Sweden’s pre-sale requirements must change

According to the latest revised forecast from the National Board of Housing, Building and Planning (Boverket), Sweden needs 52,330 new homes per year between 2024 and 2033. Last year, only half that number were started. One of the main reasons is the strict pre-sale requirements imposed by the banks, a model that emerged during the boom years of the 2010s, when buyers lined up to sign pre-construction contracts and then resell their apartments at a profit before moving in.

That era came to an abrupt end in the wake of post-COVID inflation, when the policy rate was raised eight times in just over a year. Housing starts plummeted by 60 percent overall, and the decline was even greater for tenant-owned apartments. It was the steepest drop in new construction since the currency crisis of the early 1990s, while construction costs rose faster than at any time since the Korean War. Buyers who signed contracts before the rate hikes are now feeling the risks of the pre-sale model firsthand.

As early as 2018, the Riksbank warned about the danger of overburdening households and pointed out that alternative financing models with better risk distribution would likely be necessary to enable continued production of tenant-owned housing. The market needs a structure that secures the lender without using private households as the risk bearers. Risk needs to be shifted to stronger and more diversified actors.

We advocate a model based on an insurance-backed guarantee that ensures the tenant-ownership association is fully capitalized, a so-called full subscription guarantee. The model has been developed through close collaboration between lenders and the insurance industry, with input from the Swedish Construction Federation and individual housing developers.

The idea behind the model is simple. At the start of a housing project, there is always uncertainty about where market prices will be when the project is completed. No one knows. Under the current pre-sale system, the buyer commits to a price long before completion, while the market price at the time of move-in could be higher or lower. With the full subscription guarantee, the developer can complete the project and adapt to prevailing market prices. The association’s financial plan is guaranteed by the insurer, which in turn secures the bank’s credit exposure during the construction phase.

This means the bank no longer needs to rely on pre-sale agreements, but instead gains a stronger form of security. Developers can postpone sales to a later stage when conditions are more attractive for buyers, who are then shielded from price risk during construction. The model also makes the construction sector’s access to capital more resilient in times of external shocks. And it facilitates household mobility in the housing market, since buyers can purchase closer to completion and sell their current homes under the same market conditions.

Pilot projects show that profitability increases by roughly 25 percent and that construction starts can take place six to eight months earlier, shortening overall project timelines. These positive outcomes stem from projects being launched sooner and executed under reduced uncertainty. At the same time, most of the units can be sold after construction has started, a far more attractive proposition for buyers, which also supports higher willingness to pay. The combination of increased profitability and reduced buyer risk enables more projects to go ahead.

We can’t afford to wait any longer. It’s time to act. Reforming the current financing model is essential if Sweden is to achieve the level of residential construction the country urgently needs.

Lottie Löf, Bostadskreditfonden
Martin Atterby, FRF Partners
Carl Ljungqvist, Gallagher

 

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