Sweden grapples with housing market reform as risks mount

* House prices have surged as interest rates have fallen

* Banks highly exposed to real estate market

* Mortgage lending totals $450 bln

* Government planning reforms to head off crash risks

STOCKHOLM, Dec 18 (Reuters) - When bailiffs came knocking earlier this year, it was the first time Kaddi Bah realised the four-room Stockholm apartment she shared with her sister and another friend was being illegally sub-let.

Now Bah, a 27-year-old hotel receptionist, has been evicted after authorities confiscated the property from the owner as part of a crackdown on black market rentals.

Since late November, she has shared a one-room apartment with a friend. The only other choice would be to move back in with her father and several other relatives who share an apartment, and where she had to sleep on the floor

“It’s very stressful. The room is full of stuff and it’s about as far from my work as you can get. But there’s nothing I can do,” she said.

Bah’s predicament is just one symptom of Sweden’s dysfunctional housing market.

Controls on private sector renting and a shortage of publicly allocated housing -- you can wait 30 years for an apartment in attractive parts of Stockholm -- have nurtured the perfect conditions for a lucrative market in illegal sub-lets where the final tenant must pay way over the odds.

At the same time, a toxic cocktail of negative interest rates and a shortage of housing has seen property prices double over the last 15 years.

Mortgage lending has soared and now accounts for around three-quarters of all lending in Sweden at some $450 billion -- close to the country’s annual GDP. That is fuelling fears that banks are massively exposed should the real estate bubble burst.

Sweden has been here before.

A property crash in the 1990s saw two banks fail and forced a devaluation of the currency. Interest rates briefly hit 500% while unemployment surged amid a deep recession.

“The whole system relies on nothing going wrong, ever, anywhere,” central bank chief Stefan Ingves said in October.


There are new signs of strain.

After a recent building boom, many properties now stand empty. Developers who had sought to cash in on high prices have been forced to offer deep discounts and other incentives -- if they can sell at all.

Tighter credit rules have squeezed out potential borrowers even though near-zero interest rates mean the monthly cost of repaying a mortgage is often less than renting.

“The market has changed from a few years ago,” Linda Leppanen, the head of property development for the North of Stockholm at IKANO Bostad said. “The apartments we are selling now ... on average, prices are down by 20 percent.”

IKANO, owned by the family of IKEA founder Ingvar Kamprad, is offering all the apartments in one of two new buildings in Stockholm for rent after the other block failed to sell out.

Interest has been huge, with around 900 applications for the first 27 rented homes.

Another developer, Einar Mattsson, tempted buyers with an offer of up to 6,000 Swedish crowns ($625) a month of free food delivered to their door and packed away in their fridge by the delivery driver, who sends a video as a receipt.

Some property firms are in trouble.

Financial problems at Oscar Properties, a developer in Stockholm, have seen its shares fall more than 90 percent since the start of 2017. It lost nearly 500 million crowns in 2018, after apartment sales fell by more than half to just 79 units.

In November, the financial watchdog warned that banks are underestimating the risks in the commercial property market and proposed they build bigger financial buffers.


Politicians are beginning to take action. A deal between the Social Democrat and Green coalition government and two smaller centre-right parties has broken decades of inertia.

The government has introduced subsidies for builders and is tweaking capital gains tax for house sellers to encourage more turnover.

The so-called January Agreement between the four parties promises wider changes, not least to a system that barely taxes real estate and offers tax breaks to borrowers with mortgages that can extend for a lifetime.

“All the parties which signed the January Agreement have been clear that we will deliver what the agreement states and that includes an overview of the tax system,” Markets and Housing Minister Per Bolund told Reuters.

Bolund would only say measures would likely be neutral for taxpayers, with hikes in one area offset by cuts in others.

But even with the current broad political consensus, sweeping measures will take time to implement and the financial system will remain vulnerable for years.

Meanwhile, Brexit or the trade war between the United States and China could tip the world into a new economic crisis.

“If we were to be hit by a downturn ... demand falls, unemployment rises, interest rates rise and people have problems paying their debts,” the Riksbank’s Ingves said.

“This is the single biggest risk which exists in the system and the rest of the world knows it.”

($1 = 9.6261 Swedish crowns)

Reporting by Simon Johnson; Editing by Catherine Evans