November Noir in the Swedish Housing market?

Yvan Berthoux - 13 December 2017

A haunting theme for some of the developed world’s most successful and thriving cities is the astronomic ascent of house prices in response to an extended period of ultra-low interest rates (ZIRP or NIRP in some countries). These property markets have often been supercharged by inward migration of young professionals. Nevertheless, booming house prices would have been inconceivable without the parallel surge in household debt, striking new ground for ratios to household income or GDP.  According to the OECD, in terms of house price-to-income growth since 2010, Sweden comes third after New Zealand and Austria (it is assumed that the study excluded territories such as Hong Kong and Monaco).

Following the study of Rodney Edvinsson, A price index for residential property in Stockholm, 1875 – 2011’, more recent research has updated the real house price index for Stockholm. After the Nordic banking crisis and recession of the early 1990s, real house prices turned stratospheric, with only a brief interruption around the time of the global financial crisis. It has been estimated that it would take around 15 years of (before tax) average income to purchase an average property in the capital. Is this sustainable?

Sweden shares with other non-Euro countries such as Switzerland, Denmark or Norway, the obligation to mimic the rate moves of the ECB. Failure to do so would invite the scenario of a sharp local currency appreciation (vs. the Euro). Hence, Sweden has also been running a NIRP policy over the past 3 years, with the central bank target rate switching to negative territory slightly after the ECB announced NIRP policy. As Governor Stefan Ingves mentioned in an interview a couple of months ago, the Riksbank will wait and see what the ECB does, before expressing its own thoughts about the potential interest rate path and bond-purchase program.

The Riksbank has been expanding its balance sheet since the beginning of 2015 through the on-going SEK 290 billion bond purchase program, owning roughly 40 per cent of government bonds in issue. In addition, the market expects Swedish policymakers to expand QE beyond the SEK 300bn threshold until 2019. The Riksbank is forced to turn a blind eye to incipient domestic inflation pressures as its focus in the prevention of exchange rate appreciation (and consequent weakness in inflation in the medium term).

Despite the monetary stimulus, cracks have started to appear in the housing market: Bloomberg recently noted that the SEB housing-price indicator plunged to minus 5 in November, from 70 in January this year (figure 2).  Average house prices for Sweden will be published on 14 December (HOX/Valueguard), and market participants expect another monthly fall of 3 per cent or more in November, the largest since 2008. Hence, ‘November Noir’.

With one of the highest household-debt-to-disposable-income ratios in the world, currently standing at 180%, how can Sweden normalize its monetary policy without putting a significant proportion of its citizens into negative equity?


Figure 1. Real House Prices in Stockholm

Source: Edvinsson (2014), HOX/ Valueguard and SCB

Figure 2. SEB housing indicator index

Source: Bloomberg



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