Ilija Batljan is the founder of a company with a name that is difficult to pronounce: Samhallsbyggnadsbolaget I Norden AB, which from Swedish to Spanish translates as: Social Construction Company, a real estate fund better known under the acronym SBB. Batljan was born in Montenegro and emigrated to Sweden in the 1990s, during the Balkan war. There, in the Scandinavian nation, he graduated in Economics and received a doctorate in Demography and Planning for the care of the elderly. He later embarked on a successful political career under the mantle of the Social Democratic Party. After serving as mayor of a small town in the province of Stockholm, he left everything in 2011 to go to a real estate company, from which he was later fired, but he saw his future in that sector. It was in 2016 when he forged SBB with a big bet: taking over properties for health centers, nursing homes, public schools and even police stations and then renting them to local governments. And it was worth it.
In less than a decade, brick by brick, he built a business with a portfolio valued at 13 billion dollars (about 12.2 billion euros, at current exchange rates). Most of it is social housing and council properties across the Nordic region that he secured thanks to a wave of cheap loans. At the end of 2021, SBB had about 60 million square meters of real estate, equivalent to 20 Empire State Buildings. Today, however, SBB has become the symbol of an industry that has reeled from a sharp increase in mortgage prices (derived from the rise in rates, which has also dragged down the currency), uncontrolled inflation ( which peaked last December at 12.3%, the highest in more than 30 years) and a high level of debt among families. After reaching an all-time high in the second quarter of 2022, home prices began to decline. “They’ve fallen about 12%, which means in real terms they’re down more than 20%, since then,” says Andrew Kenningham, chief economist at Capital Economics.
“There has been a considerable correction,” highlights Daniel Kral, senior economist at Oxford Economics. But it is not the bursting of a bubble. “Although we could see a further decline in the coming months, prices will return to the same level as 2020,” says Jens Magnusson, chief economist at SEB (Skandinaviska Enskilda Banken AB, a financial group in northern Europe). The situation, however, is still worrying due to the level of family debt. Because owning a house in Sweden (with 10.8 million inhabitants) has almost always been much easier than renting it. Mortgage debt represents 83% of total household debt, according to that country’s financial supervisor. Swedes are twice as indebted as Germans or Italians. And real estate represents 18% of bank loans, three times more than in Spain, according to the Organization for Economic Cooperation and Development (OECD).
House prices and debt accelerated after the last financial crisis, as a result of falling interest rates. The price of money remained negative for almost five years—from February 2015 to the end of 2019, today it is at 4%—and encouraged the desire to own a property in a buoyant economy. The average annual growth of Swedish GDP was 1.7% (double that of the EU as a whole) between 2008 and 2021. The Nordic model was admired and its politicians stuck out their chests whenever they could. Deep down, however, something was brewing. “There was a structural imbalance occurring,” says Kral. On the demand side, population growth and ultra-low interest rates were not adequately offset by the availability of real estate. Then, prices began to rise, also boosted by the great returns offered by the buying and selling business. “The Swedish market has gone through a classic boom and bust cycle over the last 15 years. Prices doubled between 2007 and 2022, making it the largest increase among most advanced economies,” says Kenningham.
The picture becomes even more cloudy when looking at the financial commitments between families. On average, household debt is about 195% of disposable income (after taxes). This indicator is a cause for concern, especially when the interest rates on that debt increase. And in a context where the majority of mortgages (between 60% and 70%) have been signed with a variable rate. “The combination of large household debt and variable loans has made Swedish households and the economy more sensitive to monetary policy decisions,” emphasizes the SEB chief economist. “It’s not that I’m particularly concerned that families will not be able to pay their loans, but they could significantly reduce other expenses, which in turn will contribute to the economic slowdown,” he elaborates. According to forecasts, Sweden will be the only economy in Europe to fall into recession at the end of this year.
Domino effect
The weakness of the real estate market is already taking its toll on construction and, together with greater uncertainty and evolution of costs, is causing investment to fall. “In a good year, we see around 75,000 housing starts. This year, we will strive to reach 25,000,” says Magnusson.
Sweden—which has had a regulated rental system since the late 1940s, but where you have to wait, on average, about 9.2 years to access a home under this scheme—knows what a real estate crisis is. In the early 1990s, after eliminating strict limits on obtaining a mortgage, the market crashed, triggering a deep crisis that led to the nationalization of two banks, the rescue of a third (with losses equivalent to 12% of GDP) and a devaluation of the crown. It took the country almost four years to recover from the blow. At that time, Ilija Batljan, the founder of SBB, had just landed on Scandinavian lands and still did not know what his destiny had in store for him three decades later. It is likely that he would never have imagined what he is today or the weight of the million-dollar business he has forged, whose current credit rating has been degraded to the category of “junk bond” and for which he has been forced to abandon the director’s chair. delegate. Of course, to Caesar what belongs to Caesar: Batljan still retains 8.3% of the firm’s shares and almost 32% of his votes on the board of directors.
Follow all the information Economy and Business in Facebook and xor in our weekly newsletter
The Five Day Agenda
The most important economic quotes of the day, with the keys and context to understand their scope.
RECEIVE IT IN YOUR EMAIL
Subscribe to continue reading
Read without limits
_
#exuberant #Swedish #brick #wobbly #great #bubble #brewing