Secular top in the Swedish housing market? (English, 2017-12-08)

If you follow the Nordic real estate market, you probably know that Sweden’s housing market has been topping out since the summer. Is this a secular top, marking the beginning of a proper bear market, or just a minor correction as the dip in 2011?

Source: Finansiell Stabilitet 2017:2, Riksbanken.

One major difference today compared to the prior price correction is that Sweden is about to lose the presence of a bank that shoulders a quarter of the Swedish mortgage financing. Today, the CEO of Nordea remarked that the bank won’t keep up with growth in Sweden’s mortgage market as the biggest Nordic lender adopts a more cautious approach (Bloomberg). The choice to de-risk follows a suite of adverse events over the last couple of years. Nordea was fined SEK 50 million (ca EUR 5 million) in 2015 by the Swedish FSA, as “Nordea, for a number of years, has had large deficiencies in its efforts to counteract money laundering and terrorism financing. “ (Swedish FSA), subsequent to which Nordea decided to mass recruit controllers to avoid further fines (DI) and a CFO from EY (Nordea). In order to streamline operations and alleviate the regulatory burden, Nordea simplified its group structure by converting non Swedish subsidiaries into branches of the Swedish parent in 2016 (Swedish FSA). This didn’t quite pan out as foreseen; in a fell swoop the size of the balance sheet grew to SEK 6 trillion (2015 figures) and the Swedish government took the consolidation as a pretext for raising the annual fee banks pay into Sweden’s resolution fund above the EU level, justified by the banks’ “big profits” (Bloomberg). 

Facing the all time high valuation of the housing market and stern regulators, the bank decided to leave the Swedish jurisdiction by moving the HQ to Finland (Bloomberg). The decision has to be ratified by two thirds of shareholders by the next shareholders general meeting in March 2018.

Source: Nordea Markets 11-2017

Now, this is where it really gets interesting. Swedish depositors, notably a couple of labor unions, decided to move their deposits from Nordea to the other banks (Aftonbladet). This has been picked up the Swedish Riksbank, who noticed the shortfall in the liquidity coverage ratios. During the press conference 22nd of November, the Riksbank noted that a bank (no name mentioned) had as little as three days worth of SEK in their treasury.

Source: Finansiell Stabilitet 2017:2, Riksbanken.

These are tell-tale signs of severe stress in any financial system, but coupled with the relocation of Nordea, it may be an indication of more to come. The decision of a large bank to leave its country of domicile signals major political uncertainty, and non resident portfolio managers will likely keep a close eye on the financial developments - as well as political - going forward. To top it off, the Swedish finance minister wants to impose a tax on capital to prevent capital flight for the wealthy. The discussion is being framed as being a government reaction to the tax evasion “Paradise papers” (SR), but the timing with respect to restricting capital outflows is noteworthy.