The downturn in Sweden's housing market continues to deteriorate.

The Swedish housing market is currently facing significant challenges, marked by decreasing property demand and construction activity, alongside a struggling economy.

In 2023, the national house price index experienced a notable decline of 6.31%, which is more severe compared to the previous year's decrease of 3.73%. This downturn stands in stark contrast to the year-over-year increases observed in 2021 (15.78%), 2020 (10.26%), and 2019 (3.9%), as reported by Statistics Sweden. Notably, 2023 marked the worst performance for the country's housing market since 1993. When adjusted for inflation, house prices plummeted by a significant 11.24% in 2023.

In the fourth quarter of 2023, nationwide house prices experienced a slight decline of 0.97% (-2.02% when adjusted for inflation).

According to the Swedish Bankers’ Association's 2023 Mortgage Market report, the decrease in housing prices since 2022 can be attributed primarily to high inflation and rising mortgage interest rates.

Regionally, the housing market showed the following trends:

- Greater Stockholm: The house price index saw a year-on-year decrease of 6.3% in 2023 (-11.2% when adjusted for inflation), following a decline of 5.3% in 2022. This downturn contrasts with annual increases of 16.3% in 2021 and 11.9% in 2020.

- Greater Göteborg: House prices experienced a more modest decline of 2.3% during 2023 (-7.4% when adjusted for inflation), following a year-on-year fall of 5.1% in 2022. Annual rises of 17.1% in 2021 and 6.2% in 2020 were observed prior to this downturn.

- Greater Malmo: House prices in this region fell by 8.7% during 2023 (-13.5% when adjusted for inflation), which is worse than the prior year's 5.6% drop. This decline contrasts with year-on-year increases of 18.1% in 2021 and 11.6% in 2020.

Property demand is experiencing a significant decline, with nationwide home sales dropping by 18.7% year-on-year to 45,588 units in 2023, marking the lowest level of home sales in recent history, according to Statistics Sweden.

The Swedish housing market is anticipated to remain subdued this year, amidst a weak economy and high interest rates.

Sweden's economy contracted slightly by 0.1% in 2023 compared to the previous year, in contrast to year-on-year expansions of 2.8% in 2022 and 6.1% in 2021. This decline was primarily attributed to a decrease in private consumption and housing construction. High inflation eroded real disposable incomes, constraining private consumption, and increasing the burden of mortgage loans as the central bank tightened monetary policy.

Both the International Monetary Fund (IMF) and the European Commission project a modest growth of 0.2% for the Swedish economy this year.

Regarding local house price variations, all eight Riksområden (National Areas) of Sweden experienced declining house prices in 2023. RIKS4 South Sweden recorded the largest year-on-year price decline of 9.4% (-16.6% when adjusted for inflation). This was followed by RIKS2 Eastern Central Sweden with a 9.2% decrease, RIKS8 Upper Norrland (-8.9%), RIKS5 West Sweden (-8.5%), RIKS6 Northern Central Sweden (-8.4%), and RIKS7 Central Norrland (-8.4%). RIKS3 Småland with the islands and RIKS1 Stockholm production county also saw declines of 6.8% and 6.3%, respectively.

RIKS1 Stockholm production county had the highest-priced housing in Sweden, with an average house price of SEK 6.69 million (EUR 592,288) in 2023, while nationwide house prices averaged SEK 3.59 million (EUR 317,759) last year.

Despite a recent significant decline, Swedish house prices remain alarmingly high, with Stockholm, according to the 2023 UBS Global Real Estate Bubble Index, still considered overvalued despite exiting the bubble territory. This situation stems from a history of falling mortgage rates, which drove up demand for owner-occupied homes, particularly in Stockholm, resulting in a nearly 70% surge in real housing prices between 2008 and 2021. This surge outpaced local incomes, rents, and housing prices in other regions, creating housing market imbalances.

The reliance on variable-rate mortgages compounded the issue, leading to excessive housing valuations. Consequently, affordability became stretched, triggering a correction of over 20% in inflation-adjusted prices between mid-2022 and mid-2023. This correction shifted the market from bubble risk to overvalued territory.

The high level of household indebtedness further exacerbates the situation, with approximately 64% of households in Sweden owning their homes, of which around 81% have a home loan. The increased interest rates have intensified the pressure on indebted households, with many experiencing a significant rise in interest and amortization payments as a percentage of disposable income. This increase has strained household finances, with around one-tenth of households now spending at least 28% of their disposable income on interest and amortization payments.

Despite the recent decline in house prices, which partially alleviated imbalances, Swedish house prices remain overvalued. Over the past two decades, house prices have risen dramatically by about 260% in nominal terms, or 178% when adjusted for inflation, further underscoring the persistent issue of overvaluation in the Swedish housing market.

Sweden underwent a significant house price boom starting in the mid-1990s, driven by factors such as low interest rates, robust economic growth, and a limited supply of new housing. Mortgage interest rates plummeted from over 10% in 1996 to below 5% between 2004 and 2008.

During the period from 1996 to 2007, house prices in major cities like Greater Stockholm, Greater Malmo, and Greater Gothenburg experienced substantial increases, with the Greater Stockholm house price index surging by 217% (equivalent to 119% after adjusting for inflation), while Greater Malmo and Greater Gothenburg saw rises of 236% (185% inflation-adjusted) and 202% (156% inflation-adjusted), respectively.

Although there was a brief pause in the market between 2008 and 2012, house prices resumed their upward trajectory, soaring by 45.1% (40.7% inflation-adjusted) from 2012 to 2017. Following a slight dip in 2018, prices surged again, recording a cumulative increase of 32.6% (25.8% inflation-adjusted) from 2019 to 2021.

However, in the past two years, the housing market experienced a significant slowdown, with house prices falling by 10.6% (-22.8% inflation-adjusted) from 2022 to 2023.

The Swedish government implemented several measures to cool the housing market, starting in June 2016, requiring mortgage loans exceeding 50% of a property's value to be amortized at 1% annually, with higher thresholds set for loans above 70%. Additionally, from March 2018, borrowers with housing debts exceeding 4.5 times their gross income were mandated to amortize at least 1% more than the basic requirement. Moreover, the Swedish Financial Services Authority introduced a 25% mortgage risk weighting to tie up bank capital, discouraging mortgage lending.

Despite these efforts, the impact on the housing market was minimal, with prices rebounding after a slight decline in 2018. In April 2020, amid the COVID-19 pandemic, the Finansinspektionen temporarily exempted households from amortization payments, benefiting around 230,000 households. However, this exemption expired in August 2021.

In 2022, interest rates for housing loans surged following key rate hikes by the central bank to combat inflationary pressures. Consequently, property demand and prices plummeted. In 2023, with inflation persisting and mortgage rates continuing to rise, the Swedish economy slipped into a recession, leading to cautious market sentiment and reduced activity.

Nationwide home sales plummeted by 18.7% year-on-year in 2023, reaching the lowest level in recent history. This decline followed a 7% drop in 2022 and modest increases in preceding years. Notably, Greater Stockholm, Greater Göteborg, and Greater Malmo experienced significant declines in home sales, reflecting the broader trend of reduced demand across the country.

Nationwide, the number of dwelling starts in newly constructed one- to two-dwelling buildings experienced a significant decline of 52.5% year-on-year to 5,971 units in 2023. Similarly, there was a decrease of 53.6% to 20,614 units in multi-dwelling buildings, according to Statistics Sweden.

Conversely, the number of dwelling completions in newly constructed one- to two-dwelling buildings decreased by 11.7% year-on-year to 11,262 units in 2023. However, there was a notable increase of 22.5% to 50,529 units in multi-dwelling buildings.

Breaking down the data by region:

- In Greater Stockholm, dwelling starts in all newly constructed buildings declined by 50% to 6,938 units in 2023, while completions increased by 21.6% to 15,849 units.

- In Greater Göteborg, dwelling starts in newly constructed buildings dropped by 43.9% year-on-year to 4,068 units in 2023, and completions fell by 5.7% to 7,673 units.

- In Greater Malmo, dwelling starts plunged by 63.7% to 1,507 units during 2023, while completions rose by 20.9% to 4,801 units.

- In Sweden excluding metropolitan areas, dwelling starts decreased by 55.7% year-on-year to 14,072 units, but completions increased by 15.9% to 33,468 units.

Sourced from Global Property Guide‍