Sweden faces its ‘day of reckoning’ as house prices plummet

Sweden’s property prices face a serious fall as the country’s former central bank chief warns of high household debt levels.

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

But now property prices are tumbling. And this downturn 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 consistently said 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 interest rates will rise and now interest rates have risen,” Ingves said. CNBC’s “Squawk Box Europe” in an exclusive interview Tuesday.

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

The pandemic effect

During the Covid-19 pandemic, house prices across Europe continued to rise, and Sweden was no exception. Demand for property soared as working from home and a penchant for domestic holidays led people to expand their space.

On average, house prices rose by as much as 30% compared to pre-pandemic levels in January 2020, according to Nordea Bank, as the Riksbanken started buying mortgage bonds, tried to bring down interest rates and added fire to an already hot housing market.

But now prices are falling dramatically.

“From November, we see prices nationally in Sweden falling 13% from the peak in February. It is the biggest downturn in the housing market since we had a major economic crisis in the nineties,” says Gustav Helgesson, analyst at Nordea, to CNBC.

Central bank rate hikes

In 2022, Sweden’s central bank conducted an aggressive rate hike cycle that ricocheted through the real estate market.

In February, the Riksbank signaled its key rate would remain unchanged at zero and predicted a possible rise in 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 just transitioned from that meeting to the next one in April and started their hiking cycle,” Helgesson told CNBC.

Prices continued to rise throughout 2022, 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 anticipate these very rapid and dramatic interest rate increases from the Riksbank,” Helgesson said.

Emil Brodin, an economist with the National Institute of Economic Research, said the magnitude of the increases was “a little more than people expected” and that it had “moved 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 mainly by macroeconomic factors.”

20% decline in 2023?

A further rate hike is expected in February, with the benchmark widely expected to hit 3%, prompting economists to predict a further fall in property prices.

Nordea Bank estimates a 20% drop in house prices from top to bottom.

“This is as a direct consequence of the Riksbank’s increased interest rates. They have risen from 0% to 2.5%, and we expect them to continue to raise key interest rates to 3% in February,” says Helgesson from Nordea to CNBC.

Handelsbanken also expects a dip in prices.

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

The Norwegian Institute of Economic Research also expects a further decline in the next few months, which will settle later in the year.

“We expect prices to continue to fall throughout the first half of 2023 and then a stabilization of prices, which is based on interest rates not moving up any further. So once interest rates stabilize, we don’t expect prices to continue about to fall,” Brodin said.

But there is a downside risk with the estimate of 20%, says SEB’s chief economist, Jens Magnusson.

“We expect [house prices] to drop a few more percentage points… So it could maybe go from 20% to 25%, but if that happens, it would mean that it is basically the pandemic increase that is being reversed, Magnusson told CNBC.

Sweden is not the only European country to experience a plunging property market post-pandemic, with some economists predicting a similar decrease of between 20% and 25% in Germany.

A return to pre-pandemic numbers

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

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

“Prices are still around the level where we entered the pandemic,” Brodin told CNBC. “Basically, the rise in house prices during the pandemic has been erased,” he added.

But the former Riksbank chief signaled that the unevenness of Sweden’s housing market was due to more fundamental problems than just a pandemic-induced fluctuation.

“We have not hidden anything on the central bank’s side in the structural difficulties we have in the housing market,” Ingves tells CNBC.

“But at the same time, the political process has been such that there hasn’t been a will on the political side to fix these issues, and that’s why we are where we are,” he added.

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