Sweden faces its ‘doomsday’ as house prices plummet


In 2022, the Swedish central bank undertook an aggressive cycle of rate hikes that rebounded through the real estate market.

JONATHAN NACKSTRAND/Contributor/Getty Images

Property prices in Sweden are facing a serious fall as the former governor of the country’s central bank warns of skyrocketing household debt.

House prices in Sweden have risen fairly reliably over the past decade. This has been supported by ultra-low interest rates in a system where about half of people’s mortgages are financed with floating rates and much of the rest is short-term fixed rates.

But now real estate prices are falling. And this downturn isn’t surprising given the “dysfunctional” nature of the market, according to Stefan Ingves, who headed Sweden’s Riksbank from 2006 to 2022.

“I have said persistently time and time again that the level of debt in the household sector is just way, way 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 see happening now is almost exactly what you would expect, which is that households have to pay more and interest rate sensitivity… is much higher,” Ingves added, which means that interest payments are higher for a large number. of Swedish households.

The pandemic effect

During the Covid-19 pandemic, house prices continued to rise across Europe, and Sweden was no exception. Demand for real estate skyrocketed as working from home and a preference for domestic holidays prompted people to increase their spaces.

On average, house prices rose as much as 30% compared to pre-pandemic levels in January 2020, according to Nordea Bank, as the Riksbank began buying mortgage bonds in an effort to lower interest rates and set the already hot housing market ablaze. set .

But now prices are falling dramatically.

“Since November, we have seen national prices in Sweden fall by 13% from their peak in February. That is the biggest downturn in the housing market since we had a major economic crisis in the 1990s,” said Gustav Helgesson, an analyst at Nordea, to CNBC.

Central bank interest rate hikes

In 2022, the Swedish central bank undertook an aggressive cycle of rate hikes that rebounded through the real estate market.

In February, the Riksbank indicated that its policy rate would remain unchanged at zero and predicted an eventual hike for the second half of 2024. But in the bank’s next monetary policy statement, just three months later, the rate was raised to 0.25 %.

“They basically just transitioned from that meeting to the next one in April and started their walking cycle,” Helgesson told CNBC.

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

“This surprised many households… and I think Swedish households… have struggled to adapt to this cycle and foresee these very rapid and dramatic rate hikes from the Riksbank,” Helgesson said.

Emil Brodin, an economist at the National Institute of Economic Research, said the magnitude of the increases was “a little more than people expected” and that it had been “faster than people thought.”

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

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

20% drop in 2023?

A further hike in key rates is expected for February, with widespread speculation that the benchmark will hit 3%, leading economists to predict a further fall in property prices.

Nordea Bank estimates a 20% drop in house prices from peak to trough.

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

Handelsbanken also expects a share price fall.

“Our current forecast is that house prices will continue to fall over the coming months and will not stabilize until mortgage rates peak in the spring,” said Christina Nyman, head of economic research and chief economist and Helena Bornevall, senior economist at Handelsbanken. in comments emailed to CNBC.

The National Institute of Economic Research also expects a further decline in the coming months, which will stabilize later in the year.

“We expect prices to continue falling in the first half of 2023 and a stabilization in prices thereafter, based on interest rates not rising further. So once interest rates stabilize, we do not expect prices to rise .continue to fall,” Brodin said.

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

“We do expect [house prices] to drop a few more percentage points… So it might go from 20% to 25%, but if that happens, that would mean it’s pretty much the uptick in the pandemic being reversed,” Magnusson told CNBC.

Sweden is not the only European country to experience a collapsing real estate market after the pandemic. Some economists predict a similar downturn of between 20% and 25% in Germany.

A return to pre-pandemic numbers

According to some economists, the dip in the market is a correction that is returning Swedish real estate to its pre-pandemic state.

“We had about 20% increases during those two pandemic years, so obviously that’s the first thing that’s going to go away now and I expect pretty much all of that to go down and down,” Magnusson said.

“As of right now, prices are still about the level we entered the pandemic at,” Brodin told CNBC. “Basically, the rise in house prices has been wiped out during the pandemic,” he added.

But the former governor of the Riksbank indicated that the bumpiness in Sweden’s housing market stemmed from more fundamental problems than just a pandemic-induced fluctuation.

“We have not hidden anything on the part of the central bank in the structural problems we have in the housing market,” Ingves told CNBC.

“But at the same time, the political process has been such that there has been no willingness on the political side to solve these problems and that is why we are where we are,” he added.

Sweden’s government offices did not immediately respond to a request for comment from CNBC.

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