Ghost of 1990s property crash haunts Sweden

Ghost of 1990s property crash haunts Sweden

Sweden’s Property Crisis: Using Old Playbook to Contain Problems

Sweden is no stranger to property crises. In the 1990s, the country went through a housing collapse, leading to a recession and the rescue of two banks. Now, as Europe faces its own debt crisis, Sweden is preparing to tackle its own set of problems using an old playbook.

It all started in the mid-1980s when Sweden loosened its strict lending limits, resulting in a free-for-all in the property market. Home prices skyrocketed, with the average price for a one-bedroom flat in Stockholm reaching a staggering 4.4 million crowns ($426,800). However, the market has abruptly come to a standstill, causing concern among Swedes.

“The market is almost at a standstill,” says Jens Henriksson, the CEO of Swedbank, one of the country’s largest banks.

The main concern lies with the mid-sized property firms in Sweden, which have accumulated significant debt over the past decade due to historically low interest rates and easy access to money. One notable company at the center of the fallout is SBB, a $13 billion property group that borrowed heavily to acquire public properties such as social housing, government offices, schools, hospitals, and police stations. However, it is now struggling to sustain its operations.

Property is the lynchpin of the Swedish economy, constituting 80% of household debt. As a result, Swedes find themselves heavily indebted, twice as much as Germans or Italians. The situation worsened when the central bank raised borrowing costs, leading to a decline in house prices by approximately one-fifth since their peak in March 2022. This decline reflects the burden of soaring mortgage costs on homeowners.

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However, experts believe that prices have the potential to fall even further. While property values doubled in the five years preceding the 1990s crash, they have since increased five-fold, leaving ample room for a downward correction.

Preparing for Action: Sweden’s Blueprint for Crisis Management

Facing these challenges, Swedish officials are readying themselves for action. Drawing from the country’s experience in the 1990s, when guarantees were issued to salvage confidence, the government is considering intervention to stabilize the property sector if necessary.

Karolina Ekholm, the director general of Sweden’s Debt Office, asserts that Sweden has the financial capability to intervene in case of a firesale of property by distressed companies. With a light debt load, the country can afford to borrow more to secure the stability of the property sector. This might include providing credit guarantees or subsidizing loans.

The lessons learned from the 1990s crisis have also shaped the approach of Swedish banks towards the struggling property companies. Jens Henriksson of Swedbank emphasizes that if problems arise, the banks would take over the collateral, including real estate, and potentially sell it in the market. Swedbank alone holds 1 trillion crowns ($97 billion) in mortgages and loans to tenant owner associations, as well as an additional 240 billion crowns in loans to property management companies.

Other banks, such as Handelsbanken, which has 1.7 trillion crowns ($165 billion) in Swedish residential loans and 300 billion crowns ($29 billion) for commercial property, are equally determined to contain any potential fallout. Carl Cederschiold, the finance chief of Handelsbanken, suggests that a similar strategy can be deployed, as was done in the 1990s, where collateral was amassed and managed as a real estate company before eventually being sold off for profit.

Despite the reassurances from the banking sector, concerns persist regarding the pressure on property firms. However, Masih Yazdi, the chief financial officer of SEB, one of Sweden’s major banks, reassures that they have the necessary collateral and stamina to tackle any challenges. Yazdi emphasizes their commitment to minimizing losses by selling off assets in a favorable market.

Nevertheless, the Swedish property firms continue to experience mounting pressure. Bo Lundgren, Sweden’s minister for fiscal and financial affairs during the early 1990s, attributes this situation to low-interest rates that have created a false sense of stability. He criticizes the central bank for what he considers a grave mistake in allowing the market to reach its current state. Lundgren predicts that despite the challenges faced by property companies, the problem will primarily affect them rather than society as a whole.

The upcoming period will be critical for Sweden’s property sector, as it navigates through potential risks. The country’s experience in crisis management, along with its financial strength and determination to intervene if necessary, provides hope for a controlled resolution. Time will tell if Sweden’s old playbook can effectively contain its current problems and lay the foundation for future stability.

($1 = 10.3092 Swedish crowns)

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