Sweden's government is ready to stem the fallout from a property rout if tumbling prices cause a broader crisis – a potential harbinger of trouble across Europe.
High debts, rising interest rates and a wilting economy have produced a toxic cocktail for Sweden's commercial property companies, with several cut to junk by rating agencies.
House prices are also down by around one-fifth since their March 2022 peak, according to the Organisation for Economic Cooperation and Development (OECD), reflecting soaring mortgage costs.
Swedish Financial Markets Minister Niklas Wykman told Reuters the state has the financial clout to prevent a property market plunge from engulfing the country, one of Europe's wealthiest, and its banks.
"There is a preparedness to act," he said.
"If ... more accidents happen ... or ... new risks are revealed ... or threats to the financial system arise, then the most important thing from a stability perspective is to have a broad toolbox ... which the state can use."
Concerns about the property sector are already weighing on the currency, while investors are wondering if Sweden is only the first domino to fall in Europe.
Sweden and Germany are among the worst affected by a widening property slump on the continent, according to Eurostat.
Earlier this week, the OECD warned of 'financial stability risks' in Sweden, pointing to banks' heavy lending to property companies and homeowners, most of whom have floating-rate mortgages that move in lock-step with rising interest rates.
Although Wykman did not outline how his government could act and emphasized that banks were "profitable and stable," his comments underscore growing worry in Stockholm.
In the early 1990s, the collapse of a Swedish housing bubble triggered the nationalization of two banks, the bailout of a third, and a devaluation of the Swedish crown, plunging the country into a deep recession.
"It is clear that Sweden has low government debt and the ability to react if a crisis ... were to develop," said Wykman.
Property is the lynchpin of the Swedish economy, making up 80% of household debt. Weighed down by home loans, Swedes are twice as heavily indebted as Germans or Italians.
According to the OECD, commercial real estate makes up 18% of bank loans, more than three times the level in Spain or Ireland.
Swedish officials are worried that banks could compound property companies' troubled by cutting credit, triggering fire sales that would further drag down the market.
One of Sweden's biggest landlords, SBB, is at the center of the spiral. It is scrambling to salvage its finances after recently seeing its credit rating downgraded to junk.
The company was founded by a former social democrat politician, Ilija Batljan, who built up vast debts, buying public property, including social housing, government offices, schools, hospitals, police stations and an army facility.
Hit by soaring interest rates that forced the company to cancel its dividend and scrap a share issue, SBB is now hunting for a buyer of all or parts of its business after Batljan was forced to step down.
SBB had 81 billion Swedish crowns ($7.6 billion) of debt as of March, with around 15% of it maturing within one year.
The company told Reuters it had strengthened its liquidity position, including selling a stake in a construction firm.
But SBB's problems, which some analysts partly blame for Sweden's sinking currency, are causing alarm in Stockholm. Its ownership of swathes of public property puts a question mark on the provision of government services.
Coupled with falling property prices and rising mortgage costs, the crisis also threatens a voter backlash against a government already under pressure over a rising tide of gang violence.
Financial markets minister Wykman said he had discussions with banks, property companies and investors about the entire commercial property market.
This week, analysts at JP Morgan said big banks in Sweden, which had 1 trillion Swedish crowns of property exposure, were 'ill-prepared' for losses.
The four main banks in Sweden played down any threat. Swedbank told Reuters it had been careful in lending. Finland's Nordea said its loans were strong and well-diversified.
SEB said it was "strong" and its credit quality "robust." Handelsbanken referred to a recent presentation, where it said that its property lending was conservative and diversified.
"When it comes to the commercial property side, clearly there are contagion risks," Wykman said, without singling out individual companies.
"It could be that one or more company sells assets. It leads to other companies having to revalue assets, which can, in turn, mean that more companies need to make changes."
