Corporate Research - Nordea Markets · Nordea Markets. Corporate Research Equity Research 27 March 2017 Nordic housing bubble? Nordic house prices are high, but for good reason In

Corporate Research 27 March 2017

Contents

Nordic housing bubble? 1

The Nordic housing markets: An introduction 2

Interview: The benefits of lower house prices 6

Supply and demand: Buildings and people 11

Interest rates: The game changer 15

Interview: It is not all about interest rates 18

Central Stockholm's hot real estate market 23

Mortgage regulations: Sweden leads the way 24

Tax rules: Mortgage interest subsidy phase-out 28

Price differences: By country, region and type 33

Accommodation costs: High prices affordable 36

Interview: Big correction unlikely without shock 40

Screening: Which companies are exposed? 45

Disclaimer and legal disclosures 50

Nordea Markets

Corporate ResearchEquity Research 27 March 2017

Nordic housing bubble?

Nordic house prices are high, but for good reasonIn the past ten years, national average house prices have risen 71% in Norway, 59% in Sweden, 17% in Finland, and 3% in Denmark. Prices in Finland have been moderated by the country's weak domestic economy, while Denmark suffered a home-grown housing market correction in 2007, from which it has now almost recovered. Price increases have accelerated in the past few years, undoubtedly fuelled by ultra-low interest rates. There are powerful drivers behind the buoyant Nordic housing markets. Population growth, further boosted by migration, supports demand, which has also increased owing to many years of limited newbuilding. The most potent driver, however, has been the combination of growing disposable income for households and record-low mortgage interest costs. General living expenses have grown more slowly than incomes, while interest costs have actually fallen, giving households more room than ever to afford expensive homes.

Should we fear the worst?A rise in interest rates would not necessarily be a problem, if rates rise because of a growing economy. The real bear scenario for housing markets would be a rather sudden, sharp interest rate spike caused by an unexpected major event. Shaken consumer confidence and higher rates could also push down house prices and raise accommodation costs, hitting private consumption and economic growth.

Who might be affected?We screen listed Nordic companies in the real estate, construction and banking sectors for exposure to Nordic housing markets. Sticking to bigger market cap companies, the most exposed are Balder, Lundbergföretagen and Wallenstam in real estate, JM among home builders (Bonava is less Nordic), and Nobia in the 'others' category (Byggmax and Inwido have greater exposure but are both small). Among the major banks, Danske Bank and Swedbank are the most exposed, with ~65% of their lending in mortgages, while SEB has the lowest exposure at 24%.

Views from the experts: The homebuilder, the mortgage lender and the economistWe interview Johan Skoglund, CEO of leading homebuilder JM, Klas Danielsson, CEO of mortgage lender SBAB, and Nordea macroeconomist Andreas Wallström and ask for their views on whether or not we have a potential Nordic housing bubble.

Nordic house prices 1970-2016, indexed to 1970 = 100

0

500

1,000

1,500

2,000

2,500

3,000

19

70

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Sweden

Denmark

Norway

Finland

Source: OECD and Nordea Markets

MarketsIMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT


The Nordic housing markets: An introduction

In this report, we look into the nature and state of the Nordic housing markets, along with the listed

companies in the Nordic countries with direct exposure to them. We start by reviewing where these

markets are today, in a historical context and compared with each other.

A topic of interest for everyoneA universal interest: Homeowners care about property values; tenants care about rent levels

Few economic topics are of such universal interest as the housing market. It affects us all. We all need somewhere to live and this carries a cost, whether we own our home and pay interest on our mortgage or whether we are tenants and pay rent to a landlord. Those of us who own our homes have exposure to – and hence great interest in – its value. Tenants are interested in where rental rates may be heading next, which is of course related to property prices.

Buildings cannot be moved, so housing markets are inherently local

Like any market, the housing market is ultimately driven by the balance between supply and demand, but both can be heavily influenced by cyclical as well as structural factors. One specific feature of the housing market is that it is local. Houses and apartments cannot be moved. They are stationary. And it takes time to construct new buildings, so local supply shortages or surpluses can be reflected very strongly in house and flat prices and rents. Similarly, it can take a long time for demand to catch up with an accumulated excess supply of local housing.

The housing market is affected by the economy, but more directly driven by factors such as funding costs, regulations, tax rules and households' disposable incomes

We are all affected by the economy, consumers, companies and industries alike. Some are affected more, others less. The housing market is also influenced by the economy, although it is not necessarily always strongly correlated with traditional macroeconomic metrics such as GDP growth, industrial production or private consumption. Very generally, housing demand depends on the size of the population needing accommodation in relation to available supply, city by city, region by region, and country by country. On top of this, there are influences from funding cost levels (mortgage interest rates), regulations (for example, of rent levels, building permits, mortgage loan-to-value caps and mortgage amortisation), tax rules and households' disposable incomes.

Nordic house prices, indexed to 1970 = 100

0

500

1,000

1,500

2,000

2,500

3,000

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

Sweden

Denmark

Norway

Finland

Source: OECD and Nordea Markets

Nordic residential property prices have risen 15-25x in 45 years

So, where are Nordic house prices today from a longer historical perspective? Since 1970, national average house prices have risen 20-25x in Sweden and Norway, and 15x in Finland and Denmark. These numbers look dramatic, but must be seen in the context of a starting point with far higher inflation and interest rates 45 years ago.

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Prospectuses from apartment viewings in Central Stockholm The highest priced apartments in Stockholm on website "Hemnet"

Source: Hemnet

The last big housing boom in the 1980s was the most extreme in Finland and Sweden, less so in Denmark and Norway

The paths to today's house prices have been different in the various countries. In the last real estate boom in the Nordic region in the late 1980s, the housing market in Finland reached greater highs than its Nordic neighbours. Sweden came in second, with a less extreme housing boom than Finland, while Denmark and Norway had more moderate housing market peaks.

The bubble built on deregulation-driven loose credit, beneficial tax rules and pent-up demand burst when defending the ERM led to interest rate spikes in the early 1990s

Back then, the Nordic housing markets were certainly helped by pent-up housing demand from limited newbuilding in prior years. But markets were also greatly pushed by credit market deregulation and favourable tax rules, which resulted in a severe hangover when central banks started to raise policy rates to fight inflation in the early 1990s. In the case of Finland, Sweden and Norway, this led to interest rate spikes when these countries tried to defend their respective unilateral exchange rate pegs to the Euro's predecessor, the European Currency Unit (ECU), in late 1992. Denmark maintained its peg, but joined the other European Exchange Rate Mechanism (ERM) members in letting the band around the peg widen in 1993.

So, the last really major housing slump in the Nordic countries was around 25 years ago. It hit Finland and Sweden hard, left Denmark and Norway much less shaken and was exacerbated by an interest rate shock when the ERM came under attack.

The post-IT boom equity market collapse of 2000-02 and the global financial crisis of 2008-09 had very limited impact on Nordic housing markets

Since then, the bursting of the IT bubble when equity markets plunged in 2000-02 did not have much impact on the Nordic housing markets. The global financial crisis of 2008-09 did take its toll, albeit much less so than during the home-grown crisis of the early 1990s. The greatest victims were the opposite of those who suffered most in the early 1990s crisis: Denmark and Norway experienced substantial declines in residential property prices, while Sweden and Finland suffered no more than a blip.

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These differences in housing market performance have persisted. Denmark has not quite bounced back to pre-crisis house price levels and Finland is slightly above, while Sweden and Norway have soared 50-60% above previous price peaks. It is important to remember that these numbers are national averages and that house price trends vary among cities and regions.

The Nordic housing markets are national, with major differences between the four countries

Once again we emphasise that there is no single Nordic housing market. There are four different national markets, each impacted by local tax rules, regulations, demographics and the local economy. Just as the four Nordic economies are quite different, the Danish, Finnish, Norwegian and Swedish residential property markets can each live a life of their own, from time to time quite independently of each other.

Before examining the various key drivers for the Nordic housing markets – and where they stand today – in the following sections of this report, we take a look at how residential accommodation differs between the Nordic countries.

Forms of housing in the Nordic countries

50%

71%80%

64%

44%

29%4% 36%

6%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Denmark Finland Norway Sweden

Other

Rental housing

Owner occupied housing

Source: The Nordic Council of Ministers and Nordea Markets

Nordic home ownership is greatest in Norway at ~80%, and lowest in Denmark at ~50%

In terms of home ownership, Norway stands out, as 80% of dwellings there are owned. This figure includes properties being rented out by their owners, but they are owned by individuals or by entities controlled by individuals. The share of rental housing in Norway is very small, far below the other Nordic countries. In both Finland and Sweden, about one-third of homes are rented and two-thirds owned by the occupants. Denmark is split roughly 50/50 between owned and rented properties.

Most Norwegian landlords are private individuals or entities controlled by them

Norway also stands out in having a very small corporate or institutional rental sector in housing. Most landlords are private individuals or entities controlled by them, while the other Nordic countries have a greater prevalence of corporate, municipal or other public housing landlords.

In Denmark and Norway, apartments are directly owned by occupants; in Finland and Sweden they are owned indirectly through co-ops or associations

There are also things to note about the nature of home ownership in the Nordic region. Direct ownership of houses and apartments exists in all four Nordic countries, but is miniscule for apartments in Finland and Sweden. While Danes and Norwegians directly own the apartments they live in, Finns and Swedes own them indirectly, through housing co-operatives or associations. The tenants possess the right to occupy their apartment, while the association owns the building (and owns or leases the land it stands on). Tenants pay their funding costs on any mortgages they have for the apartment, and in addition they pay a monthly fee to the association, which covers maintenance and running costs, property taxes and any other applicable costs for the building.

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In the following sections, we review the key drivers for the Nordic housing markets

Now that we have reviewed where Nordic house prices in general are at from a historical context, the nature of Nordic home ownership and the differences between the Nordic countries in these respects, we consider where the Nordic housing markets could go from here. We will also explore the key drivers for these markets:

Supply and demand for housingMortgage interest ratesMortgage regulationTax rules: deductibility for mortgage interest costs, and capital gains taxationHousing price differences between apartments/houses/regionsAccommodation costs (interest costs versus disposable incomes)

We will discuss each of these items in detail.

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Interview: The benefits of lower house prices

We interview Andreas Wallström, Chief Analyst at Nordea Markets Sweden, on the current state of Nordic

housing markets, how they have reached their current highs and whether there is a risk of a market

correction, what could trigger it, and how it would affect economies. Nordea Macro Research expects

stagnating house prices across the Nordic countries in 2017-18, but a moderate year-on-year rise in 2017

for Norway as prices settle at high levels.

The most important drivers behind high house prices are low interest rates and rising household incomes

KK: In October 2015, you wrote a much-noted report about accommodation costs in Sweden being at record lows, despite record-high house prices. Since then, house prices have risen further to new all-time highs. What are the main reasons for the 20-year house price rally in Sweden? Is it all about low interest rates?

AW: I would say that the most important factor absolutely is accommodation costs, which have fallen significantly since the financial crisis due to lower interest rates. But we have also had strong economic growth over the past 20 years, which has made household incomes rise.

KK: You often hear experts argue that the low level of housing construction in Sweden over the past 20-25 years is an important explanation for the price increases. Do you agree?

AW: That was an argument you often heard until a couple of years ago. Since then, housing investments have soared. High population growth in combination with low construction will increase prices. Those are basics of demand and supply. But I would also argue that it's quite difficult to estimate the demand for houses based on population growth. Take immigration growth as an example – it has boosted Swedish population growth, but is unlikely to affect house prices much in the coming years.

KK: If you compare Sweden's housing market to its neighbouring countries, the Norwegian housing market seems to be the most similar to the Swedish market, at least if you look at the house price development over the past few years. Why is that?

AW: Norway is similar to Sweden in some aspects. First, it has had declining interest rates, just as in many other countries. Second, it has had good economic growth, just like Sweden. And lastly, it has had high population growth over the past few years. But, unlike Sweden, there is a much more significant buy-to-let market in Norway. In Sweden, that phenomenon is still very unusual. The speculation-driven market in Norway has pushed house prices in a way that we have not seen in Sweden. That is also one of the main reasons we've been quite confident in saying that we don't have a housing bubble in Sweden.

KK: During the financial crisis in 2009, Denmark's housing market was hit hard, while the housing markets in the other Nordic countries were barely affected at all. What was the reason for the price fall in Denmark, and why didn't we see similar price drops in the other Nordic countries?

AW: The price decline in Denmark actually started a couple of years before the financial crisis. Therefore, I wouldn't say that the real estate housing markets were affected that strongly by the financial crisis – the correction was already underway. Prices started to drop in 2006-07 and the decline persisted for two to three years, reaching a total plunge of around 20%. Reasons included too loose credit policies and a soaring buy-to-let

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market. It was common to buy a second or third apartment to take an even larger bet on the housing market, just as we've seen in Norway. This ran out of steam when interest rates started rising before the financial crisis, and turned into a deep plunge during and after the crisis.

KK: Were there also tax reasons behind the buy-to-let market in Denmark?

AW: I believe there were. Interest-only (IO) loans, with no amortisation of debt, which were introduced in 2003, had also become very popular. All of these factors spurred optimism that eventually reversed and, when it did, the price fall was dramatic.

KK: If you look at total debt in relation to disposable income, the Danes have high leverage compared with their Nordic neighbours and internationally. Why?

AW: When you look at leverage in relation to disposable income, you have to take the national welfare system into account, particularly pension benefits. One factor that all Nordic countries have in common is a generous pension system. International studies have shown that inhabitants in countries with generous pension systems tend to be more leveraged compared with people in countries with less generous pension systems. That is fully rational, as households that will have a fair compensation rate at retirement don't need to hurry to pay off their debt.

KK: Finland appears to be the Nordic country where price increases have been most modest and owners there seem to be the most keen to repay their loans. Why is that?

AW: Could it have anything to do with typical Finnish national character? Joking aside, I would say that it is the other Nordic countries and the Anglo-Saxon countries that stand out. The Finnish approach to amortisation is much more similar to the continental European attitude, where the preference for amortisation is high. Annuity loans are also very common in Finland. Some years ago, there were discussions about introducing annuity loans in Sweden, but it never happened. Macroeconomists don't usually like annuity loans as they encourage people to amortise more in a low interest-environment, which is typically during a recession. That is not rational from a macroeconomic perspective. In a recession, you should encourage households to consume; not the opposite.

The Finnish preference for annuity loans may have to do with the fact that they generally do not care much about stabilisation policy. I've seen several examples of this. I was working at the Swedish Ministry of Finance in 2003 when the Swedish referendum on EMU membership took place. To hear about the Finnish experience with membership, we went to Finland. In Sweden at that point in time, we were quite conscious about the negative impact that membership would have on our ability to conduct fiscal stabilisation policy. The Finns, on the other hand, didn't worry much about that; they didn't actually understand the Swedes' obsession with stabilisation policy. For them, structural fiscal policy was much more important. And if we look at Finland today, after they've been struggling with poor and even negative economic growth for several years, they don't blame the Euro for the current situation.

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Any housing market corrections could have benefits: helping first-time buyers to get on the property ladder, and fuel urbanisation (make people able to afford taking jobs in big cities, and move there)

Unlikely that a very large number of households would struggle to service their mortgages if there were an interest rate spike – Nordic banks require mortgage borrowers to be able to cope with much higher rates

KK: In Finland, Norway and Denmark, measures have been introduced to reduce tax deductions on mortgage interest costs. Finland has been the most aggressive. Why has nothing happened in Sweden yet, and why does it seem so politically sensitive?

AW: I actually don't think that it's so politically sensitive. Politicians have spoken about it for many years, but it's difficult to reach an agreement. Especially now in a situation with a hung parliament, and a general election in 2018. A consensus reform backed by both main political blocs would be preferable, but has so far not proven possible.

When the Swedish FSA and the Swedish central bank criticise politicians for not acting on the issue, they tend to look at mortgage interest tax deductions as an isolated measure. If you do that, it's easy to argue that it's a factor that drives household debt and housing prices. But politicians look at it as a bigger issue – they look at the entire tax system. Then it immediately becomes a more complicated matter, as different parties have different views on how and if households should be compensated for removed mortgage interest tax deduction by other forms of tax relief, such as reduced income tax. Many argue that we need new tax reform in Sweden. If it happens, tax deductions would surely be a part of it.

KK: What would happen to the Swedish economy if there were a sudden drop in house prices? How well prepared are households?

AW: If you take a look at the "big picture", households' balance sheets are very strong. Hence, it's very difficult to see any truly threatening system risk. A big price fall could of course affect household consumption negatively, but we would likely have the same impact if there was a sudden rise in interest rates.

I would actually like to highlight the potential benefits of a house price fall, which are rarely discussed. There are many groups that would benefit from a price fall, such as young people and immigrants struggling to get on the property ladder at current price levels. Even people who already own an apartment but want to buy a bigger one, would gain from a price fall.

Another positive effect from a price fall would be increased urbanisation. Today, many people are forced to say no to job offers in Stockholm as it is just too expensive or difficult to get an apartment, especially for people who are working in the public sector on lower wages. This is actually something that hampers economic growth in Stockholm.

KK: But if we had a major fall in house prices, would many households be left with negative equity in their homes? And how might that affect society and the economy?

AW: There are surely some households that are highly leveraged that would face severe problems if there was a significant price drop. But it's difficult to see that there would be any major negative macro effect from such a price fall. I believe that the number of these households is quite small. It is important to remember that the Swedish banks have pretty tough lending policies; Nordea requires Swedish mortgage customers to be able to cope with an interest rate of 8%. Also, if we look back to the last real estate crisis in Sweden, 25 years ago, the banks didn't suffer credit losses on residential mortgages. The losses came from commercial real estate lending. At that time, Sweden also had a lot of home-grown problems, such as poor public finances and high unemployment. The current situation is much better, which means that there is more room for political stimuli to soften the impact from any new crisis.

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KK: What do you think could trigger a house price fall in Sweden and how likely is such a scenario?

AW: Again, I believe that the interest rate level is the most important factor. The obvious threat would be a nominal, sudden interest rate shock; not a gradual increased level due to higher economic growth. But an interest rate shock that is globally driven – meaning that the effect on households would only be higher interest costs – would most likely have a negative impact on the housing market. Interest rate levels are very low today, so a doubling from 2% to 4% would not be a large increase in absolute costs, but as a change factor affecting consumption, it would still mean an interest cost increase of 100% for households. There could also be a series or combination of negative events that could cause a price fall, such as an international rise in interest rates combined with tighter domestic fiscal policies and a stock market crash.

But I don't believe that a recession would affect the housing market that strongly. It would likely be met by looser monetary policy from the central bank, and lower mortgage rates. We saw a recent example of this during the latest financial crisis in 2008 when the reaction in the Swedish housing market was very modest – and that was a huge global recession.

KK: Could a major stock market fall affect the housing market?

AW: No, there are many examples of how little stock market falls actually seem to influence the Swedish housing market. We had a stock market plunge quite recently, in 2015, which hardly had any effect on the housing market. If we look further back in time, to the stock market crash in 2000, the fall was 60-70% over a three-year period but we didn't see much effect on the housing market.

KK: Is there larger risk of a house price fall in Norway compared with Sweden, given that house investments have been much higher in Norway over the past few years? Also, the Norwegian market seems to be more speculative compared with Sweden. Is it really so?

AW: Our view in Nordea Macro Research is that there is no bubble in Norway either. We expect Norwegian house prices to rise somewhat further from current levels, leading to perhaps a 10% year-on-year increase in 2017. In Sweden, we believe prices will stabilise and possibly even show a slightly positive trend. The upside we still see in Norway is despite the new measures implemented by the Norwegian government, including constraints when buying a secondary flat (not your main residence) in Oslo for which you will need to have at least 40% equity instead of the previous 15% requirement. Also, the Norwegian central bank takes the housing market into account when it sets its policy rates, and it considers house prices an important factor when it comes to financial stability.

KK: It sounds as if the central banks have quite different approaches in Sweden and Norway. The Swedish central bank currently doesn't consider the housing market at all when setting its policy rates?

AW: Yes, the Swedish central bank has plenty of opinions on what politicians and authorities should and should not do. But even without formal responsibility for the Swedish housing market, the central bank seems to have no wish to shoulder any form of responsibility for it either. I think that you could criticise the Riksbank for that. As we currently have a hung parliament in Sweden, where pushing through housing market or household leverage regulation reforms is difficult, I would have been happy to see the Riksbank adapt its monetary policy somewhat to the current situation. Whatever the central bank's opinion on the political

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agenda – or absence thereof – in parliament, the voters have put the members of parliament there to represent their interests. The Riksbank needs to abide by, and respond to, whatever that agenda is, however indecisive it may be.

Nordea Macro Research expects house prices to rise up to another 10% in Norway, stagnate near current levels in Denmark, Finland and Sweden in 2017

KK: You have already mentioned Sweden and Norway, but how do you see the general outlook for Nordic housing markets in the future?

AW: As mentioned, our view in Nordea Macro Research is that house prices will stabilise near current levels in Sweden. We also believe that further price increases are more likely than price falls, but at moderate levels. Our forecast horizon extends to next year. In Norway, we believe house prices will rise slightly from high levels, ending up to 10% higher than in 2016. In Finland and Denmark, we believe that prices will stabilise as well. There could be some modest price increases of perhaps 1-2%. Hence, the overall picture is price stagnation in all Nordic countries except Norway, where we expect further upside for this year.

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Supply and demand: Buildings and people

In the long run, the housing market is greatly impacted by supply in the form of new housing starts, and

demand in the form of population growth. Housing starts tend to be volatile and move in long cycles.

Denmark is at depressed levels and Sweden has only recently started to surge towards historical peak

levels, while Finland has been more stable and Norway is back at its peak. Population growth has been a

big boost in Norway and a boost in Sweden, but has not contributed to any great extent in Denmark and

Finland.

Buildings cannot be moved, so local demand and supply is what matters

Any market is ultimately driven by the balance between supply and demand, and housing is no exception. In the case of housing, measuring demand and supply is a little trickier than for, say, a standardised global product such as crude oil or an iPhone. As buildings cannot be moved, their value and their price are determined by local demand and supply, and impacted by local rules, regulations and taxes.

Co-author Kristina Kruse's estate agent

Source: Nordea Markets

Kristina Kruse from Nordea Corporate Research with her estate agent Olivia Raaé

Kristina Kruse (left) discussing her upcoming apartment sale with Estate Agent Olivia Raaé at Fastighetsbyrån, Södermalm, Central Stockholm.


Long-term general link between population growth and housing demand

Over time, housing demand is linked to population growth. Everyone needs a home. The more of us there are, the more homes are needed. This is a simplified, general observation, though. Strong demand can lead to flats or houses becoming home to more people (children waiting longer before moving away from their parents, families taking in lodgers, etc), increasing the utilisation of the existing local housing stock. Also, national population growth is typically net of strong growth in the cities and declining populations in many rural areas.

Nonetheless, population growth is a useful gauge of long-term housing demand trends. What does it look like in the Nordics?

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Nordic population growth, indexed to 2000 = 100

100

105

110

115

120

2000 2002 2004 2006 2008 2010 2012 2014 2016

Denmark

Finland

Sweden

Norway

Source: Eurostat

Population growth has been by far the greatest in Norway, followed by Sweden, but sluggish in Denmark and Finland

Looking at population growth in 2000-16, we see Norway in a league of its own among the Nordic countries with more than 16%. This was nearly three times the sluggish growth in Denmark and Finland. Sweden's population grew by just over 11%, twice as fast as Denmark and Finland, but not quite as fast as in Norway.

Norwegian population growth, number of people, split into organic and migration

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Popula on Growth Net migra on Excess of births

Source: Statistics Norway

Two-thirds of Norwegian population growth stems from immigration

As Norway stands out so much, we argue it deserves a closer look. What has driven such fast population growth? The answer is simple: immigration. Of Norway's 16% population growth in the past 15 years, two-thirds has come from net immigration. Without this, Norwegian population growth would have been a mere 6%.

Population growth not perfectly correlated with housing demand

While there is no doubt that population growth matters greatly for housing demand in the long term, it is important to note that the correlation is far from perfect. Urbanisation distorts the picture given by national population statistics and drives excess demand in the major cities. The contribution from immigration is also neither linear nor direct. Work migrants can affect housing demand more or less like organic population growth, but refugees might spend significant periods of time in temporary accommodation and might not have the spending power to contribute to demand for average or typical housing once granted residency.

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New housing starts, Nordic countries, 1975-2016

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

Sweden Denmark Norway Finland

Source: National statistics bureaux in each country

Nordic new housing starts move in long cycles and have been volatile

As we can see in the chart above, housing supply tends to move in long cycles. A strong market with plenty of pent-up demand can trigger major housing investments. Project cycles are long, especially when considering building permit processes in addition to the actual construction phase. There have been historical upcycles ending with project completions adding significantly to the housing stock just as demand starts declining, creating excess supply.

For Finland and Norway, we have only been able to get hold of housing starts data going back to the early 1990s, while the Danish and Swedish data stretches back to the mid- to late 1970s.

Finnish new housing starts have been most stable, Norway back at peak

We note that Finland stands out among the countries as having a more stable level of housing starts over time. There are fluctuations but not of a "boom/bust" nature over the past 25 years. Norway has seen housing supply grow more continuously, although with a big drop in growth during the financial crisis. But Norwegian housing starts do not stand out in terms of their rate of growth in relation to Norway's population growth, which has been by far the greatest among the Nordics in the past 15 years.

Danish new housing starts remain at depressed levels

Housing starts in Denmark saw a major spike before the global financial crisis but fell sharply when the crisis broke, and to this day remain at depressed levels in a historical comparison. Danish new housing starts have stayed around mid-1990s trough levels for almost ten years.

Swedish new housing starts saw a mega-boom in 1965-75, but since then have remained subdued for 35 years, apart from a couple of spikes...

Sweden leads the pack with regards to volatility in new housing starts. We already know that the Swedish government-driven "Million Programme", which aimed to build new homes for a million people, pushed housing starts to around 100,000 per annum during 1965-75. Upon its completion, the oil crisis and a weak economy wiped out two-thirds of new housing starts, until deregulation of bank lending led to a new spike in home building in the late 1980s. This boom was crushed by soaring interest rates and collapsing public finances in the home-made Swedish financial crisis, which culminated in 1992 with the failed defence of the fixed Swedish krona exchange rate against the European Currency Unit (ECU). The temporary 500% central bank repo rate triggered a credit crunch and a near-collapse of the Swedish banking system, which pulled the economy into a deep recession.

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...only really surging to peak(ish) levels in the past few years

Swedish housing starts saw a very slow and gradual recovery, and had not yet even reached the late 1980s peak when the global financial crisis struck in 2008, triggering a drop back to near rock-bottom housing start levels again in the following years. It is only in the last few years that Swedish new housing starts have surged, and are again on the way towards perhaps reaching the late 1980s peak levels again.

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Interest rates: The game changer

Nordic mortgage interest rates have fallen from at above 20% at one point in the early 1990s to below 5%

for most of the past 15 years, and down to below 3% for the past five years. While we have become used

to these low interest rates, we argue that ultra-low rates are not essential to homeowners' financial survival.

Mortgage lending standards are based on the ability to cope with higher rates, and Nordic banks have not

suffered significant credit losses on mortgages historically.

Ultra-low interest rates are the new normSaying that interest rates – specifically mortgage interest rates – are critical to housing markets is to state the obvious. No one can know for certain where interest rates will be in the future, and we do not attempt to do so in this report. Instead, we hope to offer some perspective on how interest rates might affect housing markets and mortgage lenders in the future.

Mortgage interest rates are based on the lender's funding cost, plus a risk premium for the borrower's credit profile, including collateral

What interest rates do homebuyers need to pay when financing their home purchases? Mortgage interest rates are set based on an underlying risk-free rate, set by the central bank responsible for the currency in which the mortgage is denominated, a risk premium reflecting the mortgage lender's credit worthiness (banks typically pay higher interest rates on their funding than a sovereign government does), and a mortgage spread. The last component is set in the competition between banks, and reflects what is judged to be necessary to get paid in extra interest for lending to a household (which typically pays a higher interest on its funding than a bank does), with the purchased property as collateral for the mortgage loan.

This is illustrated in the two graphs below. We show Nordic three-month risk-free interest rates and Nordic three-month mortgage interest rates side by side. Here we see that short-term mortgage interest rates are 100-200 basis points higher than the corresponding risk-free interest rate.

Nordic three-month money market interest rates, 2002-18E

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Sweden Norway Denmark Finland

Source: Eurostat

Nordic three-month mortgage interest rates, 2000-16

0

1

2

3

4

5

6

7

8

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Sweden Norway Denmark Finland

Source: ECB and Macrobond

It is striking how interest rates have plunged for so many years. To give an even better perspective, we show Swedish three-month variable mortgage interest rates on new loans since 1989.

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Swedish three-month variable mortgage interest rate, new loans, 1989-2017

0

5

10

15

20

25

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

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20

05

20

07

20

09

20

11

20

13

20

15

20

17

%

Source: Thomson Reuters

Swedish mortgage interest rates peaked at 24% in the crisis of 1992...

We actually need to look that far back in history to be reminded of a different era, with much higher interest rates and double-digit inflation in the economy. In the 1980s, Swedish mortgage interest rates peaked at 24% at the low point of the Swedish financial crisis in November 1992.

...but have been near or below 5% for 10 years

Much has happened since then, and mortgage interest rates have more or less been below 5% for the past ten years. In the past two to three years, they have been below 3%.

We are used to low rates but do not require them to surviveSo here is the big question: Have Nordic housing markets disconnected from the realities of supply and demand, and ballooned into a price bubble, propped up by today's ultra-low interest rates?

There are clearly widespread concerns about this across society. Financial regulators and central banks have become very active in trying to cool housing markets, banks have become more disciplined in their lending standards, and politicians are calling for initiatives to remedy housing shortages and help make home ownership affordable for first-time buyers.

We highlight several factors which make us less concerned about interest rate-related risks

It is easy to get the impression that the entire housing market consists of mega-leveraged, urban households, who are just able to make ends meet on a monthly basis, as long as interest rates remain at record lows; but we know this is not the case. Out of all Nordic mortgages, many are with households with low leverage; typically older homeowners who have paid off much of their debt. More highly leveraged households have faced scrutiny in their vulnerability to the impact of much higher interest rates in their mortgage applications. When considering risks related to interest rates for housing markets, we highlight:

Bank lending standards are based on cash flow and ability to pay – not just book or market values.Mortgages are only offered to households who would be able to service them at interest rates much higher than current variable rates (typically 7-8%).Not all mortgages have a floating interest rate. The share of fixed rate mortgages varies among Nordic countries, but few households would face the full effect of any potential interest rate spike immediately.History points to Nordic households prioritising homes and mortgages, and instead cutting back on other consumption when facing economic hardships.Rising interest rates are mostly a problem if they rise sharply and suddenly, for the wrong reasons. Increased interest rates due to a

Nordea Markets 16


growing economy tend to be accompanied (or driven) by higher employment and income levels.

The bear scenario would be a sudden, event-driven interest rate spike...

The real bear scenario would be a sudden, sharp interest rate spike, possibly driven by an unlikely major event triggering fear and risk aversion. How would such an interest rate spike affect housing markets, borrowers and lenders?

Demand for housing would dry up, at least in the short term. Buying a home is a huge decision for a typical household, and people will postpone a decision like that if they are suddenly very worried about the outlook.

...which would reduce liquidity and prices in housing markets...

...and reduce private consumption and hence economic growth

Property prices would start falling. The first step might be that liquidity dries up and few transactions are made. When those households that become forced to sell eventually need to act, transaction prices would decline. How much prices would fall would depend greatly on the severity of the unexpected event, and how many households are sufficiently financially vulnerable to need to realise losses by selling in a falling market (or need to sell their home for other reasons).

Economic growth would suffer from downward pressure on private consumption. As households start to pay more mortgage interest as rates rise, this eats into their disposable income. The general uncertainty will also hold back spending on big ticket items such as homes, cars, boats, summer houses and luxury holidays. This could in turn trigger rising unemployment, causing a negative spiral typical of a recession.

We expect the most obvious, direct negative impact to be on home builders

Considering the direct consequences of an interest rate spike, and how severe the effects might be for different types of players exposed to Nordic housing markets, we would expect the greatest impact to be on home builders (see our interview with home builder JM's CEO Johan Skoglund in this report). A slump in new home orders would need to be absorbed, likely forcing some downsizing.

Residential real estate companies likely less impacted through vacancies, but instead from their own debt

For real estate companies, which have residential-heavy portfolios, we doubt that vacancy rates would skyrocket. They have historically been quite resilient to economic downturns. The ongoing business would likely cope relatively well with an economic slump. For those companies with particularly high leverage, an interest rate spike could cause obvious challenges. However, the potential risk would come more from their own balance sheets than from an exodus of tenants.

Banks would likely be more affected by exposure to corporate lending than residential mortgages – as in the last crisis of the early 1990s

We find it unlikely that lenders would the big victims in such a scenario. In the Swedish financial crisis of the early 1990s, the banking system was brought to its knees by credit losses; but those losses were not on residential mortgages. Instead they came from corporate lending; particularly commercial real estate. Swedish households by and large continued to pay their mortgages, even in an environment of shrinking GDP, soaring unemployment and 24% mortgage interest rates. We believe a similar trend is likely in any future shock scenario, although outcomes will of course be heavily influenced by the severity of the shock and exactly how it affects interest rates and the economy.

Nordea Markets 17


Interview: It is not all about interest rates

We interview Johan Skoglund, CEO of Sweden's leading home builder JM, asking him where Nordic

housing markets are heading and what is driving them, how the behaviour of home buyers is changing and

what impact tax rules and regulations have and how they could be changed for the benefit of housing

markets.

Nordic house prices could rise a few percent further in 2017-18

JT: I will start with the obvious question, which might be on nearly everyone's mind. Nordic house prices have risen to record levels. As head of a leading home building company in the region you have a good insight into supply and demand for housing. Do you see any risk of a Nordic housing bubble?

JS: I don't think there is a housing bubble. Certainly, house prices are high. If I remember rightly, last year house prices rose 10% in Norway (actually 23% in Oslo), 8-9% in Sweden, 15% in Denmark and 1% in Finland. But there are fundamentals underpinning these house prices: good economic growth, low unemployment, very low interest rates, population growth, and a very strong urbanisation trend that is showing no signs of abating. The latter is also a behavioural change. As long as people continue move to the capitals and big cities, and spend a substantial share of their income on accommodation, it will support housing markets. Some form of market correction at some point is surely inevitable, but based on what we see today, I believe house prices could perhaps rise by a few percent further in 2017-18.

JT: Nordic central banks and financial regulators have paid a lot of attention to buoyant housing markets and have introduced new regulations aimed at cooling it down. Do you think too much new regulation has been enforced or is there too little regulation?

JS: I am a great supporter of a sound and healthy debt amortisation culture. When my wife and I had a house built many years ago, we had mortgages amortised over 30-40 years. Over time, those mortgages became much less common, and in Sweden the regulator responded by introducing the 85% loan-to-value cap for mortgages in 2010. This was supplemented by new amortisation requirements in 2016. But ultimately, it is up to the banks to push and enforce a sound approach to amortisation. Policymakers face a dilemma. They want more homes to be built, but the new mortgage leverage regulations make it even more difficult for low-income households to make that critical first step onto the property ladder. I am broadly in favour of the new regulations that have been introduced so far. As of yet, they do not seem to have had any negative impact on housing demand.

At the same time, support regulations give room to individuals to choose to prioritise their homes and spend more on them at the expense of other things, because they choose to do so. We have customers who are happy to travel and eat out less in order to buy the home they desire. We have even had projects in Sweden and Norway where we found it difficult to sell parking spaces in garages because young couples are opting not to own a car.

Overall, I believe the Nordic mortgage regulations introduced so far have been fairly balanced and reasonable. Most critical for the housing market is long-term consistency and visibility of regulations. Introducing restrictions or new taxation out of the blue could cause disruptions from homeowners having to act in response to new unexpected rules of play.

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The house price divergence between growth regions and the rest of the country represents a megatrend which is likely to continue

JT: How much does taxation impact housing markets? Which tax rules have the greatest impact? Tax deductions for interest costs, capital gains taxes or property taxes?

JS: Any increased taxation of home ownership would naturally have a negative impact on housing markets, but if it were accompanied by other simultaneous changes to taxation, the net impact would not necessarily be negative. One notable negative impact from taxation today is the Swedish 22% tax on any capital gains from selling your home. In the other Nordic countries this is not taxed at all, as long as the property you sell has been your main residence for a minimum period. In Sweden, it gives a "lock-in effect", where moving leads to a huge tax charge if your property has increased greatly in value and you want to move to something smaller or cheaper. It is a waste for society to have couples remain in bigger homes after their children have moved out just to avoid a big cash outflow owing to tax. There is a shortage of homes and available space should ideally be fully used.

JT: Are there currently any notable anomalies on price differences between cities and regions or between apartments and houses? Anything that particularly stands out?

JS: When I was called up for my military service in 1981, the others in my unit came from all over Sweden. When we compared our origins and talked about our homes, it was apparent that a house of comparable size cost about the same regardless of which Swedish city it was in. Today, your home, your residence, has become much more associated with lifestyle. Now, which city you live in, which part of the city, and what address you have matters. Even the street number can matter. Your home is a statement. This has made housing markets more polarised than in the past. Some urban areas develop at a pace way beyond other areas, which are in structural decline.

This is reflected very clearly in JM's operating model, where we have become very selective with regards to the areas we want to operate in. Today you will find us in Norway in Oslo, Bergen and Stavanger (a housing market that is ice cold owing to the decline in the offshore industry and has had virtually no new housing starts for two years). In Finland, we have opted to operate solely in Helsinki. We exited Denmark last year, and before that we were only in Copenhagen. In Sweden, we operate in Stockholm, Uppsala, Västerås, Örebro (together the Mälardalen region), in Gothenburg and in the Malmö-Lund area. That's it. We can only operate in regions with population growth and a mix of industries – a broad base for employment. In other areas, the business case for building new homes is typically weak as the existing housing stock more than covers the total need for accommodation.

I believe this polarisation of housing markets will continue. We have 40,000-50,000 customers queuing up to buy a home from us at some points. Many are young, well-educated and resourceful, and we try to carefully track where they would like to live. Consider this: my brother-in-law's daughter graduated from Lund University in southern Sweden two years ago. Out of 40 graduates in her class, 39 have moved to Stockholm!

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Interest rates matter for housing demand, but less so than employment, consumer and business confidence, disposable incomes, and demographics/urbanisation

JT: Which are the most critical drivers of the housing market and house prices? Interest rates? Disposable incomes? Demographics? Housing supply? Credit environment? Other factors?

JS: It is not all about interest rates, even if they have a major impact.

People make lifestyle choices. Where do they want to live, where can they live in order to make everyday life routines work? The most attractive, often central, areas have the highest prices. Living very far away from work, or in an area with lower-quality infrastructure, schools, childcare, healthcare, shopping and entertainment can be seen as incompatible with the desired quality of life. What do home buyers do then? There is a downward trend in apartment sizes. A standard two-bedroom flat in Sweden was 85 m2 seven to eight years ago. It is now 77-78 m2. An average family in Tokyo lives in 40 m2. The Nordic region will probably not fall to that level, but we expect a continued trend towards more compact and more efficient apartment layouts.

Good communications are also key. Proximity to rail-based mass transit is highly attractive, and features in most of our developments.

Studies show that choice strongly boosts happiness. Those who live in a remote village might have a single pizza place available when they want to buy takeaway dinner. Those who live in the capital might have five different sushi restaurants within walking distance of their home. Even if they keep going to the same restaurant for sushi, having that choice enriches their lives. They are often prepared to make sacrifices for that.

Fear of losing your job is the real killer for new home purchases

Most positive housing market outlook in Norway and Sweden, followed in turn by Denmark and Finland

Employment is really key for housing demand. People who fear they may lose their jobs don't sign house purchase contracts. I have been with JM forover 30 years, and I have been CEO for 15 years. During this time, I have seen demand disappear twice: when the IT bubble burst, causing big lay-offs in the tech sector after 2000; and during the global financial crisis in 2008-09. When people have lost their jobs, it is too late. Before it happens, if they fear it may happen, they do not sign a contract to buy a home for several million crowns. Buying a home is one of life's big decisions, arguably similar in importance to choosing a partner to spend your life with. People don't take it lightly. And if they don't have the confidence, they don't sign.

Trying to sum up my 30 years of experience, I would probably rank the key housing market drivers in this order: employment, GDP/business cycle, disposable income, demographics/urbanisation and interest rates.

JT: What differences do you see in the housing market outlooks for the different Nordic countries?

JS: For the next few years, we see the most favourable outlook in Norway and Sweden, followed by Denmark, and the least favourable in Finland. This more or less mirrors their respective GDP growth prospects. The urbanisation trend is not quite as strong in Denmark. Finland is held back by austerity reforms such as longer working weeks and a raised retirement age, but looks to be past the worst. Housing prices were up 1% last year, and could rise a couple of percent this year. We are currently most active in acquiring land for development in Stockholm and Oslo, especially near rail-based mass transit.

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JT: How would you describe JM's positioning and strategy compared with your main competitors?

JS: Our greatest competitor is the existing homes market, which we try to watch closely. We are quite long term and typically take a ten-year view when evaluating the prospects for different regions. We are quite stringent in selecting where we focus our operations, sticking to regions where we see population growth, a solid and diverse employment base, good communications, a commute to cities of no more than 45 minutes, good public services and municipal finances.

We have also just introduced a segmentation of the 4,000-5,000 homes we produce annually into "Premium", "JM Original" and "Smarta Kvadrat". The latter essentially means smart square metres and is a value concept. We expect 70-80% of our customers to select "JM Original", 10-15% "Premium" and 10-15% the value option. In a new, fairly centrally located apartment building, the first ten floors could be "JM Original", and the top 14 floors "Premium". For "Smarta Kvadrat", we have introduced standardised concept buildings, which could be used in areas such as Lillestrøm, 25 minutes from Oslo, or Upplands-Bro a bit further out of Stockholm. We want to cater to this strong trend of individualised homes, adapted to suit individual preferences.

Competition has increased in recent years. We note new players in current land tenders, often smaller ones with more of a financial profile or origin, perhaps not so used to construction project management. Some of this seems to be driven by investors seeking returns. More new capital has been attracted by the residential construction market, as it has shown good profitability.

JT: How do you see the supply of housing in the Nordic countries? Has it finally caught up after many years of low newbuilding activity? Is there any risk of excess supply in the coming years?

JS: In Denmark, newbuilding has finally started to liven up somewhat, and I think there is room for this to continue. Finland has been quite stable at around 25,000-30,000 housing starts annually, and should remain at that level. Norway has stepped up activity, especially in Oslo. Sweden saw around 65,000 new housing starts last year, and should reach that level also this year. During the Swedish "Million Programme" in 1965-75, there were 100,000 annual housing starts, followed by many years of low investments. Against that backdrop, current newbuilding levels are welcome. But I believe it is important to shape the supply of new homes into a mix that is not only high-end premium homes, as this segment does not represent the entire accumulated need for new homes. And from a business cycle point of view, the high-end segment is more vulnerable to any market correction as it is less liquid than the volume segments.

Swedish politicians have suggested there is a need for 70,000 new homes annually, a pent-up need of 700,000. My view is that we may see output peak near 65,000, partly owing to resource constraints, as capacity utilisation in the construction industry is very high. It could be a challenge to find skilled labour and project management staff for additional projects.

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At the top of a regulatory reform wish list for homebuilders: A common Nordic construction standard and regulations

JT: If you could make a "wish list" for political or regulatory reforms that would be helpful for the housing market, what would be on it?

JS: At the top of such a list would be common Nordic construction standards and regulations. For large, industrial players such as JM, it would offer potential scale benefits, from being able to use designs and home concepts in greater volumes. It would also stimulate competition, making it easier for international players to enter the Nordic residential construction market.

In the car industry, there are, if we simplify things somewhat, three global standards: an American standard, a European standard and an Asian standard. In residential construction, we have 290 building standards in Sweden alone – one for each of the 290 municipalities in the country.

My second wish on the list would be a reform of the Swedish capital gains tax on own residences, which we discussed before. Harmonising that with Nordic neighbours would increase flexibility in the Swedish housing market, and improve supply.

JT: To help us get a sense for how a homebuilders' business works, how would you rank the various risks you face? House prices? Project management? Interest rates? The business cycle? Others?

JS: The top risk is macro, in a broad sense: employment, disposable incomes, interest rates. The number two risk, which is also critical, is operational: project management and organisation. Having needed to respond to sharp market drops twice – when the IT bubble burst, and after the Lehman Brothers collapse – by making deep cuts to our organisation, I know how important it is to be on top of operational risks. I have just spent three and a half days in forecast reviews, going through our entire project portfolio in detail. And I do this four times a year. We need to know if any problems emerge in our projects, at an early stage, before they develop into much bigger challenges than they need to be. And we need to maintain a culture whereby project managers are encouraged to be proactive and transparent about problems, so we can address them together and bring them under control. Our staff must not feel that they would get punished for delivering bad news when something goes wrong on a project.

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Central Stockholm's hot real estate market

Example: Apartment sold in March 2017 on Södermalm, Central Stockholm, Sweden

Area: 94.4 m² Number of rooms: 4.5 Monthly fee: SEK 3,715 Asking price: SEK 7,950,000 (SEK/m²: 84,000) Closing price: SEK 9,800,000 (SEK/m²: 104,000)

Interior views

Source: Bjurfors Estate Agents

The viewing drew a big crowd


Nordea Markets 23


Mortgage regulations: Sweden leads the way

To keep the risk of potentially excessive mortgage lending and household leverage in check, the Nordic

financial services authorities (FSAs) have introduced a number of macroprudential policy measures.

Sweden was early in tightening regulations, which is probably explained by the sharp (71%) rise in house

prices over the past ten years. Norway has adopted the Swedish model, while Finland has the mildest

regulations. Finns do not seem to need them – they happily amortise their mortgages anyway.

SwedenFSA regulationsSweden has been the pioneer in the Nordic countries in terms of adopting macroprudential policy instruments. As early as 2010, Sweden introduced a mortgage loan-to-value (LTV) cap of 85% for retail borrowers. Consequently, any households applying for new mortgages since 2010 have not been able to borrow more than 85% of the property's estimated market value when using the property as collateral.

In August 2014, the Swedish FSA increased the minimum risk weights (for calculating banks' reserve capital requirements) on mortgage loans to 25%, from 15%. This followed an earlier increase in 2012 from 5% to 15%. The purpose was to ensure that Swedish banks have sufficiently large capital buffers against unexpected losses on mortgages in crisis situations. Banks' risk models for calculating reserve capital requirements against lending are based on historical credit losses. As so many years have passed since Swedish banks last took any significant credit losses, and because losses from Swedish retail lending (particularly mortgage lending) were almost insignificant even during the big Swedish banking crisis of the early 1990s, the models themselves would not create a need for the banks to build bigger reserve buffers. As the models did not respond directly to potentially important factors such as rising household leverage and record-high residential property prices, the FSA stepped in and changed the rules.

In May 2016, after a long struggle, the Swedish FSA finally managed to push through a mandatory amortisation requirement for all new mortgages with an LTV ratio of 50% or higher.

Bank policy for mortgage lendingApart from the new requirements set by the FSA, Swedish mortgage lenders have their own requirements that borrowers must meet. Nordea, for example, requires the borrower to still be able to service the mortgage at an interest rate equivalent to the fixed five-year mortgage interest rate + 3 percentage points, and never less than 8%. Additionally, the borrower must have the theoretical ability to pay off the entire debt over a 50-year horizon (although as per above, only new mortgages since May 2016 with an LTV of 50% or higher actually have to be amortised).

Amortisation is not something that Swedish mortgage borrowers have been very fond of, and the difference between Sweden and the best-in-class Nordic country, Finland, is tremendous. In 2009, the actual amortisation period averaged 125 years for apartments and 71 years for houses in Sweden (according to the National Board of Housing), compared with 18.5 years for house loans in Finland (according to Finance Finland).

Nordea Markets 24


NorwayFSA regulations The FSA requirements in Norway are quite similar to those in Sweden –apparently inspired by its neighbour. This has surely been fuelled by house price increases in Norway being almost as dramatic as in Sweden over the past ten years (+59% compared with Sweden's +71%).

As in Sweden, Norway has a loan-to-value cap of 85% for new mortgages. In Norway, this has been in effect since July 2015 – almost five years after the Swedish implementation.

The Norwegian FSA has also introduced mandatory amortisation for new mortgages based on the LTV ratio. The requirement for annual amortisation of 2.5 percentage points of the loan amount (which corresponds to full repayment in 40 years) if the LTV is 60% or higher so is even stricter than the Swedish requirement of just one percentage point (repayment in 100 years) for LTV ratios between 50% and 70%. The Norwegian amortisation requirement was introduced in July 2015, about one year after the corresponding Swedish regulatory change. At that time, however, the Norwegian LTV threshold triggered mandatory amortisation if the mortgage was 70%. This LTV threshold was lowered to 60% in January 2017.

Norway was actually ahead of Sweden in introducing instruments that tighten banks' capital adequacy requirements. As early as 2013 it introduced a probability of default floor of 20% in its calculation of risk weights. In 2015, it also increased the loss given default (LGD) floor from 10% to 20%. So, Norwegian banks now have to assume higher minimum losses, even when allowing for property as collateral, in the event of mortgage borrowers actually defaulting on their loans. These two actions practically doubled the banks' risk-weight requirements from 10-15% to 20-25%. The reasons behind these changes are the same as in Sweden.

In response to the dramatic house price increases in Norway, particularly in Oslo, the Norwegian government introduced tightened regulations for purchasing secondary (non-main residence) apartments in Oslo. The new regulation requires buyers to have at least 40% in own equity for such investments, versus previously at least 15%. The new rules were implemented in January 2017 and will be in effect until June 2018.

Bank policy for mortgage lendingNordea has one additional requirement, beyond those stipulated by the FSA and the government, on its Norwegian mortgage customers: an amortisation period of no less than 30 years. Previously, when the FSA regulations were more relaxed, Nordea had more of its own additional requirements on mortgage borrowers.

Variable interest loans are much more common in Norway than in any of the other Nordic countries. In 2009, only 10% of Norwegian mortgage loans were tied to a fixed rate, compared with 55% in Sweden and 40% in Denmark (according to The Nordic Council of Ministers). One reason for the difference is the high pre-payment penalty in Norway for mortgage borrowers who wish to repay or refinance their mortgage before the expiry of a fixed interest period.

Nordea Markets 25


FSA requirements for mortgages, Nordic countries

Regulation Applies to Country Level, % IntroducedSweden 25 2014Norway 0.2; 20* 2015;2013Finland >10

Denmark ~12LTV>70% : 50 yearsLTV 50-70% : 100 yearsLTV < 50% : None

Norway LTV>60% : 40 years** 2015Finland None

Denmark NoneSweden 85% 2010Norway 85% 2015Finland 90%*** 2016

Denmark 95% 2015*Probability of default (PD) floor 0.2% (2015) Loss given default (LGD) floor 20% (2013) **The LTV threshold was decreased from 70% to 60% in Jan 2017 *** First time buyers 95%

Sweden 2016

Loan-to-value caps for mortgages

Mortgage risk weights for capital reserves

Banks

Mortgage borrowers

Mandatory mortgage amortisation

Mortgage borrowers


FinlandFSA regulationsThe Finns love to amortise. Even though their average repayment period has risen somewhat in recent years, the Finns repay their mortgage loan within 20 years on average. Together with a comparably modest increase in Finnish house prices in recent years, this helps explain why Finland has been slower in introducing new, additional mortgage regulations than Sweden and Norway. Over the past five years, Finnish house prices have increased by a mere 4% compared with 62% and 32% in Sweden and Norway, respectively.

Currently, the sole FSA requirement for new mortgages in Finland is a loan-to-value cap of 90% (95% for first-time home buyers). Finland was also the last Nordic country to implement new mortgage regulations through its FSA; the LTV cap was first introduced in July 2016.

Also, the method for calculating the loan-to-value ratio for mortgages is more lenient in Finland than in the other Nordic countries. In addition to the actual property to be purchased, a wide range of other collateral offered by the borrower can also be included in the "value" when calculating the maximum possible loan amount. Consequently, for some borrowers, the underlying LTV ratio (based on just the property being bought) can be fairly high, and may even exceed the 100%.

Finnish banks' average risk weights for housing loans are currently under 10%. In December 2015, the Finnish FSA announced that it had commenced preparations to raise the risk weights, but nothing has happened yet.

Bank policy for mortgage lendingMost mortgages are on a floating rate in Finland and interest-only (IO) mortgage loans are non-existent. Minimum repayment periods required by banks are generally around 30 years, but as previously mentioned, Finnish mortgage borrowers tend to voluntarily pay off their mortgages much faster than that, currently at an average rate of 20 years.

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DenmarkFSA requirementsThe only current actual regulation for mortgages in Denmark is a loan-to-value cap of 95%. This rule was implemented in November 2015. The current average credit risk weight for residential mortgage lending is around 12% and there is no plan at present to raise risk weights in Denmark.

Some further initiatives have been taken by the regulator though. In January 2016, for instance, the Danish FSA issued guidelines on credit assessment for mortgages in "growth areas", which are currently Copenhagen and Aarhus.

Bank policy for mortgage lendingThe Danish mortgage market is unique in a Nordic context, in that it consists entirely of long-term fixed rate mortgages. This is not stipulated by regulations, but is an industry standard that was established many decades ago. Households can finance up to 80% of the value of a home purchased using mortgage loans with a maximum maturity of 30 years. If more financing is needed, a maximum additional 15% of the property value can be borrowed (since 2015 also formalised by the FSA's LTV cap of 95%), through a higher interest rate loan, which is not a traditional mortgage.

On 1 October 2003, Danish mortgage lenders were allowed to offer a new type of mortgage product: interest-only (IO) loans. These are deferred amortisation mortgages, where principal repayments can be postponed for up to ten years, even though the full amount still has to be repaid over the 30-year contract. IO mortgages immediately became popular among all types of households. One year after the reform, 15% of all Danish outstanding mortgages were IO loans. This number had increased to 30% in 2005, to 50% in 2010, and remains above 50% today.

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Tax rules: Mortgage interest subsidy phase-out

It may seem paradoxical – particularly in Sweden and Norway, where we see booming housing markets –

but Nordic governments continue to subsidise home ownership by allowing individuals to claim back part of

their mortgage interest costs on their income tax. However, this has started to change. Finland has been

the most aggressive in reducing interest cost deductions, while Sweden is the only Nordic country that has

taken no steps in this regard yet. At the same time, only Sweden has a capital gains tax on homeowners'

main residence.

Large differences across the Nordic countriesSweden

Sweden allows deduction of 30% of mortgage interest costs against income tax (and 21% on costs that exceed SEK 100,000 per annum)

Partly inspired by the US Tax Reform Act of 1986, major tax reforms were made in the Nordic countries in the early 1990s. As part of the Swedish tax reform in 1990-91, deductions for mortgage interest costs against income tax were cut from 50% to 30% of the total mortgage interest expense up to SEK 100,000 per annum. For costs above SEK 100,000, 21% can be deducted against income tax. There are currently very few people in Sweden with annual mortgage interest costs above SEK 100,000 owing to the low interest rates. In 2015, 23,000 homeowners fell into this category, down from 80,000 in 2012, according to Statistics Sweden. This represents a mere 0.2% of a population of ten million. The 30% and 21% deduction rules remain in place today.

Interest deductions, Nordic countries, 1992-2020

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

1992 1996 2000 2004 2008 2012 2016 2020

SE FI NO > 50,000 DKR < 50,000 DKR

Source: Swedish Tax agency, Bank of Finland, Statistics Norway, Danish Ministry of Taxation

NorwayIn Norway, the current flat 25% capital gains tax rate is mirrored by 25% of interest costs being deductible against income tax

As part of Norway's major tax reform in 1992, progressive taxation of capital gains (similar to income tax at the time: the bigger your capital gain was, the higher the rate of tax eligible on it), was replaced by a flat capital gains/capital income tax rate of 28%. This was mirrored by a corresponding 28% of interest costs (mortgage and other interest, like consumer credit, etc.) being deductible against income tax.

The first change to this tax rate came in 2014 when it was reduced to 27%. This was followed by further reductions; to 26% in 2015 and to 25% in 2016. According to Statistics Norway (SSB), further reductions are expected as “The deduction rate in the personal income tax is related to the corporate tax rate. The race to the bottom of corporate taxes indicates

Nordea Markets 28


that it will drop further. Probably dropping to 22% within a few years.”Unlike in Sweden, the deductible share of interest costs remains flat, regardless of how much interest you pay.

FinlandFinland is aggressively phasing out its tax subsidy for interest costs, which should fall from an effective 30% in 2011 to 8% in 2019

Finland has been the most aggressive among the Nordic countries in starting to phase out tax subsidies on mortgage interest costs. While the proportion of annual mortgage interest costs deductible against income tax has actually remained flat at 30% (32% for first time home buyers) since 2012, the share of the total mortgage amount outstanding on which interest can be deducted has been slashed from 100% in 2011, to 85% in 2012, and 70% in 2013. It is still falling, and in 2018 interest expenses will only be deductible on 35% of the mortgage amount. Hence, in 2018, a Finnish mortgage borrower will be able to deduct 30% of annual interest expense times 35% of the outstanding mortgage amount = 10.5% of total interest expense against personal income tax. This is much lower than the typical rates of 30% in Sweden and 25% in Norway.

According to the Bank of Finland “The reduction of mortgage interest cost tax deductions has been a politically convenient way of raising tax revenues over the last few years, and low interest rates makes it even easier”. Finnish households are also less leveraged than their Nordic neighbours, which makes an aggressive phasing out of the interest cost tax deductions more feasible. There is also a cap on this tax benefit in Finland: the total interest cost deduction against income tax cannot be greater than EUR 1,400 per person (EUR 2,800 per couple). For families, the cap is raised by EUR 400 per child up to a maximum EUR 800. Hence, for a Finnish family, the maximum interest cost deduction is EUR 3,600. This cap has been in place since 2005.

DenmarkDenmark has seen a slower start; Since 2012, 33% of annual mortgage interest costs up to DKK 50,000 have been deductible...

...and the share of deductible interest costs above DKK 50,000 is falling each year and should be down to 25% by 2019 from 34% originally

While Nordic neighbours slashed interest cost tax breaks in tax reforms in the early 1990s, Denmark followed suit later. For example, in 1996 interest rate cost deductibility was as high as 43% in Denmark, while the corresponding levels in the other Nordic countries were 28-30%. But this has changed. From 2012 on, the share of interest expense deductible against income tax was cut by one percentage point each year, and this willcontinue until 2019 (and the cut was actually two percentage points in the first year, 2012). This means the level will fall from 34% to 25% over an eight-year period. These cuts are currently only for absolute annual interest expenses above DKK 50,000 (DKK 100,000 for couples). For interest expenses below this cap, the deductible share has remained a flat 33% since 2012.

Examples show mortgage tax breaks may not matter much The obvious question at this stage is whether tax subsidies for mortgage interest costs make a real difference to the state of the Nordic housing markets? Do they help inflating house prices?

We are inclined to argue that such subsidies represent a marginal factor and that there is no macroeconomically critical justification for their existence. In our two concrete examples below we note that:

Only Finland is making a really meaningful reform to its mortgage interest cost subsidies, with a view to phasing them out.In absolute money, the subsidies are hardly make-it-or-break-it; for a Nordic single household with a mortgage of EUR 200,000, they represent around EUR 100 per month.

Nordea Markets 29


Even with the rollout of ongoing reforms, Denmark has the most generous subsidies, followed by Sweden and Norway; Finnish subsidies will fall below a third of the level among its neighbours in a few years.

Example 1: Family borrows EUR 1m at mortgage rate of 5%

The tax break for a household with a EUR 1m mortgage at 5% interest is about EUR 1,100 per month

Imagine a family with three children living in a Nordic capital. Let us compare when they borrow EUR 1m at a mortgage interest of 5% in 2010 and 2020, with the different tax rules for mortgage interest cost deductions against income tax at those two different times. This is a well-off family, as few Nordic households could carry a EUR 1m mortgage. This example serves to illustrate how much such a privileged family would benefit from tax subsidies in the different Nordic countries, before and after tax subsidy reforms (or the absence thereof).

As the loan amount is significant, the interest expense will be the same at EUR 50,000 per year. If the family lived in Sweden or Denmark, a large part of the interest expenses would be deductible against income tax at the lower rate applied to bigger mortgages. This is 21% in Sweden, for both time periods, and 34% and 25%, respectively, in Denmark in 2010 and 2020.

The tax break will fall slightly in Norway and Denmark, but will be slashed 75% in Finland, placing Finland at one-third of the level among its neighbours in 2020

If the family lived in Finland, they would hit the absolute interest tax break cap of EUR 3,600 in 2020, while in 2010 there would be no cap. A Norwegian family would see the deductible share of interest costs fall from 28% to 24% between the two time periods. The graph below illustrates how large the annual tax reduction for interest costs would be in the different Nordic countries in 2015 and 2020.

Annual tax reduction for family with EUR 1m mortgage at 5% interest, 2010 vs 2015

14,000 14,000

12,435

16,820

3,600

12,000 12,43513,575

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FI NO SE DK

2010

2020

Source: Company data and Nordea Markets

For this example the differences in deductions are not that big in 2010 while Finland clearly stands out in 2020

We can see that Denmark offers the biggest tax breaks for this well-off family both in 2010 and in 2020. All in all, in 2010 the differences between the countries aren't that great, and Sweden actually had the least generous deductions that year in this example. In 2020 Finland stands out completely. For a Finnish family, the interest deduction would be less than a third of what you would get in the other countries.

Nordea Markets 30


Example 2: Single household borrows EUR 200,000 at 2%

The tax break for a household with a EUR 200,000 mortgage at 2% interest is about EUR 100 per month

In the second example we look at a single household that borrows EUR 200,000 in 2010 and in 2020, at a mortgage interest of 2%. Even in this case, with a lower loan amount and interest level, Finland comes out as an outlier. While the difference between the countries in size of tax break was fairly small in 2010, the outcome for 2020 illustrates how aggressive Finland's reduction is.

Mortgage 200,000 EUR, mortgage rent 2%, 2010 vs 2015

1,120 1,1201,200

1,346

300

960

1,200

1,320

0

200

400

600

800

1,000

1,200

1,400

1,600

FI NO SE DK

2010

2020

Source: Company data and Nordea Markets

Just as in the previous example, the differences among the countries are fairly small in 2010, while Finland is an outlier in 2020

Looking at the two examples above, we should bear in mind that there are clear differences between the countries regarding mortgage amortisation requirements. The Finns face greatly reduced tax breaks, but are less leveraged than their Nordic neighbours. They are also much more eager to amortise. These two factors have likely made it easier for Finnish politicians to carry through such a reform. Another conclusion that could be drawn from the two examples is that although Sweden has planned no reductions in tax breaks for mortgage interest costs, it will still not have the most generous tax breaks in 2020.

Capital gains tax – Sweden goes its own waySweden is the sole Nordic country with a capital gains tax regardless of how long you have lived in the property

In terms of capital gains on residential property, Sweden has chosen a different route than its Nordic neighbours. It is the only country where there is no limit for how long you need to have lived in your main residence in order to avoid paying capital gains tax on any profit earned when you sell it. You simply have to pay it. Before 2008, you could defer the tax payment if you bought a new home. While this is still possible, home owners must pay annual interest of 0.5% on the deferred amount. Based on the currently low interest rates, it is more advantageous to pay off the tax and increase your mortgage by the corresponding amount.

Capital gains taxation on own residence – Nordic countries 2017

Level Tax exempt criteria Other

Sweden 22%

No tax exemption, but if you have lived in the apartment for less than one year, you are not able to make a deferral.

A deferral of the tax payment may be made if you buy a new residence but you need to pay interest (0.5%) on the deferred amount.

Finland30% if capital gain ≤ EUR 30,000 34% if capital gain > EUR 30,000

1) Has to be your main residence for more than 2 years 2) Total of capital gain is less than EUR 1,000

Norway Max 24%, taxed as capital incomeHas to be your main residence for more than 2 years

Denmark No capital income taxes Has to be your main residence


Nordea Markets 31


For Finland and Norway you have to have lived in your main residence for at least two years, in order avoid capital gains tax. In Finland, the tax level is clearly higher than in both Sweden and Norway if this criterion is not met (ie 30% or 34% depending on the absolute size of the capital gain). Denmark is the sole Nordic country where you do not need to have lived in the accommodation for a minimum period of time in order to avoid paying capital gains tax. It is, however, important that you have used the property as your main, permanent, residence to qualify for capital gains tax exemption.

Nordea Markets 32


Price differences: By country, region and type

The highest price rises in the course of the past ten years have been seen in Norway and Sweden. Over

the past five years, there has also been a significant 29% price increase in Denmark. Are there differences

within each country? In Sweden, for instance, there has been a substantial difference in price rises

between apartments and houses over the past ten years. In this section, we look more closely at the price

developments within each country, and compare them with each other.

Norway and Sweden have soared, Finland, Denmark laggingNorwegian and Swedish house prices have soared over the past ten years, up 71% and 59%, respectively

Over the past ten years, housing prices have soared in Norway and Sweden, rising 71% and 59%, respectively. In Finland, the corresponding price increase is 17%, while it is only 3% in Denmark. For Denmark, the modest price increase during this period is due to a home-grown property market correction that started a year before the global financial crisis, in 2007. Between 2007 and 2011, Danish house prices fell by 20% on average, and a similar price drop was seen in the Copenhagen area.

Finland has seen more moderate growth of 17% while Denmark suffered a correction in 2007-11 but has since recovered, in total up 3%

Since then, the market has recovered, with Danish house prices rising 29% during the past five years. In this section, we examine particularly noteworthy differences in house prices between the Nordic countries, between the capitals and the rest of each country, and between apartments and houses.

Apartments versus housesApartment prices have risen faster than house prices, nearly twice as fast in Sweden!

Looking at the graphs below, we reach two conclusions. First, prices for apartment have increased more than for houses in all Nordic countries. Second, the difference is much more pronounced in Sweden than in the other Nordic countries. For houses, Swedish prices increased by 106% between 2005 and 2016. For apartments, the corresponding figure was 196%. Apartment prices have increased somewhat more than house prices in all the Nordic countries, but the difference is far less than in Sweden.

Formerly very strict regulations for renting out apartments were relaxed in Sweden in 2013-14

Why does Sweden stand out so much compared with its Nordic neighbours? Well, one possible explanation could be the difficulty in finding apartments to rent in Sweden, especially in Stockholm. In 2016, the average waiting time for getting a rental apartment through the Stockholm Housing Agency (public housing) was nine years. Until recently, it was also quite difficult for landlords to rent out privately owned apartments, and to actually profit from doing so. In order to get permission to rent out an apartment from the board of the tenant-owned association (TOA), the owner needed to present "notable reasons" for doing so. Such reasons could include "moving to another city for a new job for a limited period of time" or "trying out living together with a partner before buying something together". Some boards were, of course, more accommodating than others, but legally they could all decline requests if they believed the reasons cited for renting out an apartment were not good enough. Additionally, it was forbidden to charge higher rent than the corresponding market rent for public apartments in the same area.

Regulations likely helped create major pent-up demand for rental apartments in Sweden, partly explaining soaring apartment prices

In February 2013, the regulations were changed, such that tenants could be charged significantly higher rents. The new rules for calculating rent were based on the capital cost of an apartment, as well as its maintenance cost. A year later, in July 2014, the government also decided to make it easier to rent out apartments. Hence, instead of being forced to give "notable reasons", apartment owners just have to give "any reason", meaning that the board of the housing association is in practice incapable of forbidding owners from renting out their apartments. These regulatory reforms are still quite new, and there is arguably still a shortage of apartments to rent

Nordea Markets 33


in Sweden, especially in Stockholm. This could partially explain the bigger differences in price rises between apartments and houses in Sweden compared with its Nordic neighbours.

Apartment prices, Nordics countries, indexed to 2005=100

100

150

200

250

300

Sweden Denmark Finland Norway


Houses prices, Nordic countries, indexed to 2005=100

100

150

200

250

300

Sweden Denmark Finland Norway


Capitals and city centres versus rest of the countryWe have noted major price trend differences between houses and apartments, especially in Sweden. But what about different regions in the various Nordic countries? For sure, we know that the capitals tend to stand out, but are there any notable differences between the countries? As the development between the regions seems to differ somewhat for the Nordic countries, we review them all.

Norway: Stavanger, centre of the offshore industry, was the star until the oil price crash in 2014

Stavanger has now been overtaken by Oslo, where prices rose 35% in 2014-16

First, if we look at Norway, Stavanger was the shining star for many years, until it stagnated to Oslo levels in 2015, since when Oslo has taken the clear lead. The explanation is the oil price crash in 2014 which hit Norway hard, and especially Stavanger, which is the centre of gravity for Norway's offshore industry. In the past few years, more than 40,000 people in the Norwegian offshore industry have lost their jobs, and the local housing market in Stavanger has been severely affected. Between 2014 and 2016, house prices fell by 8% in Stavanger, while they rose by 35% in Oslo. In 2016 alone, house prices in Oslo increased by 23%.

Denmark had a home-grown crisis starting just before the global financial crisis – but has now recovered

We have already mentioned Denmark, where house prices started to fall one to two years before the global financial crisis. The development was classic: the Danish housing market correction was preceded by a construction boom which started in 2004. Many apartments were finished in 2006-07, by which time house prices had started to fall. Since this correction, house prices have recovered.

Regional house price changes, 2005-16, indexed 2005=100, Norway

80

100

120

140

160

180

200

220

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Tromsø Stavanger Oslo Bergen Norge


Regional house price changes, 2005-16, indexed 2005=100,

Denmark

80

100

120

140

160

180

200

220

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capital Zealand Southern Denmark Central Jutland North Jutland


Nordea Markets 34


Regional house price changes, 2005-16, indexed 2005=100, Finland

80

100

120

140

160

180

200

220

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Country Average Greater Helsinki Rest of Finland (Outside capital area)


Regional house price changes, 2005-16, indexed 2005=100, Sweden

80

100

120

140

160

180

200

220

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Greater Stockholm Greater Malmo Greater Goteborg National

Source: Nordea Market

Finnish house prices have climbed more steadily and moved less dramatically than in other Nordic countries

Example: Price per m² 95% lower for newly built house in Kuopio than for small apartment in Helsinki

The house price increases in Finland have been steady, with no major correction since 2005. Comparing Finland with Denmark, the price development over the 12-year period is more or less the same, in total. But while Denmark had a strong price increase during the first two years, followed by a rather dramatic fall, Finnish house prices have climbed more steadily. Looking at national averages, house prices have increased about 28%, while prices in the Helsinki region have risen 48%. However, the country average does not show the spread between different areas in Finland, which can be huge.

The pictures below show one of the most expensive apartments (in terms of price per square metre) that has been sold in Helsinki, and a newly built house in a more remote and – to say the least – far less pricey area, Kuopio. The apartment has an area of 27 m2 and the house 287 m2, and yet the price of the apartment is twice that of the house! The apartment was sold for almost EUR 18,000 per m2, while the price per m2 for the house is EUR 837 – roughly 95% lower.

Helsinki, 27.5 m2 apartment: EUR 490,000 Kuopio, 287 m2 new house: EUR 240,000

Stockholm is in a league of its own among Swedish house prices

Just as in the other Nordic countries, Swedish house price increases have been most dramatic in the capital. Stockholm attracts people with job offers, and a has a rich offering of culture and entertainment. There have also been significant price increases in major Swedish university cities in Sweden, like Gothenburg, Uppsala, Linköping and Umeå. The Öresund region, including Greater Malmö, is a growing area as well, and house prices have increased there over the past ten years. The region is well integrated with Denmark (especially Copenhagen) and was therefore affected by the Danish housing market correction in 2007-11.

Nordea Markets 35


Accommodation costs: High prices affordable

It is important to make the distinction between house prices and cost of accommodation. Absolute house

prices are high, but the share of income spent by Nordic households on accommodation is not. A

combination of low unemployment, rising disposable incomes and record-low interest rates have made

households able and willing to buy homes at historically high prices.

"What is it worth?" versus "What does it cost to live there?"House prices are high but households are more willing and able to pay up

On 14 October 2015, Nordea's Swedish macro analyst, Andreas Wallström (who is interviewed in this report), managed to raise a few eyebrows when he released his research note on the Swedish housing market titled, "Sweden: Record-low housing costs". It stood out at a time of soaring house prices, and an ongoing debate about the sustainability of the record prices at that time.

The core of Andreas' argument is as valid today (when housing prices are even higher) as it was in 2015. The point is that, yes, house prices are high, but unemployment is low, disposable incomes have grown, and record-low interest rates have pushed down accommodation costs. This means that despite the high housing prices, households are spending less on their accommodations than at any other time in the past 20 years.

Norwegian national average share of income spent on accommodation is at 18%, in line with the 25-year average

In a more recent research note from 22 February this year, Nordea's Norwegian macro analyst, Joachim Bernhardsen, makes a similar argument for today's Norwegian housing market. House prices are at record highs, but low interest rates and rising disposable incomes have kept the national average share of income spent on accommodation at 18% of the median household income. This is in line with the 25-year average in Norway. In Oslo, this share is at a 25-year high of 30%, just above the pre-crisis peak in 2007.

For household income spent on accommodation and living expenses to reach historical averages, house prices would have to rise another 30% or interest rates would need to rise to 6.5%

Does this mean housing in Oslo is massively overpriced? Not necessarily. Taking into account both accommodation costs (mortgage interest and maintenance costs) and general living expenses, the latter have grown much slower than growth in disposable incomes. Adding up accommodation costs and living costs as a share of disposable income, the 25-year average is 62% for Norway as a whole, and 70% for Oslo. The current share is 55% for Norway, and 68% for Oslo. So, Norwegian households are currently spending much less of their available income on accommodation and living than they used to, and in Oslo specifically, they are still spending a bit less than the long-term trend. For the share of household income spent on accommodation and living in Norway as a whole to reach historical average levels, house prices would have to rise another 30%, or interest rates would need to rise to 6.5%.

Mortgage interest costs affect accommodation costs the most. The graph below shows interest costs as a share of household disposable income in the Nordic countries since 1999.

Nordea Markets 36


Interest expenditure % of disposal income, 1999-2016

0

2

4

6

8

10

12

14

16

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Tota

l in

tere

st e

xpen

dit

ure

% o

f d

isp

osa

l in

com

eDenmark Finland Norway Sweden


Of the Nordic countries, household debt is highest in Denmark and lowest in Finland

Interest expenditure shares of income have fallen since the peak in 2008 for all Nordic countries; most significantly for Denmark, where it has fallen from a peak of more than 14% of disposable income to less than 4%. The high interest cost share in Denmark is partly explained by the fact that Danish indebtedness is higher than in any other European country. In 2015, Danish household debt as a share of disposable income was 292%! Norway was not far behind with a corresponding figure of 222%. Not very surprisingly, the lowest household leverage in among the Nordic countries was in Finland, at 130%.

Household debt, % of disposable income, 2015

0

50

100

150

200

250

300

350

HU

NLV

ASV

NP

OL

SVK

CZE EST

ITA

DEU

AU

TFR

AU

SA BEL

GR

CES

PFI

NP

RT

GB

RKO

RC

AN

SWE

CH

EA

US

NO

RN

LDD

NK

% of net disposable income

Source: OECD

Household debt, % of disposable income, 1995-2015, Denmark

0

50

100

150

200

250

300

350

400

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

% of net disposable income

Source: OECD

Danish household debt to income peaked in 2008 at 340%, and is now 292%

Danish household debt increased steadily, driven by a booming housing market, and peaked in 2008 at 340% of disposable income. The global financial crisis, adding further to the Danish housing market correction which happened more than a year earlier, turned this trend, and lowered the household debt-to-income quota to 292% by 2015.

High savings in Denmark offset high household debt; household net worth highest in the Nordic countries

To be fair, one has to look at the bigger picture. While the Danes borrow a lot of money, they also tend to save a large amount of money, especially in pension funds. Hence, when one looks at the households' net worth (the total amount of financial assets plus the total amount of non-financial assets minus the total value of outstanding liabilities), the Danes actually top the Nordic list.

Nordea Markets 37


Household net worth, % of disposable income, 2015

0

100

200

300

400

500

600

700

Denmark Sweden Finland Norway*Household net worth % of dispsable

income

*Norway=2014

Source: OECD

Looking at interest rates, the biggest component in accommodation costs and a key driver for house prices, it is useful to get a bit of perspective. In the graph below, we show three-month policy rates in the Nordic countries. The days of short-term rates above 10%, in a high-inflation environment, are long gone. In the Nordic region, we have not seen that since the early 1990s, but even in the past 15 years, interest rates have taken a plunge.

Nordic interest rates have been below 3% since 2010 and (except for in Norway) negative since 2015

Although slightly different in the various countries, policy rates were broadly around 4% 15 years ago, peaking at around 5% at the outbreak of the global financial crisis in 2008, before falling to zero. Mortgage interest rates clearly have a spread above these short policy rates, but have over this period broadly followed the underlying risk-free rates. Policy rates in the Nordic countries have now remained below 3% for eight years, and aside from in Norway, have been negative since 2015. We have all started to get used to these low rates and it has become the new normal.

Three-month money market rates, Nordic countries, 2002-18E

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Sweden Norway Denmark Euro Area

Source: OECD

Nordic households have adapted what they can and want to pay for housing to the current employment, income and interest rate situation

In summary, house prices are of course greatly affected by interest rates, but certainly not only by them. It is more accurate to look at accommodation costs for households, and more specifically, consider accommodation costs as a share of household income. For even greater accuracy, we can look at accommodation costs plus cost of living, to get a sense of what households have available to spend, and how much of that they can and want to spend on accommodation. As our Norwegian analysis from February shows, high house prices have been accompanied (or one

Nordea Markets 38


could argue: driven) by rising incomes, low unemployment and more slowly increasing living costs, in conjunction with low interest rates. This cocktail of tailwinds has enabled households to pay up for houses and apartments; and that they have done. In fact, we argue that households have adapted what they are willing to pay for their accommodation in line with their current employment status, income and expectations for mortgage interest rates.

Nordea Markets 39


Interview: Big correction unlikely without shock

We interview Klas Danielsson, CEO of Swedish state-owned mortgage lender SBAB, asking him what the

consequences of stricter mortgage regulations are for borrowers, whether there are any anomalies in

today's housing market, how a mortgage bank can meet future challenges, what the main threats are, and

what strategies SBAB should pursue to overcome them.

KK: We’ve had a period of many years with rising house prices and currently the levels are currently record high. Do you have any concerns about a potential housing bubble in Sweden or the Nordic countries? Are there any segments that may be more vulnerable than others?

KD: Generally, you can say that if you’ve had a long period of increasing asset prices, the risk of a price correction increases as well. For house prices to fall significantly in Sweden, I believe it will take some sort of event; a shock. Households tend to be cautious if there is a big negative event, and will put home purchases on hold for a while. As we have an uncertain macro environment today, due to among other things Brexit and the recent US presidential election, the risk for a shock might be somewhat bigger today compared to some years ago. One should remember though, that if we were to see a Swedish house price fall of 10-20%, the decline would only correspond to the price increase of the past 18 months. In the long run, prices would ultimately recover as we all need somewhere to live.

Without any external negative shock, I would say that there is quite a smallrisk for a price fall in Sweden. There are fundamental factors that explain current house prices. For example, we’ve had a positive population growth in combination with a low supply of new residential housing. We are currently building at a sufficient pace; ie the number of new homes matches the population growth, but that hasn’t been the case for many years and there is pent-up demand for about 500,000 new homes in Sweden.

So, overall, I would say there is quite a low risk for a major price fall in Swedish house prices.

KK: Central banks and financial supervisory authorities in the Nordic countries have given the housing market a lot of attention, and in many cases they have been pushing for regulations to cool off the price increases. Do you feel that there has been a need for new regulations to prevent overheating? Have there been too many regulations, or do we need more?

Pent-up demand for ~500,000 new homes in Sweden

KD: This is a very interesting topic, which I think has become quite odd in some ways. Not just in Sweden, but globally, politicians have failed to correct structural imbalances in economies and between economies, and instead have pushed responsibility over to authorities like central banks and regulators. As a consequence, central banks now determine the economic development in a way that we haven’t seen before. In Sweden, we would have needed a number of political decisions, across political bloc boundaries in Parliament, to address rising house price. The politicians have not succeeded though, and the initiative has been passed on to the authorities. Hence, in Sweden, it has been the central bank and the FSA that have pushed measures to slow the price rises. And it has not stopped there. Now the authorities actually ask us, the banks, to take a socioeconomic responsibility for our business as well. Of course, we are

Nordea Markets 40


aiming at managing our business in a responsible manner, but from a business perspective. Shall we now also assume responsibility for the economic development of society as a whole? I’m not in favour of the current evolution – I believe that this responsibility should be brought back to the politicians, where it belongs.

KK: How much influence do you think tax rules have on house prices? What has affected house prices the most - the deductibility of mortgage interest costs, property taxes or capital gains taxes?

KD: It is difficult to say which has had the greatest effect, and it has most likely varied over time as well. We tend to view things from our own perspective. To me, for example, the capital gains tax is something that I would gladly see reformed. Not only do I believe that it affects prices, but more importantly it prevents people from moving. It creates substantial lock-in effects. Take me as an example. I am 53, with four children. Three of them have already moved out, and number four will most likely move out in the coming years. We would be happy to move to something smaller, perhaps to an apartment close to the city centre. But the capital gains tax makes us doubt whether it would really benefit us to do so. We bought our house in 1993 and since then apartment prices have risen more than house prices. On top of paying handsomely for a flat in a good location, we would need to pay a substantial amount of taxes on the capital gain from our house that has built up over our 20 years of ownership. We could end up with a much smaller home, without actually releasing and keeping much of the capital tied up in our previous home.

Generally, all kinds of housing market regulations tend to create lock-in effects. The rules themselves make it more difficult to move. For example, moving to a new apartment could mean that you are all of a sudden subject to the new amortisation rules. That could mean that your cash outflow for accommodation would rise significantly. Not only do the new rules make it more difficult for our customers to move, but they are also anti-competitive in that they make it more complicated for us to have potential clients move from another bank to us.

KK: Do you see any anomalies in the differences in prices between cities or regions, or between flats and houses - anything that stands out in particular?

Housing price anomaly in Sweden: yields in least attractive locations have started to converge with yields in prime locations – driven by investors' hunt for yield and by regulations

KD: I would say that we are starting to see some anomalies now. For example, yields on properties in C (least attractive) locations have started to come closer to yields in B locations. This development is at least partly driven by investors looking for yield. Even if yields have come down in the C locations, they haven’t decreased at the same pace as funding costs, from the low interest rates. The yield equalisation between the different districts is also driven by regulations. Tougher regulations have made it harder to finance an apartment in an A location. As a consequence, more people are forced to buy apartments in B and C locations, which means that prices are increasing in these areas. From an open market economy perspective, this phenomenon is of course incorrect – regulations should not determine prices.

KK: When you look at "the big picture" of the housing market, what are the most important drivers for house prices? Accommodation costs, interest rates versus disposable income? Demographics -population growth versus local supply? Credit environment? Other?

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KD: The accommodation cost is of course an important driver. Even if we currently have record high house prices, the accommodation cost has never been as low as it is now. That has a positive effect on house prices. I have already mentioned the housing deficit in Sweden, which is another important driver.

But, if we imagine that we didn't have an excess demand or record low interest rates, what would happen then? Most likely, in the city centre of Stockholm the prices would have been very high, as they are today, but the differences between prime and peripheral districts would have been greater. Hence, the main rule when it comes to pricing for housing would have been even more true – which is: location, location, location.

KK: How do you perceive the availability and terms for mortgages today from a historical perspective? Have there been significant changes over time? How do you think it will develop in the future?

Nordic banks typically refuse to offer mortgages that are higher than 5-6x of disposable incomes, or to those unable to cope with an interest rate of 7% or higher

KD: It has clearly become tougher to get a mortgage today compared to five or ten years ago. We at SBAB, as well as our competitors and the authorities, have become stricter, which has made it more difficult for households to borrow as much as they would like. Most banks require their customers to be able to cope with an interest rate of at least 7% and most banks say no to mortgages in excess of 5x to 6x the disposable household income. Thanks to stricter requirements, we can also see that the credit quality and repayment ability of our customers have improved. Still, even with these stricter mortgage rules, we see that house prices are increasing. That is driven by a very high demand. But as long as the house prices increase, we will continue to work with improved credit quality among our clients, as the risk for a price fall increases with higher house prices. I believe all banks have the same mindset in this regard.

KK: Do you see significant differences in strategy among the players in the mortgage market? Are there any that stand out? How would you describe SBAB as a player compared to its competitors?

KD: It is difficult to comment on our competitors in detail but I would say that we still are very different from other banks. Most of them look at their clients’ total business with the bank when they offer a mortgage and mortgage terms. That is also why the list prices on interest rates are much higher compared to the average rate actually paid by customers at traditional banks. Our list price for mortgage interest rates is clearly lower, by about 40 basis points, but this is also what our average customer actually pays. Furthermore, this also means that the mortgage has to exist on its own merits. Currently, at traditional banks in Sweden, you often get an interest rate based on your total commitments with the bank. Less attention is given to the actual repayment ability or the value of the underlying asset. As we are moving towards a future with more transparency, it will be easier for clients to compare prices between the banks and it will also be easier to change banks. Clients that pay high mortgage rates will most likely move to us. As a consequence, it will be harder for the traditional banks to offer lower rates to “prime customers” as the average earnings per client will decrease.

KK: But I guess that it’s not always that easy to just move your commitments from one bank to another? You have to take any sharing of your collateral between banks into account for example, and some loans might be structured in such a way that a move is not that straight forward.

KD: That is true but I think that the market will be forced to adapt sooner or later. I also believe that the first development in this direction will be

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within deposits. We already see this happening in Europe. There you can easily open up an account and put your money at the bank that offers the best yield. Hence, the money is moving to the banks that have the best offer. This will also happen in Sweden but it will be difficult to handle such a system, treasury-wise, planning-wise or financially for a bank. But theoretically we are moving in that direction.

KK: How do you think the big operators’ mortgage portfolios differ from each other? Are there differences in credit quality, regional mix, houses versus flats, other?

KD: I would not be able to comment on the credit quality, but the asset mix differs among the banks. SBAB, for example, is strong in Stockholm, Göteborg and the Öresund (Copenhagen/Malmö) region, as well as in some university cities. In Stockholm, 20-25% of the people on the street respond that SBAB is first in mind when mortgage lending is mentioned. The reason we are absent in small cities is because we are a remote operator without a branch network, and we rely on digital services. That doesn’t work as well in small cities where people traditionally have stronger relationships with their local bank.

However, as authorities put stricter and stricter requirements on mortgage customers, we might be forced to widen our customer base. The recent threat, to implement a debt-to-disposable-income cap, could impair our competitive situation, as it would affect our customers the most. People need to borrow different amounts depending on where they live. In Stockholm, people are often prepared to use a big share of their disposable income on accommodation. It would be strange for the authorities to force them not to do that.

KK: How do you think the mortgage market may change in the future? Digitising? Consolidation? Regulations? Other drivers?

KD: Something that we’ve been thinking of and that we would like to offer are products that are linked to mortgages. One fantastic product for seniors, for example, could be to offer a revolving credit facility based on the property collateral. Imagine that you have a house with no mortgage or a very small mortgage and that you, on a monthly basis, could borrow against your house - just to make life a little bit nicer. But it is not possible to offer such a product, as the lender needs to have capital enough to cover the facility even if the customer chooses not to use it. This means that the product would be very expensive for the bank, and that is a pity.

KK: What do you believe that SBAB will look like in 10 years?

Some effort will be needed for mortgage lenders to avoid becoming sub-suppliers to new digital platforms who have the relationships with end customers

KD: Ten years out is a bit too long to have an opinion on. But say in five years, then I believe that we will have an even stronger focus on our main product - mortgages. I also believe we will have started offering ancillary products; products that are linked to housing. We are moving towards a future with increased competition and with new players that threaten to take our customers. We don’t want to develop in a direction where we become suppliers of infrastructure or commodity-based services. That would hardly be a high-margin business! Companies that manage to keep up high profitability are those that manage to have a close customer relationship and manage to get paid for the service or experience that they offer. Hence, we believe that our best strategy to stay profitable is to become the number one player within our niche – mortgages. While the other banks currently offer the same service, they also have a wide range of other products. We have a comparative advantage here, as we can put all our resources into our main product.

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KK: What kind of additional products within housing do you see that you would be able to offer in the future?

KD: We like to keep it simple. What do people spend most of their time browsing for on the internet? Most of the time it has something to do with housing: properties for sale, decoration, renovation, gardening. Hemnet (housing ads) is one of Sweden’s largest internet sites, and we see a lot of opportunities there. Data and information is starting to become more and more available as authorities such as Statistics Sweden, the National Board of Housing, Building and Planning, the Swedish Tax authorities, etc, are sharing it with us. Think of what one can do with all of that info! We are currently working on developing our own site, Booli, further. In the future, we believe that the match between buyers and sellers in the housing market will be made automatically. The whole real estate sector will transform, and the role of the broker will change significantly. Since that industry is quite close to ours, we certainly want to be a part of that journey.

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Screening: Which companies are exposed?

If you are an equity investor, where among listed Nordic companies will you find exposure to the Nordic

housing markets? We highlight the most obvious exposures among home builders, real estate, general

construction and banking sectors, ranking companies by degree of exposure. Sticking to bigger market cap

companies, those which stand out with significant Nordic housing exposure include Balder,

Lundbergföretagen and Wallenstam in real estate, Danske Bank and Swedbank among banks and JM

among home builders (Bonava is less Nordic). In the mixed 'others' category, Byggmax and Inwido have

highest exposure, while Nobia is no. 3, but in the bigger market cap category.

We see exposure to the Nordic housing market among listed companies in the real estate, construction and banking sectors

Almost everyone has a view on the housing market. There could be as many interpretations and conclusions from this report as there are readers. Irrespective of whether one believes the Nordic housing markets face an imminent crash or that there is still major potential upside before peaking this time, we find it useful to review the universe of listed Nordic companies and examine which of them are exposed to the Nordic housing sector.

Together with Nordea's equity analysts, we identify three categories of listed Nordic companies with potential exposure to Nordic residential property:

Real estate companies: Own and develop real estate, including housingConstruction companies: Construct buildings, including housingBanks: Lend money to home buyers through mortgagesOther companies: Mainly building materials and installation services.

Readers can use this screening as a rough guide to the companies that would be likely (at least on a general level) clear winners or losers from any major Nordic housing market surge or correction.

Real estateThe top ten residential-heavy listed real estate groups are Swedish and Norwegian

We rank the listed Nordic real estate groups according to the share of their real estate portfolios that is residential. The top ten, in effect the ones with more than 75% residential portfolios, are all Swedish and Norwegian –except for Prime Office A/S of Denmark (which is, however, a very small company in this context). Of the bigger listed real estate groups in terms of market cap, Bonava stands out with 100% residential exposure, while Balder, Lundbergföretagen and Wallenstam are all around 50%.

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The high market cap residential plays are Bonava, Balder, Lundbergföretagen and Wallenstam

Nordic listed real estate companies ranked by exposure to residential properties

Company Market Cap EURm Country % Residential

HEBA 437 Sweden 92%D. Carnegie & Co 830 Sweden 91%Victoria Park 666 Sweden 90%Prime Office A/S 55 Denmark 77%Fastighets AB Balder 3,840 Sweden 56%Lundbergföretagen 4,689 Sweden 49%Wallenstam AB 2,355 Sweden 44%TK Development A/S 128 Denmark 17%Fast Ejendom Danmark A/S 31 Denmark 14%Dios Fastigheter AB 628 Sweden 9%FastPartner AB 888 Sweden 7%Jeudan A/S 1,046 Denmark 6%NP3 Fastigheter 276 Sweden 6%Castellum AB 3,492 Sweden 1%Fabege AB 2,593 Sweden 1%Entra ASA 1,972 Norway 1%Hufvudstaden AB 3,122 Sweden 0%Olav Thon Eiendomsselskap ASA 2,069 Norway 0%Citycon Oyj 2,008 Finland 0%Atrium Ljungberg AB 1,943 Sweden 0%Sagax AB 1,698 Sweden 0%Hemfosa Fastigheter AB 1,572 Sweden 0%Wihlborgs Fastigheter AB 1,433 Sweden 0%Sponda Oyj 1,382 Finland 0%Klovern AB 1,380 Sweden 0%Pandox AB 1,229 Sweden 0%Kungsleden AB 987 Sweden 0%Norwegian Property ASA 635 Norway 0%Catena 518 Sweden 0%Platzer 490 Sweden 0%Technopolis Oyj 482 Finland 0%Corem 419 Sweden 0%Pioneer Property Group ASA 72 Norway 0%Storm Real Estate ASA 10 Norway 0%

Source: Fastighetsvärlden, Company data and Nordea Markets, Nordea estimates for 2016

General ConstructionSkanska is the only listed construction group that is not purely Nordic (with 'only' 42%)

For listed Nordic general construction groups, we are not able to find real transparency of exposure to residential construction within their contracting businesses. We opt to look at the geographical breakdown of sales. We rank the companies according to their share of sales in the Nordics. As a complement, we add their share of group sales in each Nordic country.

We would not argue that this necessarily offers a great correlation with how much of each company's construction activity is residential versus commercial, but it gives some sense of which countries matter greatly for each company and which national markets are their key markets.

We see clearly from our screening that construction is a local business. Nearly all of the construction companies have 90% or more of their business in the Nordic region. Only Skanska has a truly international business mix, with "only" 42% Nordic sales. Peab is a play on Sweden, Lehto, Consti and Lemminkainen are plays on Finland, and Veidekke is a play on Norway, while NCC is more pan-Nordic. There is no real listed play on Denmark.

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Nordic listed construction companies ranked by Nordic share of sales

Sweden Norway Finland DenmarkNCC AB 2,458 Sweden 100% 55% 14% 17% 14%Peab AB 2,368 Sweden 100% 83% 11% 6%Veidekke ASA 1,790 Norway 100% 27% 67% 7%Lehto Group Oyj 714 Finland 100% 100%Consti Group Plc 119 Finland 100% 100%SRV Yhtiot Oyj 276 Finland 92% 92%Lemminkainen Oyj 442 Finland 87% 9% 9% 60% 9%Yit Oyj 834 Finland 72% 72%Skanska AB 9,183 Sweden 42% 25% 12% 5%

Company Market Cap EURm Country % Nordic salesOf which

Source: Thomson Reuters, Company data and Nordea Markets, Nordea estimates for 2016

Home builders have the cleanest, most direct exposure to Nordic housing markets among listed companies

Home buildersIn this category, we put companies that are classified as either real estate or construction by the stock exchange and for which we argue the main, core business is construction of new homes.

These companies arguably have the most obvious, direct exposure to any housing market correction. Almost all are entirely Nordic plays, the only exception being Bonava, which has 38% of its business in Germany, Russia and the Baltic countries. JM, Besqab and Oscar Properties have Swedish exposure, while Selvaag and Solon Eiendom are plays on Norway.

Nordic listed home builders by Nordic share of sales

Sweden Norway Finland DenmarkSelvaag Bolig ASA 421 Norway 100% 100%Besqab 328 Sweden 100% 100%Oscar Properties 300 Sweden 100% 100%Solon Eiendom ASA 132 Norway 100% 100%JM AB 2,215 Sweden 99% 82% 15% 1% 1%Bonava 1,592 Sweden 62% 37% 7% 11% 7%

Company Market Cap EURm Country % Nordic salesOf which

Source: Thomson Reuters, Company data and Nordea Markets, Nordea estimates for 2016

Other companies with exposure include mainly building materials and installation players

Other companies with residential construction exposureIn addition to the sectors reviewed above, we see a mixed group of companies whose businesses depend to a varying, but meaningful degree on residential construction activity. We group these in the table below, ranking them according to our estimated share of their revenue derived from Nordic residential construction.

To add some depth to this screening, we include a split of the residential construction between newbuilding and renovation of existing homes.

Other companies' exposure to the Nordic residential construction market

Of whichNew homes Renovation

Byggmax 392 Sweden 100% 15% 85%Inwido 630 Sweden 86% 26% 60%Nobia 1,616 Sweden 51% 28% 23%Ramirent 800 Finland 39% 17% 22%Cramo 950 Finland 28% 12% 16%NIBE 3,275 Sweden ~27% ~7% ~20%Ahlsell 2,629 Sweden ~25% ~5% ~20%Bravida 1,269 Sweden 15% 15% 0%Per Aarsleff 458 Denmark 15% 8% 8%Systemair 812 Sweden ~7-13% ~2-3% ~5-10%Lindab 611 Sweden ~11% ~6% ~5%Uponor 1,200 Finland 7% 3% 4%Rockwool 3,491 Denmark 5% 2% 4%Caverion 940 Finland 0% 0% 0%

% of revenue from Nordic residential construction

Company Market Cap EURm Country

Source: Thomson Reuters and Nordea Markets, Nordea estimates for 2016

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Highest exposure to Nordic residential construction for Byggmax (building materials), Inwido (windows) and Nobia (kitchens)

By far most exposed among these companies is Swedish building materials retailer Byggmax, closely followed by window maker Inwido. Kitchen maker Nobia has just above 50% exposure. Virtually 100% of its business is exposed, but half of its revenue comes from outside the Nordic region.

The same three are at the top regarding exposure to newbuilding as opposed to renovation, with 15-20% of their revenue linked to construction of new homes in the Nordic region.

Ramirent, Cramo, NIBE and Ahlsell all have 25-40% exposure to Nordic residential construction – significant but not dominant. The rest of the companies in this group have 15% or less exposure.

BanksThe most 'mortgage-heavy' major banks are Danske Bank (66% of lending) and Swedbank (64%)

The mix of lending among the listed Nordic banks varies quite significantly. We rank the banks according to the share of mortgage lending in their loan books. Not surprisingly, a number of smaller savings banks show up among those with the greatest exposure.

SEB stands out among major banks, with only 24% mortgage lending

Of the major Nordic banks, Danske Bank and Swedbank are by far the most mortgage-heavy in their loan books, with mortgage lending representing about two-thirds of total lending each. Handelsbanken is not that far behind at 55%. DNB and Nordea are clearly more mortgage-light, at around 40% of lending and SEB is seemingly in a category of its own, with only 24% of lending represented by mortgages.

Listed Nordic banks ranked by mortgage lending share of loan book

Bank % mortgage lending Country RankingSparebanken Øst 77% Norway 1Jyske Bank 70% Denmark 2Sparebanken Vest 68% Norway 3Danske Bank 66% Denmark 4Sparebanken Nord-Norge 65% Norway 5Swedbank 64% Sweden 6Sparebanken Møre 63% Norway 7Sparebanken SR-bank 57% Norway 8Sparebanken SMN 56% Norway 9Handelsbanken 55% Sweden 10DNB 44% Norway 11Nordea 39% Sweden 12SEB 24% Sweden 13Sydbank 23% Denmark 14SparNord 15% Denmark 15Ringkjobing Landbobank 15% Denmark 16

Source: Company data and Nordea Markets, Nordea estimates for 2016

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Completion date: 24 March 2017, 10:35 CET

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