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Sweden's housing problem builds consensus amid deep pre-election divisions

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Sweden's housing problem builds consensus amid deep pre-election divisions

As Sweden prepares to go to the polls Sept. 9 in what is shaping up to be a particularly divisive general election, one issue unites its political parties more than any other: the country's housing shortage.

The rising popularity of the far-right, anti-immigration Sweden Democrats party and its impact on Swedish society may be front and center of most voters' minds, but the longstanding problem of housing shortages in some parts of the country is so widely recognized that its solution is not even up for debate.

"There is consensus in Sweden that we need to increase the apartment production," Henrik Dahlgren, who covers several Swedish property companies as a small caps equity research analyst at Danske Markets, said in an interview. "If you look at, for example, the apartments produced per capita and those kinds of metrics and numbers, we're way below other Nordic countries and have been for several years."

Sweden's National Board of Housing, Building and Planning estimated that construction starts for residential units needed to reach 88,000 per year between 2016 and 2020 in order to meet demand. Homebuilding in Sweden has risen rapidly since 2012 when just over 20,000 units were delivered, with 2017 seeing 64,000 starts on new residential units, up 8% year over year, according to Statistics Sweden.

Preliminary figures for the first six months of 2018 show that construction of about 30,950 dwellings began in the period, a decline of about 10% from the corresponding period of 2017, according to Statistics Sweden. This is the first time since 2012 that the number of units constructed in multi-dwelling buildings fell in the first half of the year, it added.

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The slowdown in homebuilding is largely due to new mortgage lending rules, said Joachim Pelles, national director at JLL. Prompted by concerns over spiraling mortgage debt, in November 2017 the Swedish government permitted the Financial Supervisory Authority to impose tougher mortgage rules on homebuyers borrowing large amounts relative to their annual income. New mortgage borrowers who take on loans more than 4.5 times their gross income must now make larger repayments.

The tighter restrictions on borrowing have caused demand for new condominium-style apartments to plummet, said Pelles. "The new-build sector for the condo market is more or less dead [since the new borrowing rules were implemented]," said Pelles. "Sales have gone down like there's no tomorrow."

The residential sales market's loss has been the residential rental market's gain. "If you can't afford to buy, you still need a place to live, so basically those [unable to afford buying] will move into rentals instead," Pelles said. "Landlords can get really good tenants today if they have a good product. It's a lot better market if [landlords build to] rent, especially the more pricey units."

"The commercial interest in residential properties is higher than ever if you look at the [private-rented sector]," Pelles added. "That means that what is being built today is mostly rentals."

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Among the investors that have been lured by the dynamics of the Swedish residential rental market — which receives subsidies from the government for new developments — are U.S. and European property heavyweights. Blackstone Group LP, which has $119.4 billion of real estate assets under management around the world, has built a controlling stake in Swedish residential landlord D. Carnegie & Co AB (publ), which owns 168 residential properties in the country, according to S&P Global Market Intelligence data. Vonovia SE, Europe's largest listed residential landlord, recently purchased Starwood Capital Group's stake in Sweden's Victoria Park AB (publ). "Sweden has a huge demand for rental apartments with very limited risks for these companies in terms of vacancies," said Danske Markets' Dahlgren.

Part of Sweden's attraction for these companies is the country's rent control system, which allows landlords to raise rents on a residential unit to the market rate for new-builds if they have carried out sufficient renovations, said Pelles. "They've discovered that the Swedish rent control system is kind of good if you find these apartments out in the suburbs where the rent levels aren't that high and where there are buildings that need refurbishment," he said. "Because within the rent control system, you can raise rents quite aggressively if you do renovations of apartments one by one, which is exactly what both Victoria Park and D. Carnegie are doing," he said, adding that it is common for rents on such properties to be increased by about 40% following renovation.

While Sweden's election poses little risk to these companies in terms of policy proposals, the vote is not without its potential to harm the market, Dahlgren said. He noted that the rising popularity of the Sweden Democrats — the party came first in a YouGov poll of voters published Sept. 5 at 24.8% — increases the likelihood that no one party or political bloc is likely to have a clear governing majority. Both the left and right political blocs in Sweden have stated they will refuse to form a coalition government with the Sweden Democrats.

"An uncertain result, if the government will have problems to get a majority in the parliament, could create a turbulent political situation that obviously will impact the overall investment willingness in the Swedish economy," said Dahlgren. "That could be a problem."