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

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

House prices in Sweden have risen fairly reliably over the past decade. This has been fueled by ultra-low interest rates in a system where around half of people’s mortgages are financed at variable rates and most of the rest are at short-term fixed rates.

But now property prices are falling. 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 have persistently said time and time again that the level of debt in the housing sector is just too high and there will be a reckoning day and eventually rates will go up, and now rates have increased,” said Ingves. CNBC’s “Squawk Box Europe” in an exclusive interview on Tuesday.

“What you see happening now is almost exactly what you would expect to see happen, which is that families have to pay more and the sensitivity of the interest rate … is much higher,” added Ingves, who makes the higher interest rate payments for a large number. of the Swedish houses.

The pandemic effect

During the Covid-19 pandemic, house prices across Europe continued to rise, and Sweden was no exception. Demand for property has increased sharply as working from home and a preference for domestic holidays have led people to increase their spaces.

On average, house prices rose by up to 30% compared to the pre-pandemic level of January 2020, according to Nordea Bank, as the Riksbank started buying mortgage bonds, trying to lower rates and increasing the fire to an already hot housing market. .

But now prices are dropping, dramatically.

“Since November we’ve seen prices nationally in Sweden drop 13% from their peak in February. That’s the biggest drop in the housing market since we had a big economic crisis in the 1990s,” said Gustav Helgesson, Nordea analyst, to CNBC. .

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

Central bank rate hikes

In 2022, the central bank of Sweden carried out an aggressive cycle of interest rate hikes which rebounded in the property market.

In February, the Riksbank indicated that its policy rate would remain unchanged at zero, and predicted an eventual 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%.

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

Rates continued to increase throughout 2022, going 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 Swedish families … have been struggling to adjust to this cycle and foresee these very rapid and dramatic increases from the Riksbank,” Helgesson said.

Emil Brodin, an economist from the National Institute of Economic Research, said that the extent of the increases were “a little more than people expected” and that “it went faster than people thought.”

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

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% reduction in 2023?

A further increase in the policy rate is anticipated for February, with the benchmark widely speculated to hit 3%, leading economists to predict further falls in property prices.

Nordea Bank calculates a 20% drop in house prices from the highest level to the lowest.

“This is a direct consequence of the increase in the interest rate of the Riksbank. They increased from 0% to 2.5% and we expect to further increase the policy rates to 3% in February,” said Helgesson from Nordea to CNBC.

Handelsbanken also anticipates a drop in prices.

“Our current forecast is that house prices will continue to decline in the coming months and stabilize only when mortgage rates have peaked during the spring,” said Christina Nyman, head of -economic research and principal economist and Helena Bornevall, senior economist, at Handelsbanken. in emailed comments to CNBC.

The National Institute of Economic Research also expects another decline in the next couple of months that will resolve later in the year.

“We expect prices to continue to decrease during the first half of 2023 and then a stabilization of prices, which is based on interest rates not moving any higher. So basically once the interest rate is stabilized, we do not expect prices to continue to decrease,” said Brodin.

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

“We wait [house prices] to drop a few more percentage points … So it could go from 20% to 25% maybe, but if that happens it will mean that it’s pretty much the increase in the pandemic that is being reversed,” Magnusson told CNBC.

Sweden is not the only European country experiencing a property market slump following the pandemic, with some economists predicting a similar drop of between 20% and 25% in Germany.

Return to pre-pandemic figures

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

“We had about 20% increases during those two pandemic years, so obviously that’s the first thing that’s going to go now and I expect almost everything to disappear and slow down,” Magnusson said.

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

But the former governor of the Riksbank indicated that the mess in Sweden’s housing market resulted from more fundamental issues than simply a fluctuation caused by the pandemic.

“We were not hiding anything from the central bank in the structural difficulties we have in the housing market,” Ingves told CNBC.

“But at the same time, the political process was such that there was no political will to resolve these issues and that is why we are where we are,” he added.

Swedish Government Offices did not immediately respond to CNBC’s request for comment.