Author: SC
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1. The Swedish Residential Market
Swedish residential construction, as in other European countries such as Germany, suffered a very strong deceleration in 2022-2023 due to the rise in interest rates. The collapse in building permits was unprecedented when taken from peak to (current) trough, even more severe than during the global financial crisis (Figure 1).
Figure 1: Swedish residential construction permits. Source: Statistics Sweden.
Housing starts peaked in 4Q 2021 at almost 20’000 while completions tend to lag by 8 quarters (Figure 2). We should not exclude further slowdown in demand for building materials, depending on the level of channel inventories. On the optimistic side, while only time will tell, permits seem to be normalising and are anyways at extremely low levels historically. However, population growth has also been slowing, driven by a slowdown in immigration (more below) – this, all-else-equal, would support structurally lower new construction as there are less new households entering the economy.
Figure 2: Swedish residential construction starts and completions. Source: Statistics Sweden.
2. Swedish Residential Real Estate Market
Rental prices in Sweden have pretty much only gone up in the last 50 years (Figure 3), even excluding the highly inflationary period at end of the 1980s which led to the Swedish financial crisis in the 1990s. And they have done sone at a pace faster than inflation, suggesting structural undersupply over the period as a whole.
Figure 3: Rental price and inflation in Sweden since 1969. Source: Statistics Sweden.
The Swedish real estate market was also characterised in 2023 by weak transaction activity. While the decrease was very strong relative to 2021 (less than one third), 2021 was exceptional, compared to pre-covid levels, based on data by CBRE. For the residential (multi-family) sub-sector, the drop in both 2022 and 2023 relative to 2021 levels was even more extreme. The Swedish central bank has started to cut rates earlier than the ECB, and with residential yields rising ca. 1.5% from their 2021 bottom, the residential sector offers a robust spread for investors (based on CBRE estimates for prime yields[1]).
From a housing stock point of view, Sweden has a relatively high proportion of buildings built before the 1970s[2]. According to the most recent available data from the Swedish statistics agency, we can estimate that approximately 59% of existing dwellings have been built between 1931-1980. This could provide support for renovation activity going forward.
3. Swedish Demographics
After solid growth for two decades since 2000, strongly driven by immigration, the Swedish population has been stagnating recently, as net migration is now close to zero. Swedish immigration policy has become stricter[3], potentially affecting immigration levels also going forward, despite government forecasts projecting stable positive net migration[4] – a recent forecast that appears however to be already significantly deviating from reality (which highlights the difficulty of predicting, among other things, demographics).
Figure 4: Sweden population and net migration. Source: Statistics Sweden.
With stagnating population growth and stricter immigration policies, there is a realistic possibility that demand for new housing may be below the pace of the last two decades. A significant and stable reduction in interest rates will be even more important for the Swedish construction sector in the short and medium term.
[1] https://www.cbre.com/insights/figures/sweden-real-estate-market-outlook-2024#:~:text=Sweden%20entered%20the%20third%20quarter,to%20bottom%20out%20in%202024.
[2] https://www.euronews.com/green/2022/12/09/europes-energy-crisis-in-data-which-countries-have-the-best-and-worst-insulated-homes
[3] https://www.government.se/government-policy/swedens-new-migration-policy/; https://www2.deloitte.com/se/sv/pages/tax/articles/immigration-alert-the-swedish-government-proposes-new-stricter-rules-for-labor-immigration.html
[4] https://migrant-integration.ec.europa.eu/country-governance/governance/sweden_en
4. Disclosures and Conflicts of Interest
Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.
Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. They do not represent investment advice and do not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.
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