Hidden factor can contribute to the housing price rally

In April, the Tidö government introduced relaxed amortization rules and raised the mortgage ceiling, with the justification that more young people would have the opportunity to buy their first home. But the effect of the new rules is also that home buyers, especially those with higher wages, can now borrow significantly more than was previously possible.

On the surface, it may appear as small changes: the requirement for an extra percent annual repayment for households with a mortgage over 4.5 times the annual income was scrapped and the loan ceiling was raised from 85 to 90 percent of the home's value. But for individual households, buying a more expensive home offers completely different opportunities.

Stefan Westerberg, private economist at Länsförsäkringar, has calculated how the conditions for various example households have changed.

A couple who earn SEK 55,000 per person per month before tax, and have SEK 800,000 in cash deposits, can borrow SEK 7.2 million under the new rules. Previously, they could borrow a maximum of SEK 4.5 million. This means an increase of almost 60 percent.

- Households can now borrow a lot more money with the same income and savings capital as before. For the housing market, it supports purchases at higher price levels, says Stefan Westerberg.

However, households with lower incomes do not receive the same increase in how much they can borrow. This is mainly due to the banks' remaining-to-live-on calculations, which are based on the income having to be enough for the household's living expenses and also able to cope with an interest rate increase to between 6 and 7 percent. Single people also do not get the same loan opportunities as couples, calculated in kroner and ören.

- In terms of purchasing power, these rules have primarily benefited those with two incomes rather than single households, says Joakim Lusensky, head of communications at Mäklarsamfundet.

Housing prices have risen in the past year. Most of all in central Stockholm, where condominiums have increased in price by just over 9 percent. The average per square meter was just over SEK 124,000 in September – a new record.

How much the more generous credit rules have contributed to the rise is difficult to answer.

- Our assessment is that the new mortgage rules contribute to the price trend. But it must be seen in conjunction with the fact that we had a strong stock market development and general economic optimism among households, says Joakim Lusensky.

Stefan Westerberg points out that there is still uncertainty linked to the global situation, which has likely dampened the price increase.

- But in the long term, I think we will see higher housing prices simply because you can borrow more money. Housing is for many a form of status marker and then there is an attraction to pay more, he says.

But just because it is possible to borrow more money does not necessarily mean that it is a good idea. If the interest rate rises or you lose your job, the highly mortgaged dream home can turn into a nightmare.

- The crises of recent years have hopefully contributed to an understanding that the road ahead is not straight as nails. Then it is good to have margins in your finances. It's about common sense, says Stefan Westerberg.