Sweden’s asset costs are facing a sharp drop as the country’s former central bank governor warns of higher levels of household debt.
Housing costs in Sweden have risen steadily over the past decade. This has been supported by ultra-low interest rates in a formula in which a portion of people’s mortgages are financed with variable rates and much of the rest is financed with constant short-term rates.
But today, real estate costs are falling. And this slowdown is unexpected given the “dysfunctional” nature of the market, according to Stefan Ingves, who headed Sweden’s Riksbank from 2006 to 2022.
“I’ve said time and time again that the point of household sector debt is too high and there will be a day of judgment and rates will go up, and now rates are up,” Ingves said. CNBC’s “Squawk Box Europe” in an exclusive Tuesday interview.
“What we see now going down is almost precisely what you would expect, which is that families have to pay more and sensitivity to interest rates . . . it’s much higher,” Ingves added, making interest rate bills higher for many Swedish families.
During the Covid-19 pandemic, space costs across Europe have continued to rise, and Sweden has been no exception. Demand for real estate has skyrocketed as they leave home and the preference for national holidays has led other people to expand their spaces.
On average, space costs have risen 30% since the pre-pandemic point of January 2020, according to Nordea Bank, as the Riksbank has bought loan bonds, looking to lower rates and adding fire to an already hot housing market.
But now they are falling, dramatically.
“In November, we see nationals in Sweden down 13% from the February peak. This is the biggest drop in the housing market since we had a major economic crisis in the ’90s,” Nordea analyst Gustav Helgesson told CNBC.
In 2022, the Swedish central bank introduced a competitive cycle of interest hikes that impacted the real estate market.
In February, the Riksbank signaled that its policy rate would remain unchanged at 0 and predicted a conceivable accumulation for the current part of 2024. But in the bank’s next financial policy 3 months later, the rate was raised to 0. 25%.
“They moved from that assembly to the next one in April and started their cycle of walking,” Helgesson told CNBC.
Rates continued to rise in 2022, from 0. 25% to 0. 75% in July, to 1. 75% in September and 2. 5% in November.
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“It took a lot of families by surprise. . . And I think the Swedish Array families. . . have struggled to adapt to this cycle and are expecting those very rapid and dramatic rate hikes through the Riksbank,” Helgesson said.
Emil Brodin, an economist at the National Institute of Economic Research, said the magnitude of the increases was “a little more than other people expected” and that it had “gone faster than they thought. “
Helgesson called the replacement a correction, rather than bursting a bubble, “but it’s a painful and very quick correction,” he added.
Thomas Veraguth, head of global real estate strategy at UBS Wealth Management, described the correction as “a natural adjustment that is basically due to macroeconomic factors. “
A further rate hike is expected in February, and the core index is widely assumed to reach 3%, leading economists to expect a further drop in space prices.
Nordea Bank estimates a 20% drop in space costs from peak to low.
“This is a direct result of the Riksbank’s interest rate increase. They went from 0% to 2. 5% and we expect them to continue to raise policy rates to 3% in February,” Nordea’s Helgesson told CNBC.
Handelsbanken expects prices to fall.
“Our current forecast is that space costs will continue to fall over the next few months and stabilize when borrowing rates peak in the spring,” said Christina Nyman, head of economic research and lead economist, and Helena Bornevall, senior economist at Handelsbanken. in comments emailed to CNBC.
The National Institute of Economic Research also expects a decline over the next two months later in the year.
“We expect values to continue to fall in the early part of 2023 and then stabilize, based on interest rates not emerging further. So basically, once the interest rate stabilizes, we don’t expect values to rise. Keep falling,” Brodin said.
But the 20% estimate presents a problematic risk, according to SEB lead economist Jens Magnusson.
“We expect [house prices] to fall through a few more percentage problems. So, maybe it’s only going from 20% to 25%, but if that happens, it would mean that it’s largely the rise of the pandemic that’s going backwards,” Magnusson said. CNBC.
Sweden isn’t the only European country reveling in a slump in the housing market after the pandemic, with some economists predicting a 20-25% drop in Germany.
The market crash is a correction that is returning Swedish real estate to its pre-pandemic state, according to some economists.
“We’ve had increases of around 20% during those two years of the pandemic, so it’s clear that the first thing that’s happening is going away now and I hope all of that goes away and passes through,” Magnusson said.
“For now, costs are still where we got into the pandemic,” Brodin told CNBC. “Basically, the accumulation of assets costs the pandemic to be erased,” he added.
But the former Riksbank governor noted that the bumps in the Swedish asset market were the result of something more basic than a simple pandemic-induced fluctuation.
“We haven’t hidden anything from the central bank’s aspect of the structural difficulties we have in the real estate market,” Ingves told CNBC.
“But at the same time the political procedure has been such that there has been no political will to deal with those problems and that is why we are where we are,” he added.
Swedish government offices did not respond to a request for comment from CNBC.
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