedish referendum on EMU membership took
place. To hear about the Finnish experience with membership, we went to
Finland. In Sweden at that point in time, we were quite conscious about
the negative impact that membership would have on our ability to conduct
fiscal stabilisation policy. The Finns, on the other hand, didn't worry much
about that; they didn't actually understand the Swedes' obsession with
stabilisation policy. For them, structural fiscal policy was much more
important. And if we look at Finland today, after they've been struggling
with poor and even negative economic growth for several years, they don't
blame the Euro for the current situation.
Nordea Markets
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KK: In Finland, Norway and Denmark, measures have been
introduced to reduce tax deductions on mortgage interest costs.
Finland has been the most aggressive. Why has nothing happened in
Sweden yet, and why does it seem so politically sensitive?
Any housing market corrections
could have benefits: helping firsttime buyers to get on the property
ladder, and fuel urbanisation (make
people able to afford taking jobs in
big cities, and move there)
AW: I actually don't think that it's so politically sensitive. Politicians have
spoken about it for many years, but it's difficult to reach an agreement.
Especially now in a situation with a hung parliament, and a general
election in 2018. A consensus reform backed by both main political blocs
would be preferable, but has so far not proven possible.
When the Swedish FSA and the Swedish central bank criticise politicians
for not acting on the issue, they tend to look at mortgage interest tax
deductions as an isolated measure. If you do that, it's easy to argue that it's
a factor that drives household debt and housing prices. But politicians look
at it as a bigger issue – they look at the entire tax system. Then it
immediately becomes a more complicated matter, as different parties have
different views on how and if households should be compensated for
removed mortgage interest tax deduction by other forms of tax relief, such
as reduced income tax. Many argue that we need new tax reform in
Sweden. If it happens, tax deductions would surely be a part of it.
KK: What would happen to the Swedish economy if there were a
sudden drop in house prices? How well prepared are households?
AW: If you take a look at the "big picture", households' balance sheets are
very strong. Hence, it's very difficult to see any truly threatening system
risk. A big price fall could of course affect household consumption
negatively, but we would likely have the same impact if there was a
sudden rise in interest rates.
I would actually like to highlight the potential benefits of a house price
fall, which are rarely discussed. There are many groups that would benefit
from a price fall, such as young people and immigrants struggling to get
on the property ladder at current price levels. Even people who already
own an apartment but want to buy a bigger one, would gain from a price
fall.
Another positive effect from a price fall would be increased urbanisation.
Today, many people are forced to say no to job offers in Stockholm as it is
just too expensive or difficult to get an apartment, especially for people
who are working in the public sector on lower wages. This is actually
something that hampers economic growth in Stockholm.
KK: But if we had a major fall in house prices, would many
households be left with negative equity in their homes? And how
might that affect society and the economy?
Unlikely that a very large number of
households would struggle to service
their mortgages if there were an
interest rate spike – Nordic banks
require mortgage borrowers to be
able to cope with much higher rates
Nordea Markets
AW: There are surely some households that are highly leveraged that
would face severe problems if there was a significant price drop. But it's
difficult to see that there would be any major negative macro effect from
such a price fall. I believe that the number of these households is quite
small. It is important to remember that the Swedish banks have pretty
tough lending policies; Nordea requires Swedish mortgage customers to be
able to cope with an interest rate of 8%. Also, if we look back to the last
real estate crisis in Sweden, 25 years ago, the banks didn't suffer credit
losses on residential mortgages. The losses came from commercial real
estate lending. At that time, Sweden also had a lot of home-grown
problems, such as poor public finances and high unemployment. The
current situation is much better, which means that there is more room for
political stimuli to soften the impact from any new crisis.
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KK: What do you think could trigger a house price fall in Sweden and
how likely is such a scenario?
AW: Again, I believe that the interest rate level is the most important
factor. The obvious threat would be a nominal, sudden interest rate shock;
not a gradual increased level due to higher economic growth. But an
interest rate shock that is globally driven – meaning that the effect on
households would only be higher interest costs – would most likely have a
negative impact on the housing market. Interest rate levels are very low
today, so a doubling from 2% to 4% would not be a large increase in
absolute costs, but as a change factor affecting consumption, it would still
mean an interest cost increase of 100% for households. There could also
be a series or combination of negative events that could cause a price fall,
such as an international rise in interest rates combined with tighter
domestic fiscal policies and a stock market crash.
But I don't believe that a recession would affect the housing market that
strongly. It would likely be met by looser monetary policy from the central
bank, and lower mortgage rates. We saw a recent example of this during
the latest financial crisis in 2008 when the reaction in the Swedish housing
market was very modest – and that was a huge global recession.
KK: Could a major stock market fall affect the housing market?
AW: No, there are many examples of how little stock market falls actually
seem to influence the Swedish housing market. We had a stock market
plunge quite recently, in 2015, which hardly had any effect on the housing
market. If we look further back in time, to the stock market crash in 2000,
the fall was 60-70% over a three-year period but we didn't see much effect
on the housing market.
KK: Is there larger risk of a house price fall in Norway compared
with Sweden, given that house investments have been much higher in
Norway over the past few years? Also, the Norwegian market seems to
be more speculative compared with Sweden. Is it really so?
AW: Our view in Nordea Macro Research is that there is no bubble in
Norway either. We expect Norwegian house prices to rise somewhat
further from current levels, leading to perhaps a 10% year-on-year increase
in 2017. In Sweden, we believe prices will stabilise and possibly even
show a slightly positive trend. The upside we still see in Norway is despite
the new measures implemented by the Norwegian government, including
constraints when buying a secondary flat (not your main residence) in
Oslo for which you will need to have at least 40% equity instead of the
previous 15% requirement. Also, the Norwegian central bank takes the
housing market into account when it sets its policy rates, and it considers
house prices an important factor when it comes to financial stability.
KK: It sounds as if the central banks have quite different approaches
in Sweden and Norway. The Swedish central bank currently doesn't
consider the housing market at all when setting its policy rates?
AW: Yes, the Swedish central bank has plenty of opinions on what
politicians and authorities should and should not do. But even without
formal responsibility for the Swedish housing market, the central bank
seems to have no wish to shoulder any form of responsibility for it either. I
think that you could criticise the Riksbank for that. As we currently have a
hung parliament in Sweden, where pushing through housing market or
household leverage regulation reforms is difficult, I would have been
happy to see the Riksbank adapt its monetary policy somewhat to the
current situation. Whatever the central bank's opinion on the political
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agenda – or absence thereof – in parliament, the voters have put the
members of parliament there to represent their interests. The Riksbank
needs to abide by, and respond to, whatever that agenda is, however
indecisive it may be.
KK: You have already mentioned Sweden and Norway, but how do
you see the general outlook for Nordic housing markets in the future?
Nordea Macro Research expects
house prices to rise up to another
10% in Norway, stagnate near
current levels in Denmark, Finland
and Sweden in 2017
Nordea Markets
AW: As mentioned, our view in Nordea Macro Research is that house
prices will stabilise near current levels in Sweden. We also believe that
further price increases are more likely than price falls, but at moderate
levels. Our forecast horizon extends to next year. In Norway, we believe
house prices will rise slightly from high levels, ending up to 10% higher
than in 2016. In Finland and Denmark, we believe that prices will stabilise
as well. There could be some modest price increases of perhaps 1-2%.
Hence, the overall picture is price stagnation in all Nordic countries except
Norway, where we expect further upside for this year.
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Supply and demand: Buildings and people
In the long run, the housing market is greatly impacted by supply in the form of new housing starts, and
demand in the form of population growth. Housing starts tend to be volatile and move in long cycles.
Denmark is at depressed levels and Sweden has only recently started to surge towards historical peak
levels, while Finland has been more stable and Norway is back at its peak. Population growth has been a
big boost in Norway and a boost in Sweden, but has not contributed to any great extent in Denmark and
Finland.
Buildings cannot be moved, so local
demand and supply is what matters
Any market is ultimately driven by the balance between supply and
demand, and housing is no exception. In the case of housing, measuring
demand and supply is a little trickier than for, say, a standardised global
product such as crude oil or an iPhone. As buildings cannot be moved,
their value and their price are determined by local demand and supply, and
impacted by local rules, regulations and taxes.
Co-author Kristina Kruse's estate agent
Kristina Kruse from Nordea Corporate Research with her estate agent Olivia Raaé
Source: Nordea Markets
Kristina Kruse (left) discussing her upcoming apartment sale with Estate Agent Olivia Raaé at
Fastighetsbyrån, Södermalm, Central Stockholm.
Source: Nordea Markets
Long-term general link between
population growth and housing
demand
Over time, housing demand is linked to population growth. Everyone
needs a home. The more of us there are, the more homes are needed. This
is a simplified, general observation, though. Strong demand can lead to
flats or houses becoming home to more people (children waiting longer
before moving away from their parents, families taking in lodgers, etc),
increasing the utilisation of the existing local housing stock. Also, national
population growth is typically net of strong growth in the cities and
declining populations in many rural areas.
Nonetheless, population growth is a useful gauge of long-term housing
demand trends. What does it look like in the Nordics?
Nordea Markets
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Nordic population growth, indexed to 2000 = 100
120
115
Denmark
Finland
110
Sweden
Norway
105
100
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Eurostat
Population growth has been by far
the greatest in Norway, followed by
Sweden, but sluggish in Denmark
and Finland
Looking at population growth in 2000-16, we see Norway in a league of
its own among the Nordic countries with more than 16%. This was nearly
three times the sluggish growth in Denmark and Finland. Sweden's
population grew by just over 11%, twice as fast as Denmark and Finland,
but not quite as fast as in Norway.
Norwegian population growth, number of people, split into organic and migration
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Popula on Growth
Net migra on
Excess of births
Source: Statistics Norway
Two-thirds of Norwegian population
growth stems from immigration
As Norway stands out so much, we argue it deserves a closer look. What
has driven such fast population growth? The answer is simple:
immigration. Of Norway's 16% population growth in the past 15 years,
two-thirds has come from net immigration. Without this, Norwegian
population growth would have been a mere 6%.
Population growth not perfectly
correlated with housing demand
While there is no doubt that population growth matters greatly for housing
demand in the long term, it is important to note that the correlation is far
from perfect. Urbanisation distorts the picture given by national population
statistics and drives excess demand in the major cities. The contribution
from immigration is also neither linear nor direct. Work migrants can
affect housing demand more or less like organic population growth, but
refugees might spend significant periods of time in temporary
accommodation and might not have the spending power to contribute to
demand for average or typical housing once granted residency.
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New housing starts, Nordic countries, 1975-2016
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
Sweden
Denmark
Norway
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
0
Finland
Source: National statistics bureaux in each country
Nordic new housing starts move in
long cycles and have been volatile
As we can see in the chart above, housing supply tends to move in long
cycles. A strong market with plenty of pent-up demand can trigger major
housing investments. Project cycles are long, especially when considering
building permit processes in addition to the actual construction phase.
There have been historical upcycles ending with project completions
adding significantly to the housing stock just as demand starts declining,
creating excess supply.
For Finland and Norway, we have only been able to get hold of housing
starts data going back to the early 1990s, while the Danish and Swedish
data stretches back to the mid- to late 1970s.
Finnish new housing starts have
been most stable, Norway back at
peak
We note that Finland stands out among the countries as having a more
stable level of housing starts over time. There are fluctuations but not of a
"boom/bust" nature over the past 25 years. Norway has seen housing
supply grow more continuously, although with a big drop in growth during
the financial crisis. But Norwegian housing starts do not stand out in terms
of their rate of growth in relation to Norway's population growth, which
has been by far the greatest among the Nordics in the past 15 years.
Danish new housing starts remain at
depressed levels
Housing starts in Denmark saw a major spike before the global financial
crisis but fell sharply when the crisis broke, and to this day remain at
depressed levels in a historical comparison. Danish new housing starts
have stayed around mid-1990s trough levels for almost ten years.
Swedish new housing starts saw a
mega-boom in 1965-75, but since
then have remained subdued for 35
years, apart from a couple of
spikes...
Sweden leads the pack with regards to volatility in new housing starts. We
already know that the Swedish government-driven "Million Programme",
which aimed to build new homes for a million people, pushed housing
starts to around 100,000 per annum during 1965-75. Upon its completion,
the oil crisis and a weak economy wiped out two-thirds of new housing
starts, until deregulation of bank lending led to a new spike in home
building in the late 1980s. This boom was crushed by soaring interest rates
and collapsing public finances in the home-made Swedish financial crisis,
which culminated in 1992 with the failed defence of the fixed Swedish
krona exchange rate against the European Currency Unit (ECU). The
temporary 500% central bank repo rate triggered a credit crunch and a
near-collapse of the Swedish banking system, which pulled the economy
into a deep recession.
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...only really surging to peak(ish)
levels in the past few years
Nordea Markets
27 March 2017
Swedish housing starts saw a very slow and gradual recovery, and had not
yet even reached the late 1980s peak when the global financial crisis
struck in 2008, triggering a drop back to near rock-bottom housing start
levels again in the following years. It is only in the last few years that
Swedish new housing starts have surged, and are again on the way towards
perhaps reaching the late 1980s peak levels again.
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Interest rates: The game changer
Nordic mortgage interest rates have fallen from at above 20% at one point in the early 1990s to below 5%
for most of the past 15 years, and down to below 3% for the past five years. While we have become used
to these low interest rates, we argue that ultra-low rates are not essential to homeowners' financial survival.
Mortgage lending standards are based on the ability to cope with higher rates, and Nordic banks have not
suffered significant credit losses on mortgages historically.
Ultra-low interest rates are the new norm
Saying that interest rates – specifically mortgage interest rates – are
critical to housing markets is to state the obvious. No one can know for
certain where interest rates will be in the future, and we do not attempt to
do so in this report. Instead, we hope to offer some perspective on how
interest rates might affect housing markets and mortgage lenders in the
future.
Mortgage interest rates are based on
the lender's funding cost, plus a risk
premium for the borrower's credit
profile, including collateral
What interest rates do homebuyers need to pay when financing their home
purchases? Mortgage interest rates are set based on an underlying risk-free
rate, set by the central bank responsible for the currency in which the
mortgage is denominated, a risk premium reflecting the mortgage lender's
credit worthiness (banks typically pay higher interest rates on their funding
than a sovereign government does), and a mortgage spread. The last
component is set in the competition between banks, and reflects what is
judged to be necessary to get paid in extra interest for lending to a
household (which typically pays a higher interest on its funding than a
bank does), with the purchased property as collateral for the mortgage
loan.
This is illustrated in the two graphs below. We show Nordic three-month
risk-free interest rates and Nordic three-month mortgage interest rates side
by side. Here we see that short-term mortgage interest rates are 100-200
basis points higher than the corresponding risk-free interest rate.
Sweden
Source: Eurostat
Norway
Denmark
Finland
Sweden
Norway
Denmark
2016
2015
2014
2013
‐1.0
2012
0
2011
1
0.0
2010
1.0
2009
2
2008
3
2.0
2007
3.0
2006
4
2005
5
4.0
2004
6
5.0
2003
7
6.0
2000
8
7.0
2002
Nordic three-month mortgage interest rates, 2000-16
8.0
2001
Nordic three-month money market interest rates, 2002-18E
Finland
Source: ECB and Macrobond
It is striking how interest rates have plunged for so many years. To give an
even better perspective, we show Swedish three-month variable mortgage
interest rates on new loans since 1989.
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Swedish three-month variable mortgage interest rate, new loans, 1989-2017
25
20
%
15
10
5
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
0
Source: Thomson Reuters
Swedish mortgage interest rates
peaked at 24% in the crisis of 1992...
We actually need to look that far back in history to be reminded of a
different era, with much higher interest rates and double-digit inflation in
the economy. In the 1980s, Swedish mortgage interest rates peaked at 24%
at the low point of the Swedish financial crisis in November 1992.
...but have been near or below 5%
for 10 years
Much has happened since then, and mortgage interest rates have more or
less been below 5% for the past ten years. In the past two to three years,
they have been below 3%.
We are used to low rates but do not require them to survive
So here is the big question: Have Nordic housing markets disconnected
from the realities of supply and demand, and ballooned into a price bubble,
propped up by today's ultra-low interest rates?
There are clearly widespread concerns about this across society. Financial
regulators and central banks have become very active in trying to cool
housing markets, banks have become more disciplined in their lending
standards, and politicians are calling for initiatives to remedy housing
shortages and help make home ownership affordable for first-time buyers.
We highlight several factors which
make us less concerned about
interest rate-related risks
It is easy to get the impression that the entire housing market consists of
mega-leveraged, urban households, who are just able to make ends meet
on a monthly basis, as long as interest rates remain at record lows; but we
know this is not the case. Out of all Nordic mortgages, many are with
households with low leverage; typically older homeowners who have paid
off much of their debt. More highly leveraged households have faced
scrutiny in their vulnerability to the impact of much higher interest rates in
their mortgage applications. When considering risks related to interest
rates for housing markets, we highlight:
 Bank lending standards are based on cash flow and ability to pay – not
just book or market values.
 Mortgages are only offered to households who would be able to service
them at interest rates much higher than current variable rates (typically
7-8%).
 Not all mortgages have a floating interest rate. The share of fixed rate
mortgages varies among Nordic countries, but few households would
face the full effect of any potential interest rate spike immediately.
 History points to Nordic households prioritising homes and mortgages,
and instead cutting back on other consumption when facing economic
hardships.
Rising interest rates are mostly a problem if they rise sharply and
suddenly, for the wrong reasons. Increased interest rates due to a
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growing economy tend to be accompanied (or driven) by higher
employment and income levels.
The bear scenario would be a
sudden, event-driven interest rate
spike...
The real bear scenario would be a sudden, sharp interest rate spike,
possibly driven by an unlikely major event triggering fear and risk
aversion. How would such an interest rate spike affect housing markets,
borrowers and lenders?
Demand for housing would dry up, at least in the short term. Buying a
home is a huge decision for a typical household, and people will postpone
a decision like that if they are suddenly very worried about the outlook.
...which would reduce liquidity and
prices in housing markets...
Property prices would start falling. The first step might be that liquidity
dries up and few transactions are made. When those households that
become forced to sell eventually need to act, transaction prices would
decline. How much prices would fall would depend greatly on the severity
of the unexpected event, and how many households are sufficiently
financially vulnerable to need to realise losses by selling in a falling
market (or need to sell their home for other reasons).
...and reduce private consumption
and hence economic growth
Economic growth would suffer from downward pressure on private
consumption. As households start to pay more mortgage interest as rates
rise, this eats into their disposable income. The general uncertainty will
also hold back spending on big ticket items such as homes, cars, boats,
summer houses and luxury holidays. This could in turn trigger rising
unemployment, causing a negative spiral typical of a recession.
We expect the most obvious, direct
negative impact to be on home
builders
Considering the direct consequences of an interest rate spike, and how
severe the effects might be for different types of players exposed to Nordic
housing markets, we would expect the greatest impact to be on home
builders (see our interview with home builder JM's CEO Johan Skoglund
in this report). A slump in new home orders would need to be absorbed,
likely forcing some downsizing.
Residential real estate companies
likely less impacted through
vacancies, but instead from their
own debt
For real estate companies, which have residential-heavy portfolios, we
doubt that vacancy rates would skyrocket. They have historically been
quite resilient to economic downturns. The ongoing business would likely
cope relatively well with an economic slump. For those companies with
particularly high leverage, an interest rate spike could cause obvious
challenges. However, the potential risk would come more from their own
balance sheets than from an exodus of tenants.
Banks would likely be more affected
by exposure to corporate lending
than residential mortgages – as in
the last crisis of the early 1990s
We find it unlikely that lenders would the big victims in such a scenario. In
the Swedish financial crisis of the early 1990s, the banking system was
brought to its knees by credit losses; but those losses were not on
residential mortgages. Instead they came from corporate lending;
particularly commercial real estate. Swedish households by and large
continued to pay their mortgages, even in an environment of shrinking
GDP, soaring unemployment and 24% mortgage interest rates. We believe
a similar trend is likely in any future shock scenario, although outcomes
will of course be heavily influenced by the severity of the shock and
exactly how it affects interest rates and the economy.
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Interview: It is not all about interest rates
We interview Johan Skoglund, CEO of Sweden's leading home builder JM, asking him where Nordic
housing markets are heading and what is driving them, how the behaviour of home buyers is changing and
what impact tax rules and regulations have and how they could be changed for the benefit of housing
markets.
JT: I will start with the obvious question, which might be on nearly
everyone's mind. Nordic house prices have risen to record levels. As
head of a leading home building company in the region you have a
good insight into supply and demand for housing. Do you see any risk
of a Nordic housing bubble?
JS: I don't think there is a housing bubble. Certainly, house prices are high.
If I remember rightly, last year house prices rose 10% in Norway (actually
23% in Oslo), 8-9% in Sweden, 15% in Denmark and 1% in Finland. But
there are fundamentals underpinning these house prices: good economic
growth, low unemployment, very low interest rates, population growth,
and a very strong urbanisation trend that is showing no signs of abating.
The latter is also a behavioural change. As long as people continue move
to the capitals and big cities, and spend a substantial share of their income
on accommodation, it will support housing markets. Some form of market
correction at some point is surely inevitable, but based on what we see
today, I believe house prices could perhaps rise by a few percent further in
2017-18.
JT: Nordic central banks and financial regulators have paid a lot of
attention to buoyant housing markets and have introduced new
regulations aimed at cooling it down. Do you think too much new
regulation has been enforced or is there too little regulation?
JS: I am a great supporter of a sound and healthy debt amortisation
culture. When my wife and I had a house built many years ago, we had
mortgages amortised over 30-40 years. Over time, those mortgages
became much less common, and in Sweden the regulator responded by
introducing the 85% loan-to-value cap for mortgages in 2010. This was
supplemented by new amortisation requirements in 2016. But ultimately, it
is up to the banks to push and enforce a sound approach to amortisation.
Policymakers face a dilemma. They want more homes to be built, but the
new mortgage leverage regulations make it even more difficult for lowincome households to make that critical first step onto the property ladder.
I am broadly in favour of the new regulations that have been introduced so
far. As of yet, they do not seem to have had any negative impact on
housing demand.
Nordic house prices could rise a few
percent further in 2017-18
At the same time, support regulations give room to individuals to choose
to prioritise their homes and spend more on them at the expense of other
things, because they choose to do so. We have customers who are happy to
travel and eat out less in order to buy the home they desire. We have even
had projects in Sweden and Norway where we found it difficult to sell
parking spaces in garages because young couples are opting not to own a
car.
Overall, I believe the Nordic mortgage regulations introduced so far have
been fairly balanced and reasonable. Most critical for the housing market
is long-term consistency and visibility of regulations. Introducing
restrictions or new taxation out of the blue could cause disruptions from
homeowners having to act in response to new unexpected rules of play.
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JT: How much does taxation impact housing markets? Which tax
rules have the greatest impact? Tax deductions for interest costs,
capital gains taxes or property taxes?
JS: Any increased taxation of home ownership would naturally have a
negative impact on housing markets, but if it were accompanied by other
simultaneous changes to taxation, the net impact would not necessarily be
negative. One notable negative impact from taxation today is the Swedish
22% tax on any capital gains from selling your home. In the other Nordic
countries this is not taxed at all, as long as the property you sell has been
your main residence for a minimum period. In Sweden, it gives a "lock-in
effect", where moving leads to a huge tax charge if your property has
increased greatly in value and you want to move to something smaller or
cheaper. It is a waste for society to have couples remain in bigger homes
after their children have moved out just to avoid a big cash outflow owing
to tax. There is a shortage of homes and available space should ideally be
fully used.
JT: Are there currently any notable anomalies on price differences
between cities and regions or between apartments and houses?
Anything that particularly stands out?
The house price divergence between
growth regions and the rest of the
country represents a megatrend
which is likely to continue
JS: When I was called up for my military service in 1981, the others in my
unit came from all over Sweden. When we compared our origins and
talked about our homes, it was apparent that a house of comparable size
cost about the same regardless of which Swedish city it was in. Today,
your home, your residence, has become much more associated with
lifestyle. Now, which city you live in, which part of the city, and what
address you have matters. Even the street number can matter. Your home is
a statement. This has made housing markets more polarised than in the
past. Some urban areas develop at a pace way beyond other areas, which
are in structural decline.
This is reflected very clearly in JM's operating model, where we have
become very selective with regards to the areas we want to operate in.
Today you will find us in Norway in Oslo, Bergen and Stavanger (a
housing market that is ice cold owing to the decline in the offshore
industry and has had virtually no new housing starts for two years). In
Finland, we have opted to operate solely in Helsinki. We exited Denmark
last year, and before that we were only in Copenhagen. In Sweden, we
operate in Stockholm, Uppsala, Västerås, Örebro (together the Mälardalen
region), in Gothenburg and in the Malmö-Lund area. That's it. We can only
operate in regions with population growth and a mix of industries – a
broad base for employment. In other areas, the business case for building
new homes is typically weak as the existing housing stock more than
covers the total need for accommodation.
I believe this polarisation of housing markets will continue. We have
40,000-50,000 customers queuing up to buy a home from us at some
points. Many are young, well-educated and resourceful, and we try to
carefully track where they would like to live. Consider this: my brother-inlaw's daughter graduated from Lund University in southern Sweden two
years ago. Out of 40 graduates in her class, 39 have moved to Stockholm!
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JT: Which are the most critical drivers of the housing market and
house prices? Interest rates? Disposable incomes? Demographics?
Housing supply? Credit environment? Other factors?
Interest rates matter for housing
demand, but less so than
employment, consumer and business
confidence, disposable incomes, and
demographics/urbanisation
JS: It is not all about interest rates, even if they have a major impact.
People make lifestyle choices. Where do they want to live, where can they
live in order to make everyday life routines work? The most attractive,
often central, areas have the highest prices. Living very far away from
work, or in an area with lower-quality infrastructure, schools, childcare,
healthcare, shopping and entertainment can be seen as incompatible with
the desired quality of life. What do home buyers do then? There is a
downward trend in apartment sizes. A standard two-bedroom flat in
Sweden was 85 m2 seven to eight years ago. It is now 77-78 m2. An
average family in Tokyo lives in 40 m2. The Nordic region will probably
not fall to that level, but we expect a continued trend towards more
compact and more efficient apartment layouts.
Good communications are also key. Proximity to rail-based mass transit is
highly attractive, and features in most of our developments.
Studies show that choice strongly boosts happiness. Those who live in a
remote village might have a single pizza place available when they want to
buy takeaway dinner. Those who live in the capital might have five
different sushi restaurants within walking distance of their home. Even if
they keep going to the same restaurant for sushi, having that choice
enriches their lives. They are often prepared to make sacrifices for that.
Fear of losing your job is the real
killer for new home purchases
Employment is really key for housing demand. People who fear they may
lose their jobs don't sign house purchase contracts. I have been with JM for
over 30 years, and I have been CEO for 15 years. During this time, I have
seen demand disappear twice: when the IT bubble burst, causing big layoffs in the tech sector after 2000; and during the global financial crisis in
2008-09. When people have lost their jobs, it is too late. Before it happens,
if they fear it may happen, they do not sign a contract to buy a home for
several million crowns. Buying a home is one of life's big decisions,
arguably similar in importance to choosing a partner to spend your life
with. People don't take it lightly. And if they don't have the confidence,
they don't sign.
Trying to sum up my 30 years of experience, I would probably rank the
key housing market drivers in this order: employment, GDP/business
cycle, disposable income, demographics/urbanisation and interest rates.
JT: What differences do you see in the housing market outlooks for
the different Nordic countries?
Most positive housing market
outlook in Norway and Sweden,
followed in turn by Denmark and
Finland
Nordea Markets
JS: For the next few years, we see the most favourable outlook in Norway
and Sweden, followed by Denmark, and the least favourable in Finland.
This more or less mirrors their respective GDP growth prospects. The
urbanisation trend is not quite as strong in Denmark. Finland is held back
by austerity reforms such as longer working weeks and a raised retirement
age, but looks to be past the worst. Housing prices were up 1% last year,
and could rise a couple of percent this year. We are currently most active
in acquiring land for development in Stockholm and Oslo, especially near
rail-based mass transit.
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JT: How would you describe JM's positioning and strategy compared
with your main competitors?
JS: Our greatest competitor is the existing homes market, which we try to
watch closely. We are quite long term and typically take a ten-year view
when evaluating the prospects for different regions. We are quite stringent
in selecting where we focus our operations, sticking to regions where we
see population growth, a solid and diverse employment base, good
communications, a commute to cities of no more than 45 minutes, good
public services and municipal finances.
We have also just introduced a segmentation of the 4,000-5,000 homes we
produce annually into "Premium", "JM Original" and "Smarta Kvadrat".
The latter essentially means smart square metres and is a value concept.
We expect 70-80% of our customers to select "JM Original", 10-15%
"Premium" and 10-15% the value option. In a new, fairly centrally located
apartment building, the first ten floors could be "JM Original", and the top
14 floors "Premium". For "Smarta Kvadrat", we have introduced
standardised concept buildings, which could be used in areas such as
Lillestrøm, 25 minutes from Oslo, or Upplands-Bro a bit further out of
Stockholm. We want to cater to this strong trend of individualised homes,
adapted to suit individual preferences.
Competition has increased in recent years. We note new players in current
land tenders, often smaller ones with more of a financial profile or origin,
perhaps not so used to construction project management. Some of this
seems to be driven by investors seeking returns. More new capital has
been attracted by the residential construction market, as it has shown good
profitability.
JT: How do you see the supply of housing in the Nordic countries?
Has it finally caught up after many years of low newbuilding activity?
Is there any risk of excess supply in the coming years?
JS: In Denmark, newbuilding has finally started to liven up somewhat, and
I think there is room for this to continue. Finland has been quite stable at
around 25,000-30,000 housing starts annually, and should remain at that
level. Norway has stepped up activity, especially in Oslo. Sweden saw
around 65,000 new housing starts last year, and should reach that level
also this year. During the Swedish "Million Programme" in 1965-75, there
were 100,000 annual housing starts, followed by many years of low
investments. Against that backdrop, current newbuilding levels are
welcome. But I believe it is important to shape the supply of new homes
into a mix that is not only high-end premium homes, as this segment does
not represent the entire accumulated need for new homes. And from a
business cycle point of view, the high-end segment is more vulnerable to
any market correction as it is less liquid than the volume segments.
Swedish politicians have suggested there is a need for 70,000 new homes
annually, a pent-up need of 700,000. My view is that we may see output
peak near 65,000, partly owing to resource constraints, as capacity
utilisation in the construction industry is very high. It could be a challenge
to find skilled labour and project management staff for additional projects.
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JT: If you could make a "wish list" for political or regulatory reforms
that would be helpful for the housing market, what would be on it?
At the top of a regulatory reform
wish list for homebuilders: A
common Nordic construction
standard and regulations
JS: At the top of such a list would be common Nordic construction
standards and regulations. For large, industrial players such as JM, it
would offer potential scale benefits, from being able to use designs and
home concepts in greater volumes. It would also stimulate competition,
making it easier for international players to enter the Nordic residential
construction market.
In the car industry, there are, if we simplify things somewhat, three global
standards: an American standard, a European standard and an Asian
standard. In residential construction, we have 290 building standards in
Sweden alone – one for each of the 290 municipalities in the country.
My second wish on the list would be a reform of the Swedish capital gains
tax on own residences, which we discussed before. Harmonising that with
Nordic neighbours would increase flexibility in the Swedish housing
market, and improve supply.
JT: To help us get a sense for how a homebuilders' business works,
how would you rank the various risks you face? House prices? Project
management? Interest rates? The business cycle? Others?
JS: The top risk is macro, in a broad sense: employment, disposable
incomes, interest rates. The number two risk, which is also critical, is
operational: project management and organisation. Having needed to
respond to sharp market drops twice – when the IT bubble burst, and after
the Lehman Brothers collapse – by making deep cuts to our organisation, I
know how important it is to be on top of operational risks. I have just spent
three and a half days in forecast reviews, going through our entire project
portfolio in detail. And I do this four times a year. We need to know if any
problems emerge in our projects, at an early stage, before they develop
into much bigger challenges than they need to be. And we need to
maintain a culture whereby project managers are encouraged to be
proactive and transparent about problems, so we can address them together
and bring them under control. Our staff must not feel that they would get
punished for delivering bad news when something goes wrong on a
project.
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Central Stockholm's hot real estate market
Example: Apartment sold in March
2017 on Södermalm, Central
Stockholm, Sweden
The viewing drew a big crowd
Area: 94.4 m²
Number of rooms: 4.5
Monthly fee: SEK 3,715
Asking price: SEK 7,950,000
(SEK/m²: 84,000)
Closing price: SEK 9,800,000
(SEK/m²: 104,000)
Interior views
Source: Bjurfors Estate Agents
Nordea Markets
Source: Nordea Markets
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27 March 2017
Mortgage regulations: Sweden leads the way
To keep the risk of potentially excessive mortgage lending and household leverage in check, the Nordic
financial services authorities (FSAs) have introduced a number of macroprudential policy measures.
Sweden was early in tightening regulations, which is probably explained by the sharp (71%) rise in house
prices over the past ten years. Norway has adopted the Swedish model, while Finland has the mildest
regulations. Finns do not seem to need them – they happily amortise their mortgages anyway.
Sweden
FSA regulations
Sweden has been the pioneer in the Nordic countries in terms of adopting
macroprudential policy instruments. As early as 2010, Sweden introduced
a mortgage loan-to-value (LTV) cap of 85% for retail borrowers.
Consequently, any households applying for new mortgages since 2010
have not been able to borrow more than 85% of the property's estimated
market value when using the property as collateral.
In August 2014, the Swedish FSA increased the minimum risk weights (for
calculating banks' reserve capital requirements) on mortgage loans to 25%,
from 15%. This followed an earlier increase in 2012 from 5% to 15%. The
purpose was to ensure that Swedish banks have sufficiently large capital
buffers against unexpected losses on mortgages in crisis situations. Banks'
risk models for calculating reserve capital requirements against lending are
based on historical credit losses. As so many years have passed since
Swedish banks last took any significant credit losses, and because losses
from Swedish retail lending (particularly mortgage lending) were almost
insignificant even during the big Swedish banking crisis of the early
1990s, the models themselves would not create a need for the banks to
build bigger reserve buffers. As the models did not respond directly to
potentially important factors such as rising household leverage and recordhigh residential property prices, the FSA stepped in and changed the rules.
In May 2016, after a long struggle, the Swedish FSA finally managed to
push through a mandatory amortisation requirement for all new mortgages
with an LTV ratio of 50% or higher.
Bank policy for mortgage lending
Apart from the new requirements set by the FSA, Swedish mortgage
lenders have their own requirements that borrowers must meet. Nordea,
for example, requires the borrower to still be able to service the mortgage
at an interest rate equivalent to the fixed five-year mortgage interest rate
+ 3 percentage points, and never less than 8%. Additionally, the borrower
must have the theoretical ability to pay off the entire debt over a 50-year
horizon (although as per above, only new mortgages since May 2016 with
an LTV of 50% or higher actually have to be amortised).
Amortisation is not something that Swedish mortgage borrowers have
been very fond of, and the difference between Sweden and the best-inclass Nordic country, Finland, is tremendous. In 2009, the actual
amortisation period averaged 125 years for apartments and 71 years for
houses in Sweden (according to the National Board of Housing),
compared with 18.5 years for house loans in Finland (according to Finance
Finland).
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Norway
FSA regulations
The FSA requirements in Norway are quite similar to those in Sweden –
apparently inspired by its neighbour. This has surely been fuelled by house
price increases in Norway being almost as dramatic as in Sweden over the
past ten years (+59% compared with Sweden's +71%).
As in Sweden, Norway has a loan-to-value cap of 85% for new mortgages.
In Norway, this has been in effect since July 2015 – almost five years after
the Swedish implementation.
The Norwegian FSA has also introduced mandatory amortisation for new
mortgages based on the LTV ratio. The requirement for annual
amortisation of 2.5 percentage points of the loan amount (which
corresponds to full repayment in 40 years) if the LTV is 60% or higher so
is even stricter than the Swedish requirement of just one percentage point
(repayment in 100 years) for LTV ratios between 50% and 70%. The
Norwegian amortisation requirement was introduced in July 2015, about
one year after the corresponding Swedish regulatory change. At that time,
however, the Norwegian LTV threshold triggered mandatory amortisation
if the mortgage was 70%. This LTV threshold was lowered to 60% in
January 2017.
Norway was actually ahead of Sweden in introducing instruments that
tighten banks' capital adequacy requirements. As early as 2013 it
introduced a probability of default floor of 20% in its calculation of risk
weights. In 2015, it also increased the loss given default (LGD) floor from
10% to 20%. So, Norwegian banks now have to assume higher minimum
losses, even when allowing for property as collateral, in the event of
mortgage borrowers actually defaulting on their loans. These two actions
practically doubled the banks' risk-weight requirements from 10-15% to
20-25%. The reasons behind these changes are the same as in Sweden.
In response to the dramatic house price increases in Norway, particularly
in Oslo, the Norwegian government introduced tightened regulations for
purchasing secondary (non-main residence) apartments in Oslo. The new
regulation requires buyers to have at least 40% in own equity for such
investments, versus previously at least 15%. The new rules were
implemented in January 2017 and will be in effect until June 2018.
Bank policy for mortgage lending
Nordea has one additional requirement, beyond those stipulated by the
FSA and the government, on its Norwegian mortgage customers: an
amortisation period of no less than 30 years. Previously, when the FSA
regulations were more relaxed, Nordea had more of its own additional
requirements on mortgage borrowers.
Variable interest loans are much more common in Norway than in any of
the other Nordic countries. In 2009, only 10% of Norwegian mortgage
loans were tied to a fixed rate, compared with 55% in Sweden and 40% in
Denmark (according to The Nordic Council of Ministers). One reason for
the difference is the high pre-payment penalty in Norway for mortgage
borrowers who wish to repay or refinance their mortgage before the expiry
of a fixed interest period.
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FSA requirements for mortgages, Nordic countries
Regulation
Applies to
Mortgage risk weights
for capital reserves
Banks
Country
Sweden
Norway
Finland
Denmark
Sweden
Mandatory mortgage
amortisation
Loan-to-value caps
for mortgages
Mortgage borrowers
Mortgage borrowers
Norway
Finland
Denmark
Sweden
Norway
Finland
Denmark
Level, %
25
0.2; 20*
>10
~12
LTV>70% : 50 years
LTV 50-70% : 100 years
LTV < 50% : None
LTV>60% : 40 years**
None
None
85%
85%
90%***
95%
Introduced
2014
2015;2013
2016
2015
2010
2015
2016
2015
*Probability of default (PD) floor 0.2% (2015) Loss given default (LGD) floor 20% (2013)
**The LTV threshold was decreased from 70% to 60% in Jan 2017 *** First time buyers 95%
Source: Nordea Markets
Finland
FSA regulations
The Finns love to amortise. Even though their average repayment period
has risen somewhat in recent years, the Finns repay their mortgage loan
within 20 years on average. Together with a comparably modest increase
in Finnish house prices in recent years, this helps explain why Finland has
been slower in introducing new, additional mortgage regulations than
Sweden and Norway. Over the past five years, Finnish house prices have
increased by a mere 4% compared with 62% and 32% in Sweden and
Norway, respectively.
Currently, the sole FSA requirement for new mortgages in Finland is a
loan-to-value cap of 90% (95% for first-time home buyers). Finland was
also the last Nordic country to implement new mortgage regulations
through its FSA; the LTV cap was first introduced in July 2016.
Also, the method for calculating the loan-to-value ratio for mortgages is
more lenient in Finland than in the other Nordic countries. In addition to
the actual property to be purchased, a wide range of other collateral
offered by the borrower can also be included in the "value" when
calculating the maximum possible loan amount. Consequently, for some
borrowers, the underlying LTV ratio (based on just the property being
bought) can be fairly high, and may even exceed the 100%.
Finnish banks' average risk weights for housing loans are currently under
10%. In December 2015, the Finnish FSA announced that it had
commenced preparations to raise the risk weights, but nothing has
happened yet.
Bank policy for mortgage lending
Most mortgages are on a floating rate in Finland and interest-only (IO)
mortgage loans are non-existent. Minimum repayment periods required by
banks are generally around 30 years, but as previously mentioned, Finnish
mortgage borrowers tend to voluntarily pay off their mortgages much
faster than that, currently at an average rate of 20 years.
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Denmark
FSA requirements
The only current actual regulation for mortgages in Denmark is a loan-tovalue cap of 95%. This rule was implemented in November 2015. The
current average credit risk weight for residential mortgage lending is
around 12% and there is no plan at present to raise risk weights in
Denmark.
Some further initiatives have been taken by the regulator though. In
January 2016, for instance, the Danish FSA issued guidelines on credit
assessment for mortgages in "growth areas", which are currently
Copenhagen and Aarhus.
Bank policy for mortgage lending
The Danish mortgage market is unique in a Nordic context, in that it
consists entirely of long-term fixed rate mortgages. This is not stipulated
by regulations, but is an industry standard that was established many
decades ago. Households can finance up to 80% of the value of a home
purchased using mortgage loans with a maximum maturity of 30 years. If
more financing is needed, a maximum additional 15% of the property
value can be borrowed (since 2015 also formalised by the FSA's LTV cap
of 95%), through a higher interest rate loan, which is not a traditional
mortgage.
On 1 October 2003, Danish mortgage lenders were allowed to offer a new
type of mortgage product: interest-only (IO) loans. These are deferred
amortisation mortgages, where principal repayments can be postponed for
up to ten years, even though the full amount still has to be repaid over the
30-year contract. IO mortgages immediately became popular among all
types of households. One year after the reform, 15% of all Danish
outstanding mortgages were IO loans. This number had increased to 30%
in 2005, to 50% in 2010, and remains above 50% today.
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Tax rules: Mortgage interest subsidy phase-out
It may seem paradoxical – particularly in Sweden and Norway, where we see booming housing markets –
but Nordic governments continue to subsidise home ownership by allowing individuals to claim back part of
their mortgage interest costs on their income tax. However, this has started to change. Finland has been
the most aggressive in reducing interest cost deductions, while Sweden is the only Nordic country that has
taken no steps in this regard yet. At the same time, only Sweden has a capital gains tax on homeowners'
main residence.
Large differences across the Nordic countries
Sweden allows deduction of 30% of
mortgage interest costs against
income tax (and 21% on costs that
exceed SEK 100,000 per annum)
Sweden
Partly inspired by the US Tax Reform Act of 1986, major tax reforms were
made in the Nordic countries in the early 1990s. As part of the Swedish tax
reform in 1990-91, deductions for mortgage interest costs against income
tax were cut from 50% to 30% of the total mortgage interest expense up to
SEK 100,000 per annum. For costs above SEK 100,000, 21% can be
deducted against income tax. There are currently very few people in
Sweden with annual mortgage interest costs above SEK 100,000 owing to
the low interest rates. In 2015, 23,000 homeowners fell into this category,
down from 80,000 in 2012, according to Statistics Sweden. This represents
a mere 0.2% of a population of ten million. The 30% and 21% deduction
rules remain in place today.
Interest deductions, Nordic countries, 1992-2020
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
1992
1996
SE
2000
FI
2004
NO
2008
2012
> 50,000 DKR
2016
2020
< 50,000 DKR
Source: Swedish Tax agency, Bank of Finland, Statistics Norway, Danish Ministry of Taxation
In Norway, the current flat 25%
capital gains tax rate is mirrored by
25% of interest costs being
deductible against income tax
Norway
As part of Norway's major tax reform in 1992, progressive taxation of
capital gains (similar to income tax at the time: the bigger your capital
gain was, the higher the rate of tax eligible on it), was replaced by a flat
capital gains/capital income tax rate of 28%. This was mirrored by a
corresponding 28% of interest costs (mortgage and other interest, like
consumer credit, etc.) being deductible against income tax.
The first change to this tax rate came in 2014 when it was reduced to 27%.
This was followed by further reductions; to 26% in 2015 and to 25% in
2016. According to Statistics Norway (SSB), further reductions are
expected as “The deduction rate in the personal income tax is related to
the corporate tax rate. The race to the bottom of corporate taxes indicates
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that it will drop further. Probably dropping to 22% within a few years.”
Unlike in Sweden, the deductible share of interest costs remains flat,
regardless of how much interest you pay.
Finland is aggressively phasing out
its tax subsidy for interest costs,
which should fall from an effective
30% in 2011 to 8% in 2019
Finland
Finland has been the most aggressive among the Nordic countries in
starting to phase out tax subsidies on mortgage interest costs. While the
proportion of annual mortgage interest costs deductible against income tax
has actually remained flat at 30% (32% for first time home buyers) since
2012, the share of the total mortgage amount outstanding on which interest
can be deducted has been slashed from 100% in 2011, to 85% in 2012, and
70% in 2013. It is still falling, and in 2018 interest expenses will only be
deductible on 35% of the mortgage amount. Hence, in 2018, a Finnish
mortgage borrower will be able to deduct 30% of annual interest expense
times 35% of the outstanding mortgage amount = 10.5% of total interest
expense against personal income tax. This is much lower than the typical
rates of 30% in Sweden and 25% in Norway.
According to the Bank of Finland “The reduction of mortgage interest cost
tax deductions has been a politically convenient way of raising tax
revenues over the last few years, and low interest rates makes it even
easier”. Finnish households are also less leveraged than their Nordic
neighbours, which makes an aggressive phasing out of the interest cost tax
deductions more feasible. There is also a cap on this tax benefit in Finland:
the total interest cost deduction against income tax cannot be greater than
EUR 1,400 per person (EUR 2,800 per couple). For families, the cap is
raised by EUR 400 per child up to a maximum EUR 800. Hence, for a
Finnish family, the maximum interest cost deduction is EUR 3,600. This
cap has been in place since 2005.
Denmark has seen a slower start;
Since 2012, 33% of annual mortgage
interest costs up to DKK 50,000 have
been deductible...
...and the share of deductible interest
costs above DKK 50,000 is falling
each year and should be down to
25% by 2019 from 34% originally
Denmark
While Nordic neighbours slashed interest cost tax breaks in tax reforms in
the early 1990s, Denmark followed suit later. For example, in 1996 interest
rate cost deductibility was as high as 43% in Denmark, while the
corresponding levels in the other Nordic countries were 28-30%. But this
has changed. From 2012 on, the share of interest expense deductible
against income tax was cut by one percentage point each year, and this will
continue until 2019 (and the cut was actually two percentage points in the
first year, 2012). This means the level will fall from 34% to 25% over an
eight-year period. These cuts are currently only for absolute annual interest
expenses above DKK 50,000 (DKK 100,000 for couples). For interest
expenses below this cap, the deductible share has remained a flat 33%
since 2012.
Examples show mortgage tax breaks may not matter much
The obvious question at this stage is whether tax subsidies for mortgage
interest costs make a real difference to the state of the Nordic housing
markets? Do they help inflating house prices?
We are inclined to argue that such subsidies represent a marginal factor
and that there is no macroeconomically critical justification for their
existence. In our two concrete examples below we note that:
 Only Finland is making a really meaningful reform to its mortgage
interest cost subsidies, with a view to phasing them out.
 In absolute money, the subsidies are hardly make-it-or-break-it; for a
Nordic single household with a mortgage of EUR 200,000, they
represent around EUR 100 per month.
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 Even with the rollout of ongoing reforms, Denmark has the most
generous subsidies, followed by Sweden and Norway; Finnish
subsidies will fall below a third of the level among its neighbours in a
few years.
The tax break for a household with a
EUR 1m mortgage at 5% interest is
about EUR 1,100 per month
Example 1: Family borrows EUR 1m at mortgage rate of 5%
Imagine a family with three children living in a Nordic capital. Let us
compare when they borrow EUR 1m at a mortgage interest of 5% in 2010
and 2020, with the different tax rules for mortgage interest cost deductions
against income tax at those two different times. This is a well-off family,
as few Nordic households could carry a EUR 1m mortgage. This example
serves to illustrate how much such a privileged family would benefit from
tax subsidies in the different Nordic countries, before and after tax subsidy
reforms (or the absence thereof).
As the loan amount is significant, the interest expense will be the same at
EUR 50,000 per year. If the family lived in Sweden or Denmark, a large
part of the interest expenses would be deductible against income tax at the
lower rate applied to bigger mortgages. This is 21% in Sweden, for both
time periods, and 34% and 25%, respectively, in Denmark in 2010 and
2020.
The tax break will fall slightly in
Norway and Denmark, but will be
slashed 75% in Finland, placing
Finland at one-third of the level
among its neighbours in 2020
If the family lived in Finland, they would hit the absolute interest tax break
cap of EUR 3,600 in 2020, while in 2010 there would be no cap. A
Norwegian family would see the deductible share of interest costs fall
from 28% to 24% between the two time periods. The graph below
illustrates how large the annual tax reduction for interest costs would be in
the different Nordic countries in 2015 and 2020.
Annual tax reduction for family with EUR 1m mortgage at 5% interest, 2010 vs 2015
18,000
16,820
16,000
14,000
14,000
13,575
14,000
12,000
12,435 12,435
12,000
10,000
2010
8,000
2020
6,000
3,600
4,000
2,000
0
FI
NO
SE
DK
Source: Company data and Nordea Markets
For this example the differences in
deductions are not that big in 2010
while Finland clearly stands out in
2020
Nordea Markets
We can see that Denmark offers the biggest tax breaks for this well-off
family both in 2010 and in 2020. All in all, in 2010 the differences
between the countries aren't that great, and Sweden actually had the least
generous deductions that year in this example. In 2020 Finland stands out
completely. For a Finnish family, the interest deduction would be less than
a third of what you would get in the other countries.
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The tax break for a household with a
EUR 200,000 mortgage at 2%
interest is about EUR 100 per month
Example 2: Single household borrows EUR 200,000 at 2%
In the second example we look at a single household that borrows EUR
200,000 in 2010 and in 2020, at a mortgage interest of 2%. Even in this
case, with a lower loan amount and interest level, Finland comes out as an
outlier. While the difference between the countries in size of tax break was
fairly small in 2010, the outcome for 2020 illustrates how aggressive
Finland's reduction is.
Mortgage 200,000 EUR, mortgage rent 2%, 2010 vs 2015
1,600
1,346 1,320
1,400
1,120
1,200
1,200 1,200
1,120
960
1,000
2010
800
2020
600
400
300
200
0
FI
NO
SE
DK
Source: Company data and Nordea Markets
Just as in the previous example, the
differences among the countries are
fairly small in 2010, while Finland is
an outlier in 2020
Sweden is the sole Nordic country
with a capital gains tax regardless of
how long you have lived in the
property
Looking at the two examples above, we should bear in mind that there are
clear differences between the countries regarding mortgage amortisation
requirements. The Finns face greatly reduced tax breaks, but are less
leveraged than their Nordic neighbours. They are also much more eager to
amortise. These two factors have likely made it easier for Finnish
politicians to carry through such a reform. Another conclusion that could
be drawn from the two examples is that although Sweden has planned no
reductions in tax breaks for mortgage interest costs, it will still not have
the most generous tax breaks in 2020.
Capital gains tax – Sweden goes its own way
In terms of capital gains on residential property, Sweden has chosen a
different route than its Nordic neighbours. It is the only country where
there is no limit for how long you need to have lived in your main
residence in order to avoid paying capital gains tax on any profit earned
when you sell it. You simply have to pay it. Before 2008, you could defer
the tax payment if you bought a new home. While this is still possible,
home owners must pay annual interest of 0.5% on the deferred amount.
Based on the currently low interest rates, it is more advantageous to pay
off the tax and increase your mortgage by the corresponding amount.
Capital gains taxation on own residence – Nordic countries 2017
Level
Sweden
22%
Finland
30% if capital gain ≤ EUR 30,000
34% if capital gain > EUR 30,000
Norway
Max 24%, taxed as capital income
Denmark
No capital income taxes
Tax exempt criteria
No tax exemption, but if you have lived
in the apartment for less than one
year, you are not able to make a
deferral.
1) Has to be your main residence for
more than 2 years
2) Total of capital gain is less than
EUR 1,000
Other
A deferral of the tax payment may be
made if you buy a new residence but you
need to pay interest (0.5%) on the
deferred amount.
Has to be your main residence for
more than 2 years
Has to be your main residence
Source: Nordea Markets
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For Finland and Norway you have to have lived in your main residence for
at least two years, in order avoid capital gains tax. In Finland, the tax level
is clearly higher than in both Sweden and Norway if this criterion is not
met (ie 30% or 34% depending on the absolute size of the capital gain).
Denmark is the sole Nordic country where you do not need to have lived
in the accommodation for a minimum period of time in order to avoid
paying capital gains tax. It is, however, important that you have used the
property as your main, permanent, residence to qualify for capital gains
tax exemption.
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Price differences: By country, region and type
The highest price rises in the course of the past ten years have been seen in Norway and Sweden. Over
the past five years, there has also been a significant 29% price increase in Denmark. Are there differences
within each country? In Sweden, for instance, there has been a substantial difference in price rises
between apartments and houses over the past ten years. In this section, we look more closely at the price
developments within each country, and compare them with each other.
Norwegian and Swedish house
prices have soared over the past ten
years, up 71% and 59%, respectively
Finland has seen more moderate
growth of 17% while Denmark
suffered a correction in 2007-11 but
has since recovered, in total up 3%
Apartment prices have risen faster
than house prices, nearly twice as
fast in Sweden!
Norway and Sweden have soared, Finland, Denmark lagging
Over the past ten years, housing prices have soared in Norway and
Sweden, rising 71% and 59%, respectively. In Finland, the corresponding
price increase is 17%, while it is only 3% in Denmark. For Denmark, the
modest price increase during this period is due to a home-grown property
market correction that started a year before the global financial crisis, in
2007. Between 2007 and 2011, Danish house prices fell by 20% on
average, and a similar price drop was seen in the Copenhagen area.
Since then, the market has recovered, with Danish house prices rising 29%
during the past five years. In this section, we examine particularly
noteworthy differences in house prices between the Nordic countries,
between the capitals and the rest of each country, and between apartments
and houses.
Apartments versus houses
Looking at the graphs below, we reach two conclusions. First, prices for
apartment have increased more than for houses in all Nordic countries.
Second, the difference is much more pronounced in Sweden than in the
other Nordic countries. For houses, Swedish prices increased by 106%
between 2005 and 2016. For apartments, the corresponding figure was
196%. Apartment prices have increased somewhat more than house prices
in all the Nordic countries, but the difference is far less than in Sweden.
Formerly very strict regulations for
renting out apartments were relaxed
in Sweden in 2013-14
Why does Sweden stand out so much compared with its Nordic
neighbours? Well, one possible explanation could be the difficulty in
finding apartments to rent in Sweden, especially in Stockholm. In 2016,
the average waiting time for getting a rental apartment through the
Stockholm Housing Agency (public housing) was nine years. Until
recently, it was also quite difficult for landlords to rent out privately owned
apartments, and to actually profit from doing so. In order to get permission
to rent out an apartment from the board of the tenant-owned association
(TOA), the owner needed to present "notable reasons" for doing so. Such
reasons could include "moving to another city for a new job for a limited
period of time" or "trying out living together with a partner before buying
something together". Some boards were, of course, more accommodating
than others, but legally they could all decline requests if they believed the
reasons cited for renting out an apartment were not good enough.
Additionally, it was forbidden to charge higher rent than the corresponding
market rent for public apartments in the same area.
Regulations likely helped create
major pent-up demand for rental
apartments in Sweden, partly
explaining soaring apartment prices
In February 2013, the regulations were changed, such that tenants could be
charged significantly higher rents. The new rules for calculating rent were
based on the capital cost of an apartment, as well as its maintenance cost.
A year later, in July 2014, the government also decided to make it easier to
rent out apartments. Hence, instead of being forced to give "notable
reasons", apartment owners just have to give "any reason", meaning that
the board of the housing association is in practice incapable of forbidding
owners from renting out their apartments. These regulatory reforms are
still quite new, and there is arguably still a shortage of apartments to rent
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in Sweden, especially in Stockholm. This could partially explain the
bigger differences in price rises between apartments and houses in Sweden
compared with its Nordic neighbours.
Apartment prices, Nordics countries, indexed to 2005=100
Houses prices, Nordic countries, indexed to 2005=100
300
300
250
250
200
200
150
150
100
100
Sweden
Denmark
Finland
Sweden
Norway
Source: Nordea Markets
Denmark
Finland
Norway
Source: Nordea Markets
Capitals and city centres versus rest of the country
We have noted major price trend differences between houses and
apartments, especially in Sweden. But what about different regions in the
various Nordic countries? For sure, we know that the capitals tend to stand
out, but are there any notable differences between the countries? As the
development between the regions seems to differ somewhat for the Nordic
countries, we review them all.
First, if we look at Norway, Stavanger was the shining star for many years,
until it stagnated to Oslo levels in 2015, since when Oslo has taken the
clear lead. The explanation is the oil price crash in 2014 which hit Norway
hard, and especially Stavanger, which is the centre of gravity for Norway's
offshore industry. In the past few years, more than 40,000 people in the
Norwegian offshore industry have lost their jobs, and the local housing
market in Stavanger has been severely affected. Between 2014 and 2016,
house prices fell by 8% in Stavanger, while they rose by 35% in Oslo. In
2016 alone, house prices in Oslo increased by 23%.
Norway: Stavanger, centre of the
offshore industry, was the star until
the oil price crash in 2014
Stavanger has now been overtaken
by Oslo, where prices rose 35% in
2014-16
We have already mentioned Denmark, where house prices started to fall
one to two years before the global financial crisis. The development was
classic: the Danish housing market correction was preceded by a
construction boom which started in 2004. Many apartments were finished
in 2006-07, by which time house prices had started to fall. Since this
correction, house prices have recovered.
Denmark had a home-grown crisis
starting just before the global
financial crisis – but has now
recovered
Regional house price changes, 2005-16, indexed 2005=100, Norway
240
Regional house price changes, 2005-16, indexed 2005=100,
Denmark
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
2005 2006 2007 2008 2009 2010 2011
Tromsø
Stavanger
Oslo
2012 2013 2014 2015 2016
Bergen
Norge
80
2005 2006 2007 2008 2009 2010 2011
Capital
Zealand
Southern Denmark
2012 2013 2014 2015 2016
Central Jutland
North Jutland
Source: Nordea Markets
Source: Nordea Markets
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Regional house price changes, 2005-16, indexed 2005=100, Finland
Regional house price changes, 2005-16, indexed 2005=100, Sweden
240
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Country Average
Greater Helsinki
Rest of Finland (Outside capital area)
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Greater Stockholm
Greater Malmo
Greater Goteborg
National
Source: Nordea Market
Source: Nordea Markets
Finnish house prices have climbed
more steadily and moved less
dramatically than in other Nordic
countries
Example: Price per m² 95% lower
for newly built house in Kuopio than
for small apartment in Helsinki
Helsinki, 27.5 m2 apartment: EUR 490,000
Stockholm is in a league of its own
among Swedish house prices
Nordea Markets
The house price increases in Finland have been steady, with no major
correction since 2005. Comparing Finland with Denmark, the price
development over the 12-year period is more or less the same, in total. But
while Denmark had a strong price increase during the first two years,
followed by a rather dramatic fall, Finnish house prices have climbed more
steadily. Looking at national averages, house prices have increased about
28%, while prices in the Helsinki region have risen 48%. However, the
country average does not show the spread between different areas in
Finland, which can be huge.
The pictures below show one of the most expensive apartments (in terms
of price per square metre) that has been sold in Helsinki, and a newly built
house in a more remote and – to say the least – far less pricey area,
Kuopio. The apartment has an area of 27 m2 and the house 287 m2, and yet
the price of the apartment is twice that of the house! The apartment was
sold for almost EUR 18,000 per m2, while the price per m2 for the house is
EUR 837 – roughly 95% lower.
Kuopio, 287 m2 new house: EUR 240,000
Just as in the other Nordic countries, Swedish house price increases have
been most dramatic in the capital. Stockholm attracts people with job
offers, and a has a rich offering of culture and entertainment. There have
also been significant price increases in major Swedish university cities in
Sweden, like Gothenburg, Uppsala, Linköping and Umeå. The Öresund
region, including Greater Malmö, is a growing area as well, and house
prices have increased there over the past ten years. The region is well
integrated with Denmark (especially Copenhagen) and was therefore
affected by the Danish housing market correction in 2007-11.
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Accommodation costs: High prices affordable
It is important to make the distinction between house prices and cost of accommodation. Absolute house
prices are high, but the share of income spent by Nordic households on accommodation is not. A
combination of low unemployment, rising disposable incomes and record-low interest rates have made
households able and willing to buy homes at historically high prices.
House prices are high but
households are more willing and
able to pay up
"What is it worth?" versus "What does it cost to live there?"
On 14 October 2015, Nordea's Swedish macro analyst, Andreas Wallström
(who is interviewed in this report), managed to raise a few eyebrows when
he released his research note on the Swedish housing market titled,
"Sweden: Record-low housing costs". It stood out at a time of soaring
house prices, and an ongoing debate about the sustainability of the record
prices at that time.
The core of Andreas' argument is as valid today (when housing prices are
even higher) as it was in 2015. The point is that, yes, house prices are high,
but unemployment is low, disposable incomes have grown, and record-low
interest rates have pushed down accommodation costs. This means that
despite the high housing prices, households are spending less on their
accommodations than at any other time in the past 20 years.
Norwegian national average share of
income spent on accommodation is
at 18%, in line with the 25-year
average
In a more recent research note from 22 February this year, Nordea's
Norwegian macro analyst, Joachim Bernhardsen, makes a similar
argument for today's Norwegian housing market. House prices are at
record highs, but low interest rates and rising disposable incomes have
kept the national average share of income spent on accommodation at 18%
of the median household income. This is in line with the 25-year average
in Norway. In Oslo, this share is at a 25-year high of 30%, just above the
pre-crisis peak in 2007.
For household income spent on
accommodation and living expenses
to reach historical averages, house
prices would have to rise another
30% or interest rates would need to
rise to 6.5%
Does this mean housing in Oslo is massively overpriced? Not necessarily.
Taking into account both accommodation costs (mortgage interest and
maintenance costs) and general living expenses, the latter have grown
much slower than growth in disposable incomes. Adding up
accommodation costs and living costs as a share of disposable income, the
25-year average is 62% for Norway as a whole, and 70% for Oslo. The
current share is 55% for Norway, and 68% for Oslo. So, Norwegian
households are currently spending much less of their available income on
accommodation and living than they used to, and in Oslo specifically, they
are still spending a bit less than the long-term trend. For the share of
household income spent on accommodation and living in Norway as a
whole to reach historical average levels, house prices would have to rise
another 30%, or interest rates would need to rise to 6.5%.
Mortgage interest costs affect accommodation costs the most. The graph
below shows interest costs as a share of household disposable income in
the Nordic countries since 1999.
Nordea Markets
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27 March 2017
Interest expenditure % of disposal income, 1999-2016
14
12
10
8
6
4
2
Denmark
Finland
Norway
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1999
Total interest expenditure % of
disposal income
16
Sweden
Source: Nordea Markets
Of the Nordic countries, household
debt is highest in Denmark and
lowest in Finland
Interest expenditure shares of income have fallen since the peak in 2008
for all Nordic countries; most significantly for Denmark, where it has
fallen from a peak of more than 14% of disposable income to less than
4%. The high interest cost share in Denmark is partly explained by the fact
that Danish indebtedness is higher than in any other European country. In
2015, Danish household debt as a share of disposable income was 292%!
Norway was not far behind with a corresponding figure of 222%. Not very
surprisingly, the lowest household leverage in among the Nordic countries
was in Finland, at 130%.
Household debt, % of disposable income, 2015
Household debt, % of disposable income, 1995-2015, Denmark
400
350
% of net disposable income
300
250
200
150
100
300
250
200
150
100
50
50
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
HUN
LVA
SVN
POL
SVK
CZE
EST
ITA
DEU
AUT
FRA
USA
BEL
GRC
ESP
FIN
PRT
GBR
KOR
CAN
SWE
CHE
AUS
NOR
NLD
DNK
% of net disposable income
350
Source: OECD
Source: OECD
Danish household debt to income
peaked in 2008 at 340%, and is now
292%
Danish household debt increased steadily, driven by a booming housing
market, and peaked in 2008 at 340% of disposable income. The global
financial crisis, adding further to the Danish housing market correction
which happened more than a year earlier, turned this trend, and lowered
the household debt-to-income quota to 292% by 2015.
High savings in Denmark offset high
household debt; household net worth
highest in the Nordic countries
To be fair, one has to look at the bigger picture. While the Danes borrow a
lot of money, they also tend to save a large amount of money, especially in
pension funds. Hence, when one looks at the households' net worth (the
total amount of financial assets plus the total amount of non-financial
assets minus the total value of outstanding liabilities), the Danes actually
top the Nordic list.
Nordea Markets
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27 March 2017
Household net worth, % of disposable income, 2015
Household net worth % of dispsable income
700
600
500
400
300
200
100
0
*Norway=2014
Denmark
Sweden
Finland
Norway*
Source: OECD
Looking at interest rates, the biggest component in accommodation costs
and a key driver for house prices, it is useful to get a bit of perspective. In
the graph below, we show three-month policy rates in the Nordic
countries. The days of short-term rates above 10%, in a high-inflation
environment, are long gone. In the Nordic region, we have not seen that
since the early 1990s, but even in the past 15 years, interest rates have
taken a plunge.
Nordic interest rates have been
below 3% since 2010 and (except for
in Norway) negative since 2015
Although slightly different in the various countries, policy rates were
broadly around 4% 15 years ago, peaking at around 5% at the outbreak of
the global financial crisis in 2008, before falling to zero. Mortgage interest
rates clearly have a spread above these short policy rates, but have over
this period broadly followed the underlying risk-free rates. Policy rates in
the Nordic countries have now remained below 3% for eight years, and
aside from in Norway, have been negative since 2015. We have all started
to get used to these low rates and it has become the new normal.
Three-month money market rates, Nordic countries, 2002-18E
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
‐1.0
Sweden
Norway
Denmark
Euro Area
Source: OECD
Nordic households have adapted
what they can and want to pay for
housing to the current employment,
income and interest rate situation
Nordea Markets
In summary, house prices are of course greatly affected by interest rates,
but certainly not only by them. It is more accurate to look at
accommodation costs for households, and more specifically, consider
accommodation costs as a share of household income. For even greater
accuracy, we can look at accommodation costs plus cost of living, to get a
sense of what households have available to spend, and how much of that
they can and want to spend on accommodation. As our Norwegian analysis
from February shows, high house prices have been accompanied (or one
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27 March 2017
could argue: driven) by rising incomes, low unemployment and more
slowly increasing living costs, in conjunction with low interest rates. This
cocktail of tailwinds has enabled households to pay up for houses and
apartments; and that they have done. In fact, we argue that households
have adapted what they are willing to pay for their accommodation in line
with their current employment status, income and expectations for
mortgage interest rates.
Nordea Markets
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Interview: Big correction unlikely without shock
We interview Klas Danielsson, CEO of Swedish state-owned mortgage lender SBAB, asking him what the
consequences of stricter mortgage regulations are for borrowers, whether there are any anomalies in
today's housing market, how a mortgage bank can meet future challenges, what the main threats are, and
what strategies SBAB should pursue to overcome them.
KK: We’ve had a period of many years with rising house prices and
currently the levels are currently record high. Do you have any
concerns about a potential housing bubble in Sweden or the Nordic
countries? Are there any segments that may be more vulnerable than
others?
KD: Generally, you can say that if you’ve had a long period of increasing
asset prices, the risk of a price correction increases as well. For house
prices to fall significantly in Sweden, I believe it will take some sort of
event; a shock. Households tend to be cautious if there is a big negative
event, and will put home purchases on hold for a while. As we have an
uncertain macro environment today, due to among other things Brexit and
the recent US presidential election, the risk for a shock might be somewhat
bigger today compared to some years ago. One should remember though,
that if we were to see a Swedish house price fall of 10-20%, the decline
would only correspond to the price increase of the past 18 months. In the
long run, prices would ultimately recover as we all need somewhere to
live.
Without any external negative shock, I would say that there is quite a small
risk for a price fall in Sweden. There are fundamental factors that explain
current house prices. For example, we’ve had a positive population growth
in combination with a low supply of new residential housing. We are
currently building at a sufficient pace; ie the number of new homes
matches the population growth, but that hasn’t been the case for many
years and there is pent-up demand for about 500,000 new homes in
Sweden.
So, overall, I would say there is quite a low risk for a major price fall in
Swedish house prices.
KK: Central banks and financial supervisory authorities in the Nordic
countries have given the housing market a lot of attention, and in
many cases they have been pushing for regulations to cool off the price
increases. Do you feel that there has been a need for new regulations
to prevent overheating? Have there been too many regulations, or do
we need more?
Pent-up demand for ~500,000 new
homes in Sweden
Nordea Markets
KD: This is a very interesting topic, which I think has become quite odd in
some ways. Not just in Sweden, but globally, politicians have failed to
correct structural imbalances in economies and between economies, and
instead have pushed responsibility over to authorities like central banks
and regulators. As a consequence, central banks now determine the
economic development in a way that we haven’t seen before. In Sweden,
we would have needed a number of political decisions, across political
bloc boundaries in Parliament, to address rising house price. The
politicians have not succeeded though, and the initiative has been passed
on to the authorities. Hence, in Sweden, it has been the central bank and
the FSA that have pushed measures to slow the price rises. And it has not
stopped there. Now the authorities actually ask us, the banks, to take a
socioeconomic responsibility for our business as well. Of course, we are
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Corporate Research
27 March 2017
aiming at managing our business in a responsible manner, but from a
business perspective. Shall we now also assume responsibility for the
economic development of society as a whole? I’m not in favour of the
current evolution – I believe that this responsibility should be brought
back to the politicians, where it belongs.
KK: How much influence do you think tax rules have on house prices?
What has affected house prices the most - the deductibility of
mortgage interest costs, property taxes or capital gains taxes?
KD: It is difficult to say which has had the greatest effect, and it has most
likely varied over time as well. We tend to view things from our own
perspective. To me, for example, the capital gains tax is something that I
would gladly see reformed. Not only do I believe that it affects prices, but
more importantly it prevents people from moving. It creates substantial
lock-in effects. Take me as an example. I am 53, with four children. Three
of them have already moved out, and number four will most likely move
out in the coming years. We would be happy to move to something
smaller, perhaps to an apartment close to the city centre. But the capital
gains tax makes us doubt whether it would really benefit us to do so. We
bought our house in 1993 and since then apartment prices have risen more
than house prices. On top of paying handsomely for a flat in a good
location, we would need to pay a substantial amount of taxes on the capital
gain from our house that has built up over our 20 years of ownership. We
could end up with a much smaller home, without actually releasing and
keeping much of the capital tied up in our previous home.
Generally, all kinds of housing market regulations tend to create lock-in
effects. The rules themselves make it more difficult to move. For example,
moving to a new apartment could mean that you are all of a sudden subject
to the new amortisation rules. That could mean that your cash outflow for
accommodation would rise significantly. Not only do the new rules make
it more difficult for our customers to move, but they are also anticompetitive in that they make it more complicated for us to have potential
clients move from another bank to us.
KK: Do you see any anomalies in the differences in prices between
cities or regions, or between flats and houses - anything that stands
out in particular?
Housing price anomaly in Sweden:
yields in least attractive locations
have started to converge with yields
in prime locations – driven by
investors' hunt for yield and by
regulations
KD: I would say that we are starting to see some anomalies now. For
example, yields on properties in C (least attractive) locations have started
to come closer to yields in B locations. This development is at least partly
driven by investors looking for yield. Even if yields have come down in
the C locations, they haven’t decreased at the same pace as funding costs,
from the low interest rates. The yield equalisation between the different
districts is also driven by regulations. Tougher regulations have made it
harder to finance an apartment in an A location. As a consequence, more
people are forced to buy apartments in B and C locations, which means
that prices are increasing in these areas. From an open market economy
perspective, this phenomenon is of course incorrect – regulations should
not determine prices.
KK: When you look at "the big picture" of the housing market, what
are the most important drivers for house prices? Accommodation
costs, interest rates versus disposable income? Demographics population growth versus local supply? Credit environment? Other?
Nordea Markets
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KD: The accommodation cost is of course an important driver. Even if we
currently have record high house prices, the accommodation cost has
never been as low as it is now. That has a positive effect on house prices. I
have already mentioned the housing deficit in Sweden, which is another
important driver.
But, if we imagine that we didn't have an excess demand or record low
interest rates, what would happen then? Most likely, in the city centre of
Stockholm the prices would have been very high, as they are today, but the
differences between prime and peripheral districts would have been
greater. Hence, the main rule when it comes to pricing for housing would
have been even more true – which is: location, location, location.
KK: How do you perceive the availability and terms for mortgages
today from a historical perspective? Have there been significant
changes over time? How do you think it will develop in the future?
Nordic banks typically refuse to offer
mortgages that are higher than 5-6x
of disposable incomes, or to those
unable to cope with an interest rate
of 7% or higher
KD: It has clearly become tougher to get a mortgage today compared to
five or ten years ago. We at SBAB, as well as our competitors and the
authorities, have become stricter, which has made it more difficult for
households to borrow as much as they would like. Most banks require
their customers to be able to cope with an interest rate of at least 7% and
most banks say no to mortgages in excess of 5x to 6x the disposable
household income. Thanks to stricter requirements, we can also see that
the credit quality and repayment ability of our customers have improved.
Still, even with these stricter mortgage rules, we see that house prices are
increasing. That is driven by a very high demand. But as long as the house
prices increase, we will continue to work with improved credit quality
among our clients, as the risk for a price fall increases with higher house
prices. I believe all banks have the same mindset in this regard.
KK: Do you see significant differences in strategy among the players
in the mortgage market? Are there any that stand out? How would
you describe SBAB as a player compared to its competitors?
KD: It is difficult to comment on our competitors in detail but I would say
that we still are very different from other banks. Most of them look at their
clients’ total business with the bank when they offer a mortgage and
mortgage terms. That is also why the list prices on interest rates are much
higher compared to the average rate actually paid by customers at
traditional banks. Our list price for mortgage interest rates is clearly lower,
by about 40 basis points, but this is also what our average customer
actually pays. Furthermore, this also means that the mortgage has to exist
on its own merits. Currently, at traditional banks in Sweden, you often get
an interest rate based on your total commitments with the bank. Less
attention is given to the actual repayment ability or the value of the
underlying asset. As we are moving towards a future with more
transparency, it will be easier for clients to compare prices between the
banks and it will also be easier to change banks. Clients that pay high
mortgage rates will most likely move to us. As a consequence, it will be
harder for the traditional banks to offer lower rates to “prime customers”
as the average earnings per client will decrease.
KK: But I guess that it’s not always that easy to just move your
commitments from one bank to another? You have to take any sharing
of your collateral between banks into account for example, and some
loans might be structured in such a way that a move is not that
straight forward.
KD: That is true but I think that the market will be forced to adapt sooner
or later. I also believe that the first development in this direction will be
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within deposits. We already see this happening in Europe. There you can
easily open up an account and put your money at the bank that offers the
best yield. Hence, the money is moving to the banks that have the best
offer. This will also happen in Sweden but it will be difficult to handle
such a system, treasury-wise, planning-wise or financially for a bank. But
theoretically we are moving in that direction.
KK: How do you think the big operators’ mortgage portfolios differ
from each other? Are there differences in credit quality, regional mix,
houses versus flats, other?
KD: I would not be able to comment on the credit quality, but the asset
mix differs among the banks. SBAB, for example, is strong in Stockholm,
Göteborg and the Öresund (Copenhagen/Malmö) region, as well as in
some university cities. In Stockholm, 20-25% of the people on the street
respond that SBAB is first in mind when mortgage lending is mentioned.
The reason we are absent in small cities is because we are a remote
operator without a branch network, and we rely on digital services. That
doesn’t work as well in small cities where people traditionally have
stronger relationships with their local bank.
However, as authorities put stricter and stricter requirements on mortgage
customers, we might be forced to widen our customer base. The recent
threat, to implement a debt-to-disposable-income cap, could impair our
competitive situation, as it would affect our customers the most. People
need to borrow different amounts depending on where they live. In
Stockholm, people are often prepared to use a big share of their disposable
income on accommodation. It would be strange for the authorities to force
them not to do that.
KK: How do you think the mortgage market may change in the
future? Digitising? Consolidation? Regulations? Other drivers?
KD: Something that we’ve been thinking of and that we would like to
offer are products that are linked to mortgages. One fantastic product for
seniors, for example, could be to offer a revolving credit facility based on
the property collateral. Imagine that you have a house with no mortgage or
a very small mortgage and that you, on a monthly basis, could borrow
against your house - just to make life a little bit nicer. But it is not possible
to offer such a product, as the lender needs to have capital enough to cover
the facility even if the customer chooses not to use it. This means that the
product would be very expensive for the bank, and that is a pity.
KK: What do you believe that SBAB will look like in 10 years?
Some effort will be needed for
mortgage lenders to avoid becoming
sub-suppliers to new digital
platforms who have the relationships
with end customers
Nordea Markets
KD: Ten years out is a bit too long to have an opinion on. But say in five
years, then I believe that we will have an even stronger focus on our main
product - mortgages. I also believe we will have started offering ancillary
products; products that are linked to housing. We are moving towards a
future with increased competition and with new players that threaten to
take our customers. We don’t want to develop in a direction where we
become suppliers of infrastructure or commodity-based services. That
would hardly be a high-margin business! Companies that manage to keep
up high profitability are those that manage to have a close customer
relationship and manage to get paid for the service or experience that they
offer. Hence, we believe that our best strategy to stay profitable is to
become the number one player within our niche – mortgages. While the
other banks currently offer the same service, they also have a wide range
of other products. We have a comparative advantage here, as we can put
all our resources into our main product.
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KK: What kind of additional products within housing do you see that
you would be able to offer in the future?
KD: We like to keep it simple. What do people spend most of their time
browsing for on the internet? Most of the time it has something to do with
housing: properties for sale, decoration, renovation, gardening. Hemnet
(housing ads) is one of Sweden’s largest internet sites, and we see a lot of
opportunities there. Data and information is starting to become more and
more available as authorities such as Statistics Sweden, the National Board
of Housing, Building and Planning, the Swedish Tax authorities, etc, are
sharing it with us. Think of what one can do with all of that info! We are
currently working on developing our own site, Booli, further. In the future,
we believe that the match between buyers and sellers in the housing
market will be made automatically. The whole real estate sector will
transform, and the role of the broker will change significantly. Since that
industry is quite close to ours, we certainly want to be a part of that
journey.
Nordea Markets
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Screening: Which companies are exposed?
If you are an equity investor, where among listed Nordic companies will you find exposure to the Nordic
housing markets? We highlight the most obvious exposures among home builders, real estate, general
construction and banking sectors, ranking companies by degree of exposure. Sticking to bigger market cap
companies, those which stand out with significant Nordic housing exposure include Balder,
Lundbergföretagen and Wallenstam in real estate, Danske Bank and Swedbank among banks and JM
among home builders (Bonava is less Nordic). In the mixed 'others' category, Byggmax and Inwido have
highest exposure, while Nobia is no. 3, but in the bigger market cap category.
We see exposure to the Nordic
housing market among listed
companies in the real estate,
construction and banking sectors
Almost everyone has a view on the housing market. There could be as
many interpretations and conclusions from this report as there are readers.
Irrespective of whether one believes the Nordic housing markets face an
imminent crash or that there is still major potential upside before peaking
this time, we find it useful to review the universe of listed Nordic
companies and examine which of them are exposed to the Nordic housing
sector.
Together with Nordea's equity analysts, we identify three categories of
listed Nordic companies with potential exposure to Nordic residential
property:
 Real estate companies: Own and develop real estate, including housing
 Construction companies: Construct buildings, including housing
 Banks: Lend money to home buyers through mortgages
Other companies: Mainly building materials and installation services.
Readers can use this screening as a rough guide to the companies that
would be likely (at least on a general level) clear winners or losers from
any major Nordic housing market surge or correction.
The top ten residential-heavy listed
real estate groups are Swedish and
Norwegian
Nordea Markets
Real estate
We rank the listed Nordic real estate groups according to the share of their
real estate portfolios that is residential. The top ten, in effect the ones with
more than 75% residential portfolios, are all Swedish and Norwegian –
except for Prime Office A/S of Denmark (which is, however, a very small
company in this context). Of the bigger listed real estate groups in terms of
market cap, Bonava stands out with 100% residential exposure, while
Balder, Lundbergföretagen and Wallenstam are all around 50%.
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Nordic listed real estate companies ranked by exposure to residential properties
The high market cap residential
plays are Bonava, Balder,
Lundbergföretagen and Wallenstam
Company
HEBA
D. Carnegie & Co
Victoria Park
Prime Office A/S
Fastighets AB Balder
Lundbergföretagen
Wallenstam AB
TK Development A/S
Fast Ejendom Danmark A/S
Dios Fastigheter AB
FastPartner AB
Jeudan A/S
NP3 Fastigheter
Castellum AB
Fabege AB
Entra ASA
Hufvudstaden AB
Olav Thon Eiendomsselskap ASA
Citycon Oyj
Atrium Ljungberg AB
Sagax AB
Hemfosa Fastigheter AB
Wihlborgs Fastigheter AB
Sponda Oyj
Klovern AB
Pandox AB
Kungsleden AB
Norwegian Property ASA
Catena
Platzer
Technopolis Oyj
Corem
Pioneer Property Group ASA
Storm Real Estate ASA
Market Cap EURm
437
830
666
55
3,840
4,689
2,355
128
31
628
888
1,046
276
3,492
2,593
1,972
3,122
2,069
2,008
1,943
1,698
1,572
1,433
1,382
1,380
1,229
987
635
518
490
482
419
72
10
Country
% Residential
Sweden
Sweden
Sweden
Denmark
Sweden
Sweden
Sweden
Denmark
Denmark
Sweden
Sweden
Denmark
Sweden
Sweden
Sweden
Norway
Sweden
Norway
Finland
Sweden
Sweden
Sweden
Sweden
Finland
Sweden
Sweden
Sweden
Norway
Sweden
Sweden
Finland
Sweden
Norway
Norway
92%
91%
90%
77%
56%
49%
44%
17%
14%
9%
7%
6%
6%
1%
1%
1%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Source: Fastighetsvärlden, Company data and Nordea Markets, Nordea estimates for 2016
Skanska is the only listed
construction group that is not purely
Nordic (with 'only' 42%)
General Construction
For listed Nordic general construction groups, we are not able to find real
transparency of exposure to residential construction within their
contracting businesses. We opt to look at the geographical breakdown of
sales. We rank the companies according to their share of sales in the
Nordics. As a complement, we add their share of group sales in each
Nordic country.
We would not argue that this necessarily offers a great correlation with
how much of each company's construction activity is residential versus
commercial, but it gives some sense of which countries matter greatly for
each company and which national markets are their key markets.
We see clearly from our screening that construction is a local business.
Nearly all of the construction companies have 90% or more of their
business in the Nordic region. Only Skanska has a truly international
business mix, with "only" 42% Nordic sales. Peab is a play on Sweden,
Lehto, Consti and Lemminkainen are plays on Finland, and Veidekke is a
play on Norway, while NCC is more pan-Nordic. There is no real listed
play on Denmark.
Nordea Markets
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27 March 2017
Nordic listed construction companies ranked by Nordic share of sales
Company
NCC AB
Peab AB
Veidekke ASA
Lehto Group Oyj
Consti Group Plc
SRV Yhtiot Oyj
Lemminkainen Oyj
Yit Oyj
Skanska AB
Market Cap EURm
Country
2,458
2,368
1,790
714
119
276
442
834
9,183
% Nordic sales
Sweden
Sweden
Norway
Finland
Finland
Finland
Finland
Finland
Sweden
100%
100%
100%
100%
100%
92%
87%
72%
42%
Of which
Sweden
55%
83%
27%
Norway
14%
11%
67%
9%
9%
25%
12%
Finland
17%
6%
7%
100%
100%
92%
60%
72%
5%
Denmark
14%
9%
Source: Thomson Reuters, Company data and Nordea Markets, Nordea estimates for 2016
Home builders
In this category, we put companies that are classified as either real estate
or construction by the stock exchange and for which we argue the main,
core business is construction of new homes.
Home builders have the cleanest,
most direct exposure to Nordic
housing markets among listed
companies
These companies arguably have the most obvious, direct exposure to any
housing market correction. Almost all are entirely Nordic plays, the only
exception being Bonava, which has 38% of its business in Germany,
Russia and the Baltic countries. JM, Besqab and Oscar Properties have
Swedish exposure, while Selvaag and Solon Eiendom are plays on
Norway.
Nordic listed home builders by Nordic share of sales
Company
Selvaag Bolig ASA
Besqab
Oscar Properties
Solon Eiendom ASA
JM AB
Bonava
Market Cap EURm
Country
421
328
300
132
2,215
1,592
% Nordic sales
Norway
Sweden
Sweden
Norway
Sweden
Sweden
100%
100%
100%
100%
99%
62%
Sweden
Of which
Norway
100%
Finland
Denmark
1%
11%
1%
7%
100%
100%
82%
37%
100%
15%
7%
Source: Thomson Reuters, Company data and Nordea Markets, Nordea estimates for 2016
Other companies with residential construction exposure
In addition to the sectors reviewed above, we see a mixed group of
companies whose businesses depend to a varying, but meaningful degree
on residential construction activity. We group these in the table below,
ranking them according to our estimated share of their revenue derived
from Nordic residential construction.
Other companies with exposure
include mainly building materials
and installation players
To add some depth to this screening, we include a split of the residential
construction between newbuilding and renovation of existing homes.
Other companies' exposure to the Nordic residential construction market
Company
Byggmax
Inwido
Nobia
Ramirent
Cramo
NIBE
Ahlsell
Bravida
Per Aarsleff
Systemair
Lindab
Uponor
Rockwool
Caverion
Market Cap EURm
Country
392
630
1,616
800
950
3,275
2,629
1,269
458
812
611
1,200
3,491
940
Sweden
Sweden
Sweden
Finland
Finland
Sweden
Sweden
Sweden
Denmark
Sweden
Sweden
Finland
Denmark
Finland
% of revenue from Nordic
residential construction
100%
86%
51%
39%
28%
~27%
~25%
15%
15%
~7-13%
~11%
7%
5%
0%
Of which
New homes Renovation
15%
85%
26%
60%
28%
23%
17%
22%
12%
16%
~7%
~20%
~5%
~20%
15%
0%
8%
8%
~2-3%
~5-10%
~6%
~5%
3%
4%
2%
4%
0%
0%
Source: Thomson Reuters and Nordea Markets, Nordea estimates for 2016
Nordea Markets
47
Corporate Research
Highest exposure to Nordic
residential construction for Byggmax
(building materials), Inwido
(windows) and Nobia (kitchens)
27 March 2017
By far most exposed among these companies is Swedish building
materials retailer Byggmax, closely followed by window maker Inwido.
Kitchen maker Nobia has just above 50% exposure. Virtually 100% of its
business is exposed, but half of its revenue comes from outside the Nordic
region.
The same three are at the top regarding exposure to newbuilding as
opposed to renovation, with 15-20% of their revenue linked to
construction of new homes in the Nordic region.
Ramirent, Cramo, NIBE and Ahlsell all have 25-40% exposure to Nordic
residential construction – significant but not dominant. The rest of the
companies in this group have 15% or less exposure.
The most 'mortgage-heavy' major
banks are Danske Bank (66% of
lending) and Swedbank (64%)
SEB stands out among major banks,
with only 24% mortgage lending
Banks
The mix of lending among the listed Nordic banks varies quite
significantly. We rank the banks according to the share of mortgage
lending in their loan books. Not surprisingly, a number of smaller savings
banks show up among those with the greatest exposure.
Of the major Nordic banks, Danske Bank and Swedbank are by far the
most mortgage-heavy in their loan books, with mortgage lending
representing about two-thirds of total lending each. Handelsbanken is not
that far behind at 55%. DNB and Nordea are clearly more mortgage-light,
at around 40% of lending and SEB is seemingly in a category of its own,
with only 24% of lending represented by mortgages.
Listed Nordic banks ranked by mortgage lending share of loan book
Bank
% mortgage lending
Sparebanken Øst
77%
Jyske Bank
70%
Sparebanken Vest
68%
Danske Bank
66%
Sparebanken Nord-Norge
65%
Swedbank
64%
Sparebanken Møre
63%
Sparebanken SR-bank
57%
Sparebanken SMN
56%
Handelsbanken
55%
DNB
44%
Nordea
39%
SEB
24%
Sydbank
23%
SparNord
15%
Ringkjobing Landbobank
15%
Country
Norway
Denmark
Norway
Denmark
Norway
Sweden
Norway
Norway
Norway
Sweden
Norway
Sweden
Sweden
Denmark
Denmark
Denmark
Ranking
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Source: Company data and Nordea Markets, Nordea estimates for 2016
Nordea Markets
48
Corporate Research
27 March 2017
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Nordea Markets
49
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Completion date: 24 March 2017, 10:35 CET
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