What Sweden’s wobbly housing market can tell us about bubbles

View of the waterline in Stockholm, Sweden © Getty images
House prices in Stockholm had reached eye-watering heights

When looking at tricky economic and market questions, it helps to get some perspective on the problem.

I’ve found that two things are great for that. The first is to look at what’s happened in the past (which is one reason I’ve been discussing crashes from financial history every Friday in Money Morning).

The second is to look at what’s going on in similar situations elsewhere around the world.

Hence, today’s Money Morning takes us on a trip to Sweden – and a tour of its housing market in particular.

A quick tour of the Swedish property market

We can feel fairly confident that house prices in the UK are overvalued in many areas (at least relative to history and most ratios that you might care to use). But one thing we don’t know is what might trigger a change in that state of affairs.

So today I wanted to take a look at a similarly overvalued property market, that appears to be on the verge of a slowdown – or potentially something more significant.

Swedish property prices have roared ahead over the last decade or so. Since 2005, prices of flats have tripled, while house prices have more than doubled.

As the FT points out, property in central Stockholm will set you back an average of £8,500 per square metre. That’s similar to the London boroughs of Lambeth or Hackney, apparently. (For those of you who don’t live in or near London – stunning as it may seem, I know you’re out there – those are relatively central, once-dodgy, now gentrified areas). In other words, it’s expensive.

Last year, prices kept rip-roaring ahead, rising at double-digit annual rates. But now there are signs that things are slowing down.

Data published last week showed that house prices in Sweden fell by 1.5% in September, the biggest drop since October 2012. Flats in Stockholm (more on those in a moment) were hit hardest, falling by 2.2%. Annual growth is down to 6% for flats and 9% for houses (which sound high, but they’re well off the gains seen in 2016, and heading lower). The time taken to sell is also rising.

Shares in property developers are on the slide. Several are re-categorising developments as rental properties, rather than attempting to sell them. Those which focus mainly on building flats for sale have seen their share prices fall – one developer of luxury flats has issued a profit warning.

Sweden’s ever-so-slowly tightening housing market

So what’s going on?

First things first, there’s supply. The number of flats for sale is at its highest level since 2008, reports Bloomberg. Meanwhile, the number being built is at its highest level since at least 1996. In the second quarter of this year, “apartment starts” came in at 15,700. That’s pretty much double where they were just three years ago.   

(Interestingly, if you read the press on the topic from this time a year ago, it’s all worries about a “housing crisis” and “not enough properties”. Amazing how rapidly the story changes.)   

Second, there are efforts to micromanage the market by regulators. Mortgages were capped at 85% loan to value back in 2010, which did slow the lending market down sharply when it was introduced, but it picked back up again in mid-2012.

Also, you can still get interest-only mortgages, but any loan above 50% of the property’s value has to involve repaying the capital too. That was introduced in June last year, and appears to have hit lending growth too. The regulator is now planning additional rules for heavily indebted households and also the idea of a cap on loan-to-income ratios.  

These latest new rules have been introduced partly as a reaction to the central bank’s interest rate policies. The Swedish central bank – the Riksbank – is desperately fixated on dodging deflation.

As a result, in 2014, it cut interest rates into negative territory, despite strong economic growth. The main rate now sits at -0.5%. The idea is to keep the currency weak and to prevent deflation from taking hold. And it does seem to be working – inflation in Sweden is now above the 2% target.

The Riksbank has also done its fair share of quantitative easing, and now owns around 40% of Swedish government bonds. In a recent review of its policies, it said – with a certain understatement – that “the picture is not unambiguous”, but overall, Sweden’s government bond market is “still functioning relatively well”.

It’s also aware of the potential for low interest rates to drive up house prices – which is why it’s been nagging the authorities to do something about property prices (unlike the Bank of England, the Riksbank doesn’t have the power to regulate the mortgage market directly). Hence the new rules on mortgage lending.  

Maybe markets sometimes fall because they’re just too expensive

None of that quite answers the real question – what has triggered the apparent slowdown now? Perhaps there is no trigger. Perhaps it’s down to the fact that Swedish households are extraordinarily indebted (moreso even than the UK); interest rates are extraordinarily low; and therefore even minor changes such as rising supply and a gentle tightening of the rules around lending, can make a difference.

As for the implications for investors – I’d be a little wary of hanging on to Swedish banks I must admit. Swedish bank SEB described the slowdown yesterday as “healthy signs of stabilisation” in its third quarter earnings report. Swedbank – the country’s biggest mortgage lender – said something similar.

The Swedish banks in general are often touted as the best in the banking sector, and I’ve no reason to doubt that. But even the best banks in the world are pro-cyclical. If the housing market in Sweden is turning, that can hardly be good news for the companies writing the mortgages and taking the hit when consumer credit demand inevitably falls.

But it’s probably more interesting to keep an eye on how this develops. Overall, in many ways, Sweden’s housing bubble doesn’t sound hugely different to the UK’s. Interest rates are as low as they’re likely to get. The government is tightening up on taxation, and the central bank is tightening up on lending criteria. Houses are certainly overpriced. And in some of the most overstretched pockets, supply is even rising (those swathes of pointless flats in central London).

And of course, just as Sweden is experiencing a wobble, so is the UK – or certainly its most overpriced areas, London specifically.

Could the market simply crumble under the weight of its own absurdities? I’ll be keeping an eye on what happens in Sweden and other parts of the world for clues.  

  • Robert S Redfern

    Is this 2007 or 2017?

    • Horiboyable .

      2007 Redux

  • Stephen Sumner

    Not sure this is a very well researched article. The property market is pretty solid in most parts of Sweden and things are fairly stable. If there were any bubble / over heating it would be in Stockholm but even there, there is a 10 year wait for first hand contracts on rental properties, the rest of the country things are pretty sensible even with a general shortage of rental properties in most communities. You can pick up a large detached family home with garden and outbuildings within 30 minutes commuting distance of Gothenburg for less than £290K for example, where can you do that anywhere near London? or even in the SE England.

    • LeeHazelwood

      If the article is wrong, if anything it’s in the opposite direction. The nominal amount is less relevant than the debt that creates it, the UK and Sweden have similar household debt to GDP ratios, but Sweden has considerably worse prices to rents ratio, and prices to income ratio, on par with Australia.
      I doubt very much Sweden (or Australia, among others) can avoid a crisis and recession over the next couple of years. The UK is at the riskier end of the definition ‘wobble’, which may amount to a fall in real terms if not nominally as data shows the Western economic cycle has begun to roll over into it’s predicted 2019 slowdown period.

      • Stephen Sumner

        Rent is considerably more affordable in Sweden compared to the UK, about 50% cheaper all said and told if you are outside of Stockholm.

        • LeeHazelwood

          What matters is not necessarily whether landlord rents are more or less ‘affordable’, without being pedantic rents are by definition always affordable as they tend not to be funded by debt. It is the divergence between real rents (including imputed rents), incomes and house prices that are largely funded by mortgage debt that tells us whether there is a bubble.
          Sweden has a notoriously tightly controlled, if relatively small rental market. Due to a massive undersupply of capped rental properties there is a 30-40 year waiting list and inevitably this had led to a reputedly large black market, there are also market distorting taxes on transactions, all in all meaning rental inflation data is obscured and patchy and imputed rent undoubtedly higher.
          By the same logic though, if they fundamentally unregulated the Sweden’s rental market like the UK’s then the rent to price ratio would improve, but that still wouldn’t explain the considerably larger divergence between incomes and prices in Sweden vs the UK which is probably the more reliable metric, along with household debt to GDP, neither of which look healthy.