Swedish Housing Is Now in the Worst Rout Since the 1990s

(Bloomberg) — Sweden’s home-price decline accelerated in October, as the Nordic country gripped by the most severe housing slump in three decades shows what may lie ahead for many other developed economies.

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One of the pacesetters for a global housing downturn fueled by soaring inflation and central bank moves to curb price increases, Sweden has now seen home prices drop by about 14% from a peak earlier this year, according to Valueguard, which compiles the data. Prices have slid for seven straight months, as households are being squeezed by the rising cost of living.

The slump is unusual in a country where previous corrections have been shallow and short-lived, and many young home buyers have never experienced a housing market crash.

While housing markets are cooling across the world with fewer transactions taking place, price declines have yet to begin in a number of countries. Home prices in Canada are now down 10% from the peak. In addition to Sweden, peak-to-trough declines of as much as 20% are forecast for countries including the US, the UK and New Zealand.

“A lot of homes are being sold at levels around the asking price, and bidding wars are rare,” Marcus Svanberg, chief executive of Lansforsakringar Fastighetsformedling, a realtor, said in a statement. “We don’t expect to see a real recovery until spring next year at the earliest.”

In October, the HOX Sweden housing-price index decreased 3% from the previous month, the steepest drop since June, Valueguard said on Monday.

Declines are led by detached houses, which are particularly vulnerable as electricity prices soar. A report published last week by realtor organization Maklarstatistik showed that the price drop is twice as large in southern electricity zones, which suffer from a deficit and high rates, than in the northern end of the country enjoying an abundance of hydroelectric power.

Most forecasters expect the decline to continue, and the current trajectory indicates that the outsized gains in housing prices achieved during the pandemic could be erased by early next year.

What Bloomberg Intelligence Says:

The central bank’s expected 18% total drop looks like a best-case outcome. Along with surging mortgage rates (doubled to 3.6% for new mortgages), that suggests higher impairments at Swedbank and Handelsbanken — followed by SEB and Nordea — with weaker revenue also likely as lending slows. A price slump of 30% or more may be needed to trigger a sizable increase in bad debt, which looks increasingly realistic.

— Philip Richards and Ilia Shchupko, analysts. For the full note, click here.

The latest data comes as the Swedish central bank is getting ready to announced its next move in the battle to tackle soaring inflation. The bank is widely expected to increase its policy rate by 75 basis points at a meeting on Nov. 23, following a full percentage-point hike in September. The Riksbank will communicate its decision on Nov. 24.

“The pace of the slump on the housing market should be a cause for concern for the Riksbank,” Nordea Bank Abp analyst Gustav Helgesson said in a note to clients. “We don’t expect today’s figure to affect the coming rate decision on Thursday, but continued rapid declines could cause the Riksbank to move slower next year.”

Before the slump, Sweden’s housing market was one of Europe’s hottest, and a steady build-up of household debt has long been a headache to the country’s financial regulators and the central bank. At this stage, the main concern centers on the impact on consumer spending as borrowing costs rise in a society where a large proportion of mortgages are linked to variable rates.

As prices rise, the Riksbank has estimated that a family in Stockholm with loans covering half of their home’s value could see its overall expenses rise by 60% next year, from the 2021 level.

In addition, increased borrowing costs are pressuring the finances of commercial real-estate owners, many of whom are facing large bond maturities in coming years. The Riksbank has singled out the sector as the largest threat to Sweden’s financial stability, and urged banks to be cautious when considering cash handouts to shareholders, saying that the risk of large credit losses has increased.

–With assistance from Joel Rinneby.

(Adds details on economic impact from eleventh paragraph.)