Half-Year Report 2019

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After 2018 finished with strong GDP growth in Sweden, growth slowed to 0.6% in the first quarter of 2019. On the demand side, the picture is a mixed one. According to the National Institute of Economic Research (NIER), domestic demand dipped slightly due to declining investment and a drop in private household consumption. In combination with a weak Swedish krona, this prompted a drop in imports. On the other hand, the depreciation of the krona spurred exports. The slowdown in the first quarter of 2019 is also reflected in the labor market, with employment stagnating at a relatively high level. However, further growth in the potential working-age population, mainly due to immigration, pushed the unemployment rate up slightly, to 6.4%. Despite a relatively strong labor market, both the economic confidence and consumer confidence index have been on a downward trend since the late summer of 2018, with both indices currently below their long-term averages. The inflation rate (CPIF) came to 2.1% in May. With inflation lagging behind the forecast released by the Swedish Riksbank, the Swedish central bank made the decision in April to postpone its planned rate hike until the spring of 2020, leaving the interest rate at the current level of -0.25%. The NIER expects GDP growth to slow further to 0.2% in the second quarter of 2019.

The growth of the Swedish economy in 2019 is likely to lag behind the previous year’s figure of 2.3%, even though the NIER recently revised its forecast upward to GDP growth of 1.9% for 2019. The European Commission forecasts a figure of 1.4%. Future years do not promise a marked increase in growth either: The NIER is predicting economic growth of 1.2% in 2020, with private consumption expected to be the main contributing factor. Growth in the number of jobs remains slow. As the working-age population is continuing to grow at the same time, the unemployment rate is likely to increase slightly. The latest forecasts indicate that foreign trade will show positive development. The depreciation of the Swedish krona means that exports are likely to grow at a faster pace than imports in 2019 and 2020. Government spending will remain on a par with the prior-year level in 2019. Gross fixed asset investment will fall in 2019 in a year-on-year comparison. Investment activity is expected to increase in the years to come. Investments are being hindered by the growing lack of skilled workers coupled with concerns surrounding developments in global trade. The Swedish economy is affected by the same uncertainty factors as Germany and Austria. The NIER expects the rate of inflation (CPIF) to come to 1.8% in 2019, just shy of the 2% target set by the Swedish Riksbank. The NIER predicts that inflation will fall further to 1.7% in 2020.

According to Sveriges Allmännytta (formerly SABO), the Swedish Association of Public Housing Companies, the housing market is under significant pressure. The population has seen strong growth in recent years and is expected to continue expanding. New construction has not been able to keep up with this population growth. Much of Sweden is facing a housing shortage, primarily in its urban areas. According to the residential property market survey by Boverket, the Swedish National Board of Housing, Building and Planning, rental apartments are needed in particular. Residential construction is limited in many municipalities due to high construction costs and the difficulties faced by private individuals in being granted loans. According to data supplied by Statistics Sweden, rents rose by an average of 1.1% in 2018. In 2019, a further increase is predicted. According to “Hem & Hyra,” the member’s magazine published by the Swedish tenants’ association (“Hyresgästföreningen”), this year’s rent negotiations had largely been concluded in May 2019. The average increase came to around 2%, higher than in previous years.

As CBRE reports, the market situation for multifamily residences varies considerably depending on whether they contain rental apartments or condominiums. Whereas international investors are showing increased interest in rent-restricted apartments – the Swedish rental housing market is subject to stringent statutory regulation – the market for condominiums is under pressure. According to CBRE, some developers have a tough year ahead and individual project developments could be turned into rental apartments. The prices on the market for residential property ownership came under pressure in the fall of 2017 but have largely stabilized over the last few quarters as Boverket reports. The Valueguard HOX price index, which reflects the price development of typical condominiums and single-family homes, was up by 1.8% year-on-year in May 2019. Stricter mortgage rules governing real estate financing contributed to a downward price trend in late 2017, which, according to the European Commission, was driven mainly by weakness in the tenant-owned apartment (“Bostadsrätt”) market. This term refers to the cooperative property ownership of apartment buildings common in Sweden. In addition, the increase in the supply of new homes coming on the market is likely to have contributed to the cooling of prices, too, although property service provider Newsec says that these homes are often being built in a market segment that is too expensive. The NIER expects home prices to gradually bounce back from the previous slump. Boverket has identified fears of a slowdown and the high level of supply as the biggest price risks.

The NIER reports that, after the drop in house prices, housing investment was down last year after a prolonged phase of rapid growth. The number of housing starts has declined considerably. According to SEB (“Skandinaviska Enskilda Banken”), the drop is primarily focused in the segment of tenant-owned apartments, whereas the construction of apartments for rent and single-family homes is much more stable. Boverket predicts that the number of housing starts will drop from almost 68,000 in 2017 to 49,000 in 2019. This means that construction activity would fall considerably short of the level that is actually required. In its June 2018 forecast, Boverket calculated that 93,000 apartments would have to be built every year in the period leading up to 2020.

According to Savills, the real estate investment market made an impressive start to the first quarter of 2019. The investment volume came to SEK 42 billion, 54% more than in the prior-year period and the largest volume ever witnessed for a first quarter. It was also a strong first quarter for residential real estate, with an investment volume of SEK 10 billion. There is keen investor interest in both new builds and old stock. Savills expects the volume to remain at a consistently high level in this sector in 2019.