Sweden house price crash: Scandi property plunge exceeds financial crisis dip as Riksbank retains hawkish stance

Should we expect a Sweden housing market crash amid high interest rates and rising gloom?

By Capital.com Research Team12:08 (UTC), 1 March 2023 Updated

Picture of a swedish street with small multi coloured houses during spring — Scandi property plunge exceeds financial crisis dip as Riksbank retains hawkish stance. – Photo: captainbadtaste / Shutterstock

House prices in Sweden are bottoming out at a dramatic rate, giving up nearly all the gains experienced during the pandemic.

Will the continued increases in interest rates brought on to battle soaring inflation need to be reconsidered in the face of an increasingly likely Sweden housing market crash?

What is a house crash?

A house crash is characterised by a sudden drop in the price of housing, usually thanks to a market shock. They are usually preceded by housing bubbles, periods of aggressive growth that prove later to be unsustainable.

They can come from an exogenous shock, typically when the housing market is intertwined with financial markets, as was the case when a sub-prime crisis among borrowers affected securitized bonds, forcing a combination of defaults and wider financial contagion which worked to obliterate house prices in 2008 and 2009.

Interest rate rises can also precipitate a housing crash as they increase the cost of borrowing. Higher policy rates set by central banks filter through to interest rates offered on loans by commercial banks.

For homeowners, this jump in interest raises the price of servicing a mortgage on a home into potentially unaffordable territory, while for prospective homebuyers, the higher rate can make purchasing a home prohibitive. In other words, higher interest rates mechanically increase the supply of homes on the market while reducing demand, pushing prices down.

At the same time, higher interest rates also work to reduce demand across the economy by increasing the cost and risk of investing and encouraging saving. This can have macro impacts like job and wage cuts by businesses, which further reduce income and demand for housing.

Because lower house prices hurt confidence, this can induce a cycle of falling demand and higher supply, which causes house prices to crash.

What's shaping property prices in Sweden right now?

The country’s consumer prices rose 11.7% in January 2023, the slowdown from 12.3% a month earlier, yet still at three-decades high. Costs for housing and utilities have eased, yet prices of food and nonalcoholic beverages accelerated.

In February Sweden’s central bank was forced to continue its increasingly aggressive rate hikes. The Riksbank lifted its policy rate by 50 basis points to 3%, the highest in 14 years, and will start selling government bonds. The bank also signalled that “the policy rate will probably be raised further during the spring”.

Riksbank’s interest rate, 1998 - 2023

The hawkish policy has already started to affect house prices in the country, which have been declining for the better part of 2022.

The HOX housing index of privately owned homes conducted by ValueGuard fell by 1.4% in December 2022. The index has been falling for nine consecutive months, since April 2022 dropping to the lowest level since 2020.

HOX Sweden housing-price index, 2013 - 2023

That pales in comparison to recent developments, which suggested the bottom has fallen out of the Sweden housing market. According to the latest Nordic Credit Rating analysis housing prices fell more than 10% in the last quarter of 2022, and 16% from their March 2022 peak.

That follows a period of soaring growth in the country, which is causing some concern that the market could be described as a Sweden housing bubble. The country’s house price index rose by 16.8% in 2021, following a 6.6% rise in 2020, according to annual data from Statisitcs Sweden.

In fact, the Nordic Crating Rating cited the high levels of price increases post-Covid as a key reason behind the currently sharper fall in single-family housing prices. High energy costs and persistently high inflation with the likelihood of further interest rate hikes were also among the factors to hurt sentiment.

Like most developed economies, Sweden’s currency, the Swedish krona (SEK), has tumbled against the dollar (USD) this year in the face of a rising inflationary environment.

However, the intervention in late November 2022 by the Riksbank and the continued monetary tightening has helped offset some of the losses. The Swedish currency gained over 8% against USD from the October 2022 lows, trading between 0.0933 and 0.0976 in 2023, as of 28 February.

USD/SEK exchange rate

Is a Sweden housing market crash likely?

Based on current consensus forecasts, it may be reasonable to assume an end to a mini Sweden property bubble, with a double-digit contraction expected across the board.

Nordic Credit Rating said that monetary policy will continue to be the key driver of the housing market in Sweden. The agency stated:

“If the central bank signals that interest rates have peaked, either in February or at its next scheduled policy meeting in April, we believe prices will stabilise at about 20% below their recent peak levels before recovering slowly in the second half. Conversely, if buyer uncertainty persists over cost-of-living concerns, prices could fall further.”

Meanwhile, in early December SBAB’s chief economist Boije said it was likely Sweden would experience a house price contraction of up to around 20%, per Nord News.

Nordea echoed this sentiment in its Sweden housing market crash assessment, expecting the prices to drop 20% from the peak in 2023 “on the back of weaker economic activity and rising interest rates.” a similar drop in prices from peak, in its latest assessment. The bank said:

In a December update from Oxford Economics, economists Daniel Kral and Rory Fennessy expected both Sweden and Norway’s rate tightening cycles to come to an end in the first half of next year. The economist wrote:

“But the policy stances will be contractionary for the whole year as central banks remain focused on stamping out inflation, which will weigh on the over-leveraged Nordic private sectors. We don't expect the two central banks to start cutting rates until at least early 2024, just as in the eurozone.”

In more recent news, the new governor of Riksbank, Erik Thedéen, who took office in January 2023, said at a conference in Stockholm, that the housing market in Sweden may be showing signs of optimism, as per Bloomberg. He said:

“If you look at some of the indicators, the decline may have subsided. Perhaps there are signs of some form of stabilisation on the housing market, but we will have to see how this develops going forward.”

Final thoughts

Note that analysts’ predictions about the housing market crash in Sweden may be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading, looking at the latest news and analyst commentary as well as technical and fundamental analysis.

Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.

FAQs

Is there a housing crisis coming in Sweden?

Some analysts did expect a Sweden housing crisis as prices were expected to fall as the market battles higher interest rates and a wider economic slowdown after strong growth in 2020 and 2021.

Is the Sweden housing market a bubble?

A recent steep drop in house prices would suggest the Sweden market was in something of a bubble, but analysts disagreed. Note that their predictions can be wrong.

Will house prices drop in 2023?

Both SBAB and Nordea expected Sweden house prices to fall by 20% from the peak in 2023, as of their December forecasts respectively. Note that analysts’ predictions can be wrong and shouldn’t substitute your own research.