1. Why has the market risen so strongly?
There had been warnings, for years, even decades, of an exaggerated rise in property prices. Home values have risen due to a housing shortage, years of low interest rates and mortgages that for years required only interest payments. New depreciation requirements introduced from 2016 have changed this, but most households are still only required to repay their debt at 50% of the value of properties. The results include increases in house prices that have outpaced wage increases as well as the expansion of gross domestic product, and left many homeowners deeply in debt.
2. What caused the fall?
Around the world, housing markets suffered in 2022 as central banks raised interest rates in response to a sharp rise in inflation. But the fallout in Sweden has been particularly dramatic, largely because the prevalence of variable-rate mortgages has left households there exceptionally 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 7½ years when the Riksbank set rates at zero or below. That ended in April, when he started raising rates. By the end of the year, the central bank had raised its benchmark rate to 2.5% and expected to continue the hike in 2023.
3. What is the global context?
The evolution of the Swedish property market is just one example of a wake-up call taking place as the world emerges from an era of cheap credit, which has led to ballooning debt. . In 2022, house prices have fallen in countries like Canada, Australia and China, and forecasters are warning of an impending recession in the UK. But just as its price gains have overtaken most European markets since the 2008 financial crisis, Sweden is being hit harder now that the trends are reversing.
The main concern, for now, is that households will cut spending as falling house values make them feel poorer – as will real wages, i.e. wages adjusted for a rate inflation rate of nearly 10%, are falling at a record pace. The transmission of rate increases to mortgage rates should have a rapid effect on consumer finances. The central bank still thinks the fallout may be limited to a mild recession in 2023, while other forecasters, such as Nordea Bank Abp’s chief economist, Annika Winsth, have warned that the Riksbank may underestimate the impact. The bank, which is the largest in the Nordic region, pointed out that falling house prices generally force households to tighten the purse strings, as the lender downgraded its forecast to indicate that the Swedish economy will contract by 2% this year.
Forecasters converged on 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 retain control once its policy rate reaches around 3%. Neither is guaranteed. With consumer confidence close to historic lows, the hitherto stable labor market situation could change drastically next year. The central bank has warned that if inflation refuses to budge, it may have to raise its benchmark rate above 4.5%. In such a scenario, and with the added risk that electricity prices will remain at record highs as the effect of Russian restrictions on energy exports continues to reverberate across Europe, it is difficult to see the fall in house prices stagnate at 20%.
6. Everything is dark then?
Well, there are a few factors that might be reassuring. Speculative buying has been limited by restrictions on subletting, and a housing shortage is expected to provide a cushion in many local markets. Additionally, real estate agents – admittedly perpetual optimists – are reporting that there has been some stabilization in Stockholm, which is sometimes taken as an indicator for the broader market. Most forecasters still believe that prices will continue to fall until there are signs of moderating inflation, which would provide some clarity on rising interest rates.
7. Is there a risk that this will trigger a financial crisis?
It seems unlikely. The country’s financial watchdog still expects most new mortgage takers to have enough margin to service their loans, even if their finances are weakening. Some households may find themselves in difficulty but, for now, few people fear that these problems will translate into major credit losses in the banking system. Borrowers are stress tested by lenders, and Sweden’s generous welfare system provides support in the event of unemployment and illness. For those who are still struggling to pay their interest charges, there is no way to get rid of a foreclosure mortgage. The Swedish financial watchdog’s latest stress test showed that in a scenario where house prices continued to plunge for three years and unemployment increased significantly, banks’ mortgage losses would represent less of 1% of the outstanding amount. As a result, authorities are more concerned about credit losses and contagion effects from the Swedish commercial real estate sector than housing.
–With the help of Ott Ummelas.
More stories like this are available at bloomberg.com