Sweden’s housing market crash | Everything you need to know
House prices in Sweden are beginning to give up some of the gains realized during the enormous growth during the pandemic.
With interest rates continues to rise in a battle against sky high inflationcould it signal the beginning of a full correction, and potentially one Sweden’s housing market is crashing.
What is a house crash?
A housing crash is characterized by a sudden drop in housing prices, usually thanks to a market shock. They are usually preceded by housing bubbles, periods of aggressive growth that later prove to be unsustainable.
They can come from an exogenous shock, usually when the housing market is intertwined with financial markets, as was the case when a The subprime crisis among concerned borrowers securitized bondswhich forced a combination of defaults and a broader financial contagion that worked to wipe out house prices in 2008 and 2009.
Interest rate hikes can also precipitate a housing crash because they increase the cost of borrowing. Higher policy rates were set aside central banks filter through to interest rates offered on loans by commercial banks.
For homeowners, this jump in interest rates raises the price of servicing a mortgage on a home into potentially unaffordable territory, while for prospective home buyers, the higher interest rate can make buying a home unaffordable. In other words, higher interest rates increase mechanically supply of housing on the market while decreasing demandpushing prices down.
At the same time, higher interest rates also work to reduce demand throughout the economy by increasing the cost and risk of investing and encouraging savings. This can have macro effects such as job and wage cuts for businesses, further reducing incomes and housing demand.
As lower house prices damage confidence, this can induce a cycle of falling demand and higher supply, causing house prices to crash.
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What is shaping property prices in Sweden right now?
The country’s consumer price index (CPI) reached 10.8%, which, in addition to skyrocketing energy costs, was partly driven by rising mortgage rates.
Sweden’s central bank has been forced to begin a schedule of increasingly aggressive interest rate increases. The Riksbank raised its policy rate by 100 basis points at its monetary policy meeting in September, noting that inflation was “undermining household purchasing power and making it more difficult for both businesses and households to plan their finances.”
The policy has already started to affect house prices in the country, which have been falling for most of 2022. Prices fell at the fastest rate since at least 2013 with a 4% decline in October 2022 compared with the previous month, according to SBAB. The seasonally adjusted figure of 2.3% is slightly slower than the 2.6% fall recorded in September, which the bank called the fastest monthly price fall on record.
SBAB’s Chief Economist Robert Boije said in a statement:
“Prices continue to fall, even for apartments, but the decline is not as steep as for detached houses…One possible explanation is that the high inflation, and especially the increase in electricity prices, is hitting the detached house market harder.”
It follows a period of strong growth in the country, which raises some concerns that the market could be described as a Swedish housing bubble. The country’s house price index rose 16.8% in 2021, after a 6.6% increase in 2020, according to annual information from Statistics Norway.
Analysis by the RiksbankOn September 20, it said expectations of higher interest rates are likely to drive down the value of house prices in the long term, although the central bank stopped short of predicting a Swedish housing market crash. The bank said:
“Energy prices have risen sharply in the short term and there is a risk that they will remain high for some time. In addition, housing prices in Sweden rose sharply in 2021, a pattern that has also been observed in other countries.
“The price increase has been interpreted as a shift in preferences where households chose to spend more of their income on housing during the pandemic.24 If that change in preferences is reversed, in whole or in part, this may also contribute to lower preferences after the pandemic. house prices.”
SBAB Bank enraptured a decline in house prices to increased housing costs through mortgage interest rates and energy costs linked to Russia’s invasion of Ukraine.
“Households that did not take into account a sudden increase in interest rates will naturally be less willing to pay for housing,” the group wrote. “The long-term house price trend can be explained by a range of structural factors, including household incomes and mortgage rates.”
In a September Research NoteNordea analyst Gustav Helgesson characterized an expected downturn in the Swedish property market as a “correction to a new interest rate environment rather than a crash in the housing market”, adding:
“Rapidly rising mortgage rates, which have increased more and faster than expected, are a key factor in the current downturn. High inflation erodes households’ purchasing power and housing construction is at historically high levels. At the same time, the labor market is stronger than ever. The current situation can be summed up as households keeping their jobs but having less money left in their wallets at the end of the month.”
The analyst noted that “the decline in prices is therefore seen as more of a correction to a new interest rate level rather than a crash in the housing market”, concluding:
“Unlike 2008 and 2011, we do not expect the housing market to be supported by any rate cuts in the short term. Overall, this points to further pressure on house prices and a slower recovery compared to previous crises in the 2000s.”
Nordic Credit Ratings Ylva Forsberg expected house prices continue to decline as they battle an increasingly bearish economic environment.
“Continued interest rate increases, combined with uncertainty around inflation and energy costs, are likely to continue to push prices down for some time,” Forsberg wrote.
“We continue to believe that the price decline is not an indication of an impending market crash, but note that the longer uncertainty persists, the longer it will take for the market to stabilize and return to natural, long-term price growth.”
A September report by the Swedish Bank Association noted reasons why the Swedish housing market may be less sensitive to a crash:
– One factor is that the banks’ lending processes are stringent and governed by well-functioning legislation. Banks have long based their credit decisions on the borrower’s ability to repay rather than on the value of the collateral.”
The company’s analysts said that “high employment rates mean that it is common for each household to have two incomes that can be used to repay the loan”, adding that “the welfare system is another important factor, as households can maintain an acceptable financial position even in the event of unemployment or disease.”
Like most developed economies, Sweden’s currency, the Swedish krona (SEK), has fallen against the dollar (USD) this year in the face of a rising inflationary environment. One dollar bought SEK 11.23 on November 3, 2022, up from SEK 9.05 at the start of the year, a 24% shift over the year.
USD/SEK exchange rate
A devalued krona can have consequences for the housing market in the form of increased costs for materials, as well as for financial assets linked to the dollar, which increases the pressure on affordability.
Is it likely that the Swedish housing market will crash?
Based on current consensus forecasts, it may be reasonable to assume an end to a mini-Swedish property bubble, with a double-digit contraction expected across the board.
Oxford Economics predicted that a Swedish housing market crash, defined by the group as a price drop of more than 10%, was more than 50% likely, along with housing markets in Canada and New Zealand, in a note shared with Capital.com . Swedish house prices were predicted by the group to fall 15%.
“The implication for assessing risk in housing markets around the world is that while rising mortgage rates are certainly not helpful, they are not in and of themselves always a precursor to a crash,” wrote Innes McFee, Oxford Economics’ global chief economist. But McFee said a simultaneous decline in employment could be the precursor to a more severe drop in prices.
– If employment falls, it increases the number of forced sellers and ensures that house prices fall significantly. History shows that if labor markets can remain strong, the chances of a more benign correction are greater.”
In its assessment in September, Nordea also predicted a fall of 15% from house prices earlier in 2022 to next year. At the same time, the Riksbank expected that the housing market in Sweden would see a price drop of 18% until 2024, before they start to rise again. per Bloomberg.
Final thoughts
Note that analysts’ predictions about the housing market crash in Sweden may be wrong and should not be used as a substitute for your own research. Always do your own due diligence before trading, look at the latest news and analyst comments as well technical and basic analysis.
Remember that past performance does not guarantee future returns. And never trade money you can’t afford to lose.
common questions
Will there be a housing crisis in Sweden?
House prices in Sweden were expected to fall as the market battles higher interest rates and a broader economic downturn after strong growth in 2020 and 2021. In late October, Oxford Economics predicted a Swedish housing market crash, defined by the group as a fall in prices of more than 10%, was more than 50% likely, along with housing markets in Canada and New Zealand. Note that analysts’ predictions may be wrong.
Is the Swedish housing market a bubble?
Analysts mentioned in this article did not believe that Sweden’s housing market is in a bubble, but that prices may fall as the market adjusts to a high interest rate environment. Note that their predictions may be wrong.
Will House Prices Fall in 2023?
Both Oxford Economics and Nordea expected Swedish house prices to fall by 15% by next year, starting with their forecasts for September and the end of October, respectively.
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