Sweden is the first domino to fall, but it likely won’t be the only one. The Riksbank forecasts an 18% drop in housing prices over the next two years.

Authors: Mario Becedas and Vicente Nieves

Source: El Economista

The synchronized boom experienced by the global real estate market is on the verge of ending. Some of the markets that have seen the highest valuations in recent years (hot markets) are beginning to feel the impact of a new reality, characterized by much higher interest rates and a languishing economic activity. Sweden is, to date, the best example of this abrupt shift. The Nordic economy may serve as a sort of canary in the coal mine for other advanced countries, according to Bloomberg.

The decline in housing prices in Sweden accelerated in October, and the Nordic country, facing the most significant real estate slump in the past three decades, illustrates what might happen in many other developed economies, with consequent impacts on the global economy.

Sweden is one of the countries setting the pace for what appears to be a new global real estate crisis, fueled by rising inflation and measures by central banks to curb price increases. The correction in Sweden’s real estate market serves as a clear warning for other developed economies, according to Bloomberg. Sweden may be the first domino to fall, but not the only one. Several indicators already reveal intense slowdowns in various real estate markets around the world, which could be a precursor to a global housing correction.

The Nordic country has seen housing prices fall by 12% from the peak reached earlier this year, according to the HOX index compiled by Valueguard. This is the largest drop in the Swedish real estate market since the financial crisis of 1990. Prices have been falling for seven consecutive months as households face increased living costs. In the past three months, the decline has reached 5.9%, with a 3% drop in October alone.

The forecasts are not promising. The Swedish central bank, the Riksbank, predicts a price drop of up to 18% from the peak recorded last March. SBAB, the state mortgage lender, estimates a 20% drop. Recently, the largest bank in the Nordic region, Finland’s Nordea Bank AB, adjusted its economic forecasts to reflect a more pronounced decline in housing prices than previously anticipated. Nordea now believes that prices will fall by 20% from the peak, compared to a previous forecast of 15%.

The downturn is unusual in a country where previous corrections have been superficial and short-lived, and many young homebuyers have never experienced a market collapse. Housing prices in Canada have dropped by 10% from their peak. In addition to Sweden, declines of up to 20% are expected in countries like the US, the UK, and New Zealand.

The recent boom, driven by historically low interest rates and a high savings rate, propelled housing prices to levels detached from their long-term fundamentals, according to UBS indices. If a recession occurs next year, Moody Analytics Chief Economist Mark M. Zandi believes that prices in “significantly overvalued” markets could fall between 15% and 20%.

Sweden Among the Hottest Markets

The Nordic countries appear particularly exposed to a correction in the real estate market due to high household debt and a significant proportion of variable-rate debt. Swedish households have the fifth-highest proportion of debt relative to net disposable income, reaching 205%, compared to 101% in Spain, for example. Swedish households may be more affected by rising interest rates, especially those with a portion of their liabilities tied to variable rates (as is the case with many mortgages).

Oxford Economics warned in a recent report that Sweden is one of the most vulnerable countries due to accumulated imbalances since 2007. “We see increases of 25 percentage points (in debt) or more since the fourth quarter of 2007 in Australia, South Korea, France, Canada, Sweden, Switzerland, and Norway. In most of these cases, debt was already high in 2007, but it is now even higher,” the Oxford Economics report cautions.

The high proportion of households with variable-rate mortgages (44% in Sweden according to the European Mortgage Federation) puts the country in a somewhat complex situation. “Countries and territories that are likely to be most affected are those markets that saw the largest price increases during the pandemic and where price-income and price-rent ratios have diverged,” explain Knight Frank.

Sweden in Detail

In Sweden, house prices have decreased by 3.8%, while apartment prices have fallen by 1.6%. Single-family homes are particularly vulnerable as electricity prices soar. A report released last week by the real estate organization Maklarstatistik showed that the price drop is twice as large in the southern part of the country, which suffers from electricity shortages and high rates, compared to the northern part, which benefits from abundant hydroelectric power.

Before the downturn, Sweden’s real estate market was one of the most dynamic in Europe, and the ongoing accumulation of household debt has long been a headache for the country’s financial regulators and central bank. At this stage, the main concern is the impact on consumer spending as borrowing costs rise in a society where a significant proportion of mortgages are tied to variable rates.

“We do not expect prices to stabilize soon. Housing supply increased by 49% year-on-year, while transaction volumes decreased by 28% year-on-year in October. Additionally, home price expectations and consumer confidence remain very low,” notes Gustav Helgesson, macro strategist at Nordea Bank AB.

The analyst points out that the Finnish bank has recently revised its forecasts for the Swedish economy downward: “We now see GDP growth of -1.8% next year and a more pronounced increase in unemployment. The Riksbank is expected to raise the official interest rate by 75 basis points on Thursday and by another 25 basis points in February. The weakening economic activity and rising interest rates have also led us to revise our housing market forecasts downward, and we now expect prices to fall by 20% from the peak and bottom out by next summer.”

“The pace of the housing market decline should be a concern for the Riksbank. The Swedish central bank expects housing prices to fall by 18% from the peak, but anticipates a much more orderly decline than we do. We do not expect today’s data to affect the next interest rate decision on Thursday, but continued rapid declines could cause the Riksbank to act more slowly next year, in line with our forecasts,” adds Helgesson. The Riksbank surprised at the end of September with a historic 100 basis point rate hike, bringing the reference rate to 1.75%.

“This week, Statistics Sweden (SCB) will present the number of housing starts for the third quarter, which will likely continue the decline initiated in the first half of the year. Our forecast is that the number of housing starts in 2023 will be 50% lower than in 2021, but anecdotal data suggests that new projects are about to stop almost completely. In addition to the fall in housing prices, construction companies are facing pressure from a significant increase in construction material costs,” adds Seyran Naib, strategist at Swedish bank SEB.

How Long Will the Housing Decline Last?

Nordic Credit Rating explains that “the price decline, in our opinion, is not only based on a market correction from the increases of the last three years but also on a shift in expectations regarding housing costs. Therefore, we believe that households and the market will take some time to adjust to a new equilibrium.”

“Continuous interest rate hikes, combined with uncertainty about inflation and energy costs, are likely to continue pushing prices down for some time… Thus, we expect prices to keep falling during the second half of 2022 and believe that we will need to wait until well into 2023 for prices to stabilize,” conclude Nordic Credit Rating economists.