Sweden faces ‘judgment day’ as house prices plummet

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

House prices in Sweden have risen quite steadily over the past decade. This has been driven by extremely low interest rates in a system where about half of people’s mortgages are financed with variable interest rates and most of the remainder are short-term fixed rates.

But now property prices are falling. According to Stefan Ingves, head of Sweden’s Riksbank from 2006 to 2022, this downturn is not surprising given the “dysfunctional” nature of the market.

“I’ve been told over and over again that the level of debt in the household sector is too high and there’s going to be a day of reckoning and eventually interest 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 is almost exactly what you would expect it to happen, which is households paying more and the sensitivity to interest rates… is much higher,” Ingves added. of Swedish households.

Pandemic effect

During the Covid-19 pandemic, house prices across Europe continued to rise, and Sweden was no exception. The skyrocketing demand for real estate as working from home and the preference for vacationing in the country have prompted people to increase the area of ​​their space.

According to Nordea Bank, median house prices rose up to 30% from pre-pandemic levels in January 2020, when the Riksbank began buying mortgage bonds, trying to lower interest rates and rekindle an already-severe housing market. hot. .

But now the price is dropping, significantly.

“As of November, we see prices nationally in Sweden down 13% from their peak in February. It was the biggest downturn in the housing market since we went through the economic crisis. major economy in the 1990s,” Gustav Helgesson, an analyst at Nordea, told CNBC. .

Home prices have fallen 15% from their peak in March to November last year, according to financial services firm Valueguard. as reported by Nordic corporate bank SEB.

Central bank raises interest rates

In 2022, Sweden’s central bank embarked on an intense cycle of interest rate hikes that ignited the property market.

In February, Riksbank signal Its policy rate is left unchanged at zero and predicts a final rise in the second half of 2024. But in the bank’s next monetary policy statement just three months later, the rate was already set. increased to 0.25%.

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

Price keep increasing throughout 2022, increasing 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 households… have struggled to adapt to this cycle and foresee very rapid and dramatic rate hikes. This is from the Riksbank,” Helgesson said.

Emil Brodin, an economist from the National Institute for Economic Research, said the magnitude of the increase was “a little bit more than people expected” and it “was going faster than people thought.”

Helgesson describes the change as a correction, rather than a bubble burst, “but it was a very quick and painful correction,” he added.

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

20% off in 2023?

A further hike in policy rates is anticipated in February, with the widely rumored benchmark hitting 3%, prompting economists to expect property prices to continue falling.

Nordea Bank estimates house prices to fall 20% from peak to trough.

“This is a direct consequence of the Riksbank raising rates. They went from 0% to 2.5% and we expect them to continue to raise the policy rate to 3% in February,” said Helgesson from Nordea. told CNBC.

Handelsbanken also predicts a fall in prices.

“Our current forecast is for housing prices to continue falling in the coming months and only stabilize once mortgage rates peak in the spring,” said Christina Nyman, head of economic research and economist. and Helena Bornevall, senior economist at Handelsbanken, said. in comments emailed to CNBC.

The National Institute for Economic Research also expects further declines over the next few months and will stabilize by year-end.

“We expect prices to continue falling through the first half of 2023 and then stabilizing prices, based on the fact that interest rates won’t rise any further. So basically, once rates are stable, We don’t expect prices to continue falling,” Brodin said.

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

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

Sweden isn’t the only European country experiencing a post-pandemic property market plunge, with some economists forecasting the same. recession from 20% to 25% in Germany.

Back to pre-pandemic numbers

According to some economists, the market slump is a correction that returns Swedish property to its pre-pandemic state.

“We’ve grown about 20% in the two years of that pandemic, so obviously that’s the first thing that’s going to happen right now, and I think pretty much all of that will go away,” Magnusson said. lost and diminished”.

“As of right now, prices are still at the level where we entered the pandemic,” Brodin told CNBC. He added: “Basically, the increase in house prices during the pandemic has been erased.

But the former Riksbank governor signaled that the bump in Sweden’s housing market is rooted in more than just the volatility caused by the pandemic.

“We haven’t hidden anything from the central bank in light of the structural difficulties we have had in the housing market,” Ingves told CNBC.

“But at the same time, the political process has gotten to the point where the political side is not willing to deal with these issues and that’s why we are here,” he added.

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