Sweden is facing its ‘day of reckoning’ as house prices plummet

Swedish property prices have suffered a serious decline as the country’s former central bank governor warned of high levels of household debt.

House prices in Sweden have risen quite reliably over the last decade. This has been supported by the lowest interest rates in a system where about half of people’s mortgages are financed on variable rates and the rest on short-term fixed rates.

But now property prices are on the rise. And this decline is not surprising given the “dysfunctional” nature of the market, according to Stefan Ingves, who led Sweden’s Riksbank from 2006 to 2022.

“I keep saying that debt levels in the household sector are just too far, too high and there will be a day of reckoning and eventually rates will go up, and now rates have gone up,” Ingves said. CNBC’s “Squawk Box Europe” in an exclusive interview Tuesday.

“What you’re seeing now is almost exactly what we expected, and that is that households have to pay more and interest rate sensitivity … from Swedish households.

Pandemic effect

During the Covid-19 pandemic, house prices across Europe continue to rise, and Sweden is no exception. The demand for property is increasing as work from home and the preference for domestic holidays are causing people to expand their space.

On average, house prices rose by 30% compared to pre-pandemic levels in January 2020, according to Nordea Bank, as the Riksbank began buying mortgage bonds, trying to lower rates and add fire to an already overheated housing market. .

But now prices fall, dramatically.

“In November, we saw national prices in Sweden fall 13% from the peak in February. This is the biggest decline in the housing market since we had a great economic crisis in the nineties,” Gustav Helgesson, analyst at Nordea, told CNBC.

House prices fell 15% between their peak in March and November last year, according to financial services firm Valueguard, as reported by Nordic corporate bank SEB.

Central bank interest rate hike

In 2022, Sweden’s central bank undertook an aggressive interest rate hiking cycle that ricocheted through the property market.

In February, the Riksbank signaled the policy rate would remain unchanged at zero, and predicted a final increase for the second half of 2024. But in the bank’s next monetary policy statement just three months later, the rate rose to 0.25%.

“He really just moved from that meeting to the next meeting in April and started the hiking cycle,” Helgesson told CNBC.

Rates continue to rise throughout 2022, from 0.25% to 0.75% in July, to 1.75% in September and 2.5% in November.

“This has taken many households by surprise … and I think that Swedish households … have struggled to adjust to this cycle and predict a rapid and dramatic rate hike from the Riksbank,” Helgesson said.

Emil Brodin, an economist from the National Economic Research Institute, said the increase was “much more than people expected” and “has been faster than we thought.”

Helgesson characterized the change as a correction, rather than a bursting bubble, “but it was a painful and very quick correction,” he said.

Thomas Veraguth, head of global real estate strategy for UBS Wealth Management, described the correction as “a natural adjustment that is mainly explained by macroeconomic factors.”

20% down in 2023?

A further increase in policy rates is expected in February, with the benchmark widely speculated to reach 3%, economists predicting a drop in property prices.

Bank Nordea estimates that house prices fell by 20% from peak to trough.

“This is a direct result of the Riksbank’s increased interest rates. They increased from 0% to 2.5% and we expect them to continue to increase the policy rate to 3% in February,” Nordea’s Helgesson told CNBC.

Handelsbanken also anticipates a drop in prices.

“The current forecast is that house prices will continue to fall in the coming months and only stabilize when the mortgage rate has peaked in the spring,” said Christina Nyman, head of economic research and chief economist and Helena Bornevall, senior economist, at Handelsbanken, said. in an emailed comment to CNBC.

The National Institute of Economic Research also expects further declines in the coming months that will continue this year.

“We expect prices to continue to fall in the first half of 2023 and then price stabilization, which is based on interest rates not rising. Continue to fall,” said Brodin.

But there is a downside risk to the 20% estimate, according to SEB’s chief economist, Jens Magnusson.

“We look forward to it [house prices] to drop a few percentage points… So maybe it’s from 20% to 25%, but if that happens, it means a reversed pandemic increase,” Magnusson told CNBC.

Sweden is not the only European country to experience a falling property market after the pandemic, with some economists predicting a similar decline of between 20% and 25% in Germany.

Back to pre-pandemic numbers

The decline in the market is a correction that brings Swedish property back to its pre-pandemic state, according to some economists.

“We grew by about 20% in the two years of the pandemic, so obviously that’s the first thing we’re going to do now and I’m expecting it to all go away and decrease,” Magnusson said.

“Right now prices are still at the level when we entered the pandemic,” Brodin told CNBC. “The real increase in house prices during the pandemic has been wiped out,” he said.

But the former Riksbank governor hinted that the crash in Sweden’s housing market stems from more fundamental problems than fluctuations caused by the pandemic.

“We’re not hiding anything on the central bank side about the structural difficulties we have in the housing market,” Ingves told CNBC.

“But at the same time, the political process is such that there is no will on the political side to solve the problem and that is why we are where we are,” he said.

Sweden’s Government Office did not immediately respond to CNBC’s request for comment.