What’s Causing the Swedish Housing Market Plunge
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The Swedish housing market, long one of the hottest in Europe, has become one of the coldest in the world. The fall in prices is at levels comparable to the early 1990s, when Sweden was rocked by a property crash that reverberated throughout its financial markets and forced the government to take over banks that were on the brink of bankruptcy. This time around, high prices and rising interest rates to combat runaway inflation have combined to knock home values down more than 15% from their peak in March 2022, with many predicting further declines – and that the problems of the housing market may worsen an impending recession.
1. Why did the market grow so significantly?
There have been warnings, for years, if not decades, of an exaggerated rise in house prices. Home values were boosted by housing shortages, years of low interest rates, and mortgages that for years only required interest payments. New amortization requirements introduced from 2016 changed that, but most households are still forced to pay down their debt up to 50% of the property’s value. The results include home price increases that outstripped the pace of wage growth as well as the expansion of gross domestic product, and left many homeowners deep in debt.
2. What caused the fall?
Around the world, housing markets suffered in 2022 as central banks raised interest rates in response to sharp increases in inflation. But the consequences in Sweden were particularly dramatic, largely because the proliferation of variable-rate mortgages has left households there extremely vulnerable to changes in interest rates. More than 40% of mortgages reset their rates in three months or less, and only 18% are fixed for terms of three years or more. And Swedish household debt in 2022 averaged 200% of annual disposable income, up from 150% 15 years ago. This seemed easier to sustain during the unprecedented 7-year period during which the Riksbank set rates at or below zero. That ended in April, when it started raising rates. By the end of the year, the central bank had raised its key rate to 2.5% and was expected to continue raising it in 2023.
3. What is the global context?
The development in the Swedish housing market is just one example of a reckoning that is unfolding as the world emerges from an era of cheap credit that has led to rising debt. In 2022, house prices fell in countries including Canada, Australia and China, and forecasters warn of an imminent fall in the UK. But just as its price gains outpaced most European markets since the 2008 financial crisis, Sweden is taking a harder hit now that trends are changing.
The main concern, for now, is that households will cut back on spending as falling home values make them feel poorer – just as real wages, that is wages adjusted for an inflation rate of around 10%, are falling a record pace. The pass-through of rate hikes to mortgage rates is expected to have a rapid effect on consumer finances. The central bank still believes the fallout could be limited to a mild recession in 2023, while other forecasters, such as Nordea Bank Abp chief economist Annika Winsth, have warned the Riksbank may be underestimating the impact. The bank, which is the Nordic region’s largest, pointed out that falling house prices typically make households tighten their belts after the lender cut its forecasts to show the Swedish economy will shrink by 2% this year.
Forecasters have been united around calls for a 20% drop from the peak, but it could get worse. Their projections are based on the assumption that unemployment will not rise and that the Riksbank will stay on the hook once the base interest rate reaches around 3%. Neither is guaranteed. With consumer confidence near all-time lows, the hitherto stable situation in the labor market could change drastically next year. The central bank has warned that if inflation refuses to budge, it may have to raise its key rate above 4.5%. In such a scenario, and with the added risk of electricity prices remaining at record levels as the effect of Russia’s curb on energy exports continued to ripple across Europe, it is hard to see house prices falling in 20%.
6. Is all bleak then?
Well, there are a few factors that can provide some comfort. Speculative buying has been limited by restrictions on subletting, and the housing shortage should provide a cushion in many local markets. Also, estate agents – no doubt perpetual optimists – report that there has been some stabilization in Stockholm, which is sometimes seen as a drag on the wider market. Most forecasters still believe prices will continue to fall until there are signs that inflation is easing, which would bring some clarity on how higher interest rates will fare.
7. Is there a risk that this will cause a financial crisis?
It seems impossible. The country’s financial watchdog still expects most new borrowers to have sufficient margins to service their loans, even if their finances weaken. Some families may find themselves in trouble, but there is still little concern that such problems will translate into significant credit losses in the banking system. Borrowers are tested by lenders and Sweden’s generous social welfare system provides support through unemployment and sickness. For those still struggling to pay their interest rate costs, there is no way to get rid of a mortgage through foreclosure. The latest stress test by the Swedish financial watchdog showed that in a scenario where house prices continue to fall for three years and unemployment rises sharply, banks’ mortgage loan losses would amount to less than 1% of outstanding stock. The authorities are therefore more concerned about credit losses and contagion effects from Sweden’s commercial real estate sector than from housing.
–With the help of Ott Ummelas.
More stories like this are available at bloomberg.com
