Half-Year Report 2020


Scandinavia was hit by the coronavirus pandemic somewhat later than the rest of Europe. As a result, the crisis only had a minimal impact on the Swedish economy in the first quarter of 2020. Even though the momentum of the GDP did slow down according to the Swedish statistics office SCB, a marginal increase of 0.1% compared with the previous quarter was still achieved. Private consumption, in particular car purchases due to the new motor vehicle taxation system in place since the beginning of the year, and fixed investment decreased. Net exports, on the other hand, were stronger than expected.

The Swedish government opted for a strategy involving minimal restrictions on public life and placing great trust in collective responsible behavior. Despite high infection and mortality rates, trades and services were largely still available. Propensity to buy, however, was affected by the pandemic. The index of consumer confidence compiled by the National Institute of Economic Research (NIER) recorded a fast downward trend and fell in April and May to the same low levels as when the financial crisis hit in the fall of 2008, while again showing a positive trend in June. Accordingly, consumption will develop negatively and hit a low point of -8% in the second quarter of 2020. The activity indicator of the Swedish statistical office shows that economic activity in April has declined by more than 7% year-over-year. Additional company surveys conducted by the NIER regarding the development of sales compared to a normal situation show that the sales in the most affected sectors of production and services in May were about 20% behind the normal value, which is due to a steep decrease in demand for exports on the one hand, and to an interruption of supply chains on the other. All in all, the NIER expects Sweden’s GDP to fall by 9.5% in the second quarter 2020. Economic policy measures to mitigate the slowdown will also be introduced in Sweden. The effects on the labor market should be mitigated by the comprehensive implementation of short-time working schemes. Nevertheless, the SCB reported an unemployment rate of 9.0% for May, which is 2.2 percentage points higher compared with the same month of the previous year. Inflation as measured by the annual change in the consumer price index with a fixed interest rate (CPIF) amounted to -0.4% in April and 0.0% in May. Low energy prices made a huge contribution to the downswing of inflation, particularly since oil prices fell considerably this year. The Riksbank left the interest rate unchanged at 0.0%.

No upswing in economic activity as strong as in the Eurozone is expected in the coming months due to the fact that the Swedish economy was not closed down to the same extent and the sectors most affected by the social distancing recommendations are relatively small. Furthermore, a survey conducted by the Riksbank shows that companies generally expect a slower and more halting recovery, and will in turn also withhold investments. This will mostly affect investments in manufacturing, where the capacity utilization is already as low as at the time of the financial crisis. Private consumption should see a steady recovery, even if the accumulated backlog is counteracted by decreasing household income and increasing unemployment. Exports, which are key for Sweden, are starting to gain steam. However, there is still uncertainty regarding the possibility of a new lockdown affecting regions or producers, which could again disrupt supply chains. Swedish imports have been decreasing since the fall of 2019. The downward trend will continue over the course of 2020 and will also spill over to the service sector.

The Riksbank assumes that this year’s GDP could decrease by 6.9% or, in the event of a second wave of infections, by 9.7%. The NIER concluded that even though the Swedish economy will pick up speed in the third quarter, the particularly steep economic downturn will persist this year and also have a negative impact on the following year. For 2020, the Institute expects a decline of 5.7%, with growth of 3.4% in 2021.

The unemployment rate should linger at around 10% until the end of the year, and only start to slowly sink in the following years. The NIER assumes that the inflation rate could remain clearly under the target level of 2.0% over the next few years. Low government debt in Sweden allows fiscal policy a lot of elbowroom for further supporting measures. The Riksbank has also emphasized that it has not ruled out lowering interest rates. The krona is already relatively weak, and it is difficult to determine how an interest rate reduction would impact the current situation. Therefore, the NIER assumes that the interest rate will remain at 0.0%.

According to the Swedish Association of Public Housing Companies, Sveriges Allmännytta, the Swedish housing market is under considerable pressure. The population has grown significantly in the past few years and is expected to grow by more than 458,000 inhabitants in the period from 2020 to 2025 according to the latest forecast by Boverket – the Swedish National Board of Housing, Building and Planning. In the meantime, new construction has not been able to keep up with this population growth. Much of the country is facing a housing shortage, primarily in its urban areas. Even though the number of municipalities with a balanced housing market is increasing, 212 out of 290 municipalities reported a shortage of homes in Boverket’s residential property market survey for this year. This includes all the municipalities in the greater Stockholm, Gothenburg and Malmö regions. The supply of rental apartments in particular needs to be expanded; there is a shortage of apartments for low-income households as well as housing for people who have a weak position on the housing market for other reasons. The tense situation on the housing market is likely to continue in the future, but the number of municipalities still expecting a shortage of homes three years from now will be lower than it is today. In many municipalities, residential construction activity is hampered by high construction costs. Furthermore, strict lending requirements or difficulties faced by private individuals in being granted loans limit new construction.

According to data supplied by Statistics Sweden, rents in the country rose by an average of 1.9% in 2019, the highest increase seen since 2013. Rents are also expected to continue rising. According to “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (Hyresgästföreningen), this year’s rent negotiations had largely been concluded in June 2020. When the tenants’ associations summarized the negotiations in early spring, the average increase was 1.9%. The increase somewhat slowed in the wake of the coronavirus pandemic. According to Hem & Hyra, the latest agreements are much lower than before the outbreak of the pandemic. The consequences of the coronavirus crisis are still not entirely foreseeable, but markets consider rental apartments to be an asset class carrying a comparably lower risk and according to the assessment of the experts at real estate consultancy firm Svefa, this real estate market segment could be the one to best overcome the coronavirus crisis. Interest in the segment continues to be high. Boverket reports that, before the outbreak of the coronavirus pandemic, home prices on the market for residential property ownership had recovered after falling at the end of 2017. Initially, the upswing continued into the first quarter of the current year. Measured against the Valueguard HOX price index, which reflects the price development of typical condominiums and single-family homes, residential real estate prices dropped considerably in April, the month in which the strongest impact of the coronavirus was felt, but rose again noticeably in May. The HOX price index was up by 5.5% year-over-year in June 2020. Even though the NIER does not expect housing prices to collapse this year, there is still considerable uncertainty regarding their development. Boverket believes that the possible drop in home prices – compared to their highest level – predicted by experts could be mitigated by the solid results of the first quarter of 2020. However, this also depends on the development of the economy as a whole. The experts at Swedbank expect the real estate market to recover later in 2020 and in 2021. Interest rates will remain low and demand for homes high due to a steadily growing population.

The construction industry seems not to have been hit as hard by the pandemic as other sectors of the economy. The answers provided by companies as part of the “Economic Tendency Survey” are indicative of this. Still, construction activity slowed down in the wake of the coronavirus pandemic. According to the NIER, building permits and new housing construction decreased in the first quarter of 2020, and this trend is likely to continue over the course of the year. Housing investments will sink considerably, albeit with a certain time delay. According to a forecast by Boverket, the number of completed construction projects is expected to fall to 53,000 completed apartments in 2020 after peaking at around 58,500 apartments in 2018 and 2019. In 2021, an estimated 47,000 apartments will be completed. This means that construction activity is falling considerably short of the level that is currently required. In its June 2019 housing needs estimate, Boverket calculates that 64,000 apartments would have to be built every year in the period leading up to 2027. Around 75% of demand is attributable to the three urban areas.

According to the independent consultancy company Pangea Property Partners, residential properties worth € 6.7 billion were traded on the Swedish transaction market in the first half of 2020, representing a year-over-year decrease of 14%. In terms of transaction volume, residential properties were the preferred asset class with a share of 38%. Catella reports that the pricing of well-located rental apartments and public properties in the major cities has not been affected by the coronavirus crisis yet. Due to the fact that large amounts of institutional capital are now more or less focusing entirely on these segments, there is a good possibility that prices will be subject to an upward pressure in the future. According to Catella, investors believe that the real estate segments with the best performance in 2020 will be public properties (such as retirement homes, schools and public buildings) as well as residential rental properties.