Sweden faces ‘Judgment Day’ as house prices fall

In 2022, Sweden’s central bank ran an aggressive rate hike that bounced through the property market.

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Sweden’s real estate prices are facing a dangerous decline as the country’s former central bank governor has warned of high household debt levels.

Home prices in Sweden have risen fairly reliably over the past decade. This is reinforced by the extremely low interest rates in a system where about half of all mortgages to individuals are funded with variable rates and many of the remainder with short-term fixed rates.

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

“I’ve consistently said over and over that the debt level in the household sector is just way too high, there will be a day of reckoning, eventually rates will go up, and now rates have gone up,” Engives said on CNBC’s “Squawk Box Europe” program in a special interview on Tuesday.

Ingves added, “What you’re seeing happening now is exactly what you’d expect to happen, and that is that households have to pay more and interest rate sensitivity…is much higher,” making interest rate payments higher for a huge number of Swedish households.

The impact of the epidemic

During the Covid-19 pandemic, house prices across Europe have continued to soar, and Sweden is no exception. The demand for real estate has skyrocketed as working from home and preference for home vacations has prompted people to enlarge their spaces.

On average, house prices have increased by up to 30% compared to their pre-pandemic level in January 2020, according to Nordea Bank, as Riksbank began buying mortgage bonds, in an effort to lower rates and set an already hot housing market on fire. .

But prices are now falling dramatically.

Riksbank Ingvis: Swedish inflation is very high, but it will come down

“As of November, we’re seeing prices nationally in Sweden fall 13% from their February peak. This is the biggest downturn in the housing market since we experienced a major economic crisis in the 1990s,” Nordea analyst Gustav Helgesson told CNBC. .

Raising central bank rates

In 2022, Sweden’s central bank ran an aggressive rate hike that bounced through the property market.

In February, the Riksbank indicated that its policy rate would remain unchanged at zero, and expected a final increase 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 really went from that meeting to the next meeting in April and started their hiking cycle,” Helgeson told CNBC.

Prices 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…were struggling to adjust to this cycle and expect such rapid and dramatic interest rate hikes from the Riksbank,” Helgesson said.

Emile Brodin, an economist from the National Institute for Economic Research, said the magnitude of the hikes was “a little bit more than people expected” and that it “went more quickly than people thought.”

Helgeson described the change as a correction rather than an explosive bubble, “but a very painful and rapid correction,” he added.

Thomas Feragoth, head of global real estate strategy at UBS Wealth Management, called the correction “a natural adjustment mainly explained by macroeconomic factors.”

20% decline in 2023?

Another rate hike is expected for February, as the benchmark is widely expected to reach 3%, leading economists to expect a further decline in real estate prices.

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

“This is a direct result of Riksbank’s rate hike. It went from 0% to 2.5% and we expect them to continue to raise rates to 3% in February,” Nordea’s Helgesson told CNBC.

Handelsbanken also expects a decline in prices.

“Our current forecast is that housing prices will continue to decline over the coming months and only stabilize when mortgage rates peak during the spring,” said Christina Niemann, head of economic research and chief economist, and Helena Borneval, chief economist at Handelsbanken. in comments emailed to CNBC.

The National Institute for Economic Research also expects a further decline in the next two months that will stabilize later in the year.

“We expect rates to continue to decline throughout the first half of 2023 and then price stabilization, which depends on interest rates not going up. So once the interest rate stabilizes, we don’t expect prices to go up,” Brodin said.

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

“We expect [house prices] To fall a few more percentage points … So it could go from 20% to maybe 25%, but if that happens, it’s pretty much the epidemic spike that’s being reversed,” Magnuson told CNBC.

Sweden isn’t the only European country seeing a post-pandemic real estate market decline, with some economists predicting a similar slowdown of between 20% and 25% in Germany.

Back to pre-pandemic numbers

The market downturn is a correction that returns Swedish real estate to its pre-pandemic state, according to some economists.

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

“So far prices are still around the level where we entered the pandemic,” Brodin told CNBC. “Essentially, the increase in house prices during the pandemic has been erased,” he added.

But the former Riksbank governor pointed out that the volatility in the Swedish housing market stemmed from more fundamental issues than just pandemic-induced volatility.

“We have not hidden anything from the central bank side in the structural difficulties we are facing in the housing market,” Ingves told CNBC.

“But at the same time, the political process was such that there was no willingness on the political side to sort out these issues and that is why we are where we are,” he added.

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

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