Nordic Economies Risk Housing Market Collapse
Nordics Face Housing Market Losses May Trigger Double Dip
Linus Hook/Bloomberg
House prices in Sweden jumped an annual 7 percent in the three months through July, the 15th consecutive period of increases.
House prices in Sweden jumped an annual 7 percent in the three months through July, the 15th consecutive period of increases. Photographer: Linus Hook/Bloomberg
House prices in Sweden, Finland and Norway may slump, derailing one of the strongest rebounds in Europe and threatening to drive their economies back into recession.
Swedish real estate may fall as the 20 percent of borrowers with the biggest debts struggle with burdens as much as 46 times their disposable incomes, says Royal Bank of Scotland Group Plc. Norway’s central bank says low interest rates risk overheating its lending and property markets, while euro-member Finland says a bubble may be forming in its housing market.
“I’m very worried,” Finnish Finance Minister Jyrki Katainen said in an interview. “There could be a housing bubble in the making in Finland. There is a risk that mortgage borrowing costs are too low.”
House prices in the three countries rose last year even as their economies contracted and unemployment shot up, creating imbalances that economists say now need to be corrected. Higher Swedish interest rates may bankrupt some borrowers, RBS says. Finland’s borrowing costs are set by the European Central Bank, making it tough for policy makers to steer the domestic economy.
About 95 percent of mortgages in Finland and Norway track money-market levels, while about 60 percent of Swedish loans are based on adjustable rates. That compares with the 90 percent of German homeowners whose interest payments are fixed, meaning last year’s record low borrowing costs fed into the Nordic region faster than elsewhere in Europe.
Double Dip
House prices in Sweden, the biggest Nordic economy, jumped an annual 7 percent in the three months through July, the 15th consecutive period of increases. Norway’s house prices have risen 19.6 percent from the end of 2008 through last quarter. In Finland, existing home prices rose an annual 10 percent last quarter, after surging a record 11.4 percent in the three months through March.
Lars Magnusson, a director at the Swedish Ministry of Finance’s National Housing Credit Guarantee Board, said in an Aug. 16 interview that houses will lose a fifth of their value in the next three to five years.
“A 20 percent drop would probably be instrumental in bringing on, or deepening, a double-dip,” in which a period of recession is followed by a brief recovery before the economy contracts again, said Par Magnusson, the chief Nordic economist at RBS in Stockholm. “A double-dip could occur in any case as international growth conditions are deteriorating.”
Krona Losses
Sweden’s krona lost 0.2 percent against the dollar to trade at 7.3557 at 12:37 p.m. in Stockholm, making it the second-worst performer after the New Zealand dollar today of the 16 major currencies tracked by Bloomberg.
Norway’s economy emerged from a recession in the third quarter last year, while Sweden exited its recession in the second quarter of 2009. Finland’s economy contracted in the fourth and first quarters, while monthly data show output expanded in the three months through June.
Household debt was 167 percent of disposable income in Sweden by the end of last year, compared with 104 percent a decade earlier, the Riksbank estimates. In Finland, that ratio rose to 107 percent at the end of last year from 65 percent in 2000, central bank data show. In Norway, the debt ratio will rise to 197 percent of disposable incomes by the end of the year, up 14.5 percent from 2005, Norges Bank estimates.
Puncture Rally
Rate rises in Sweden may puncture the property rally, RBS’s Magnusson said. In Norway, the central bank may be unable to tighten enough to avoid a bubble, said Frank Jullum, chief Oslo- based economist at Danske Bank A/S unit Fokus Bank.
Last month, the Stockholm-based Riksbank raised its benchmark rate by a quarter point to 0.5 percent from a record low, and said borrowing costs will need to rise further. Oslo- based Norges Bank on Aug. 11 left its benchmark rate at 2 percent after signaling fewer increases as policy makers try to avoid widening the gap with euro-area rates and fueling krone gains that may hurt exporters.
“If you are now trying to keep interest-rate differentials to other western countries as small as possible, then of course you are running a greater risk in Norway because the channel to the household sector functions much better than in any other country,” said Danske Bank’s Jullum.
Preventing Bubbles
In Finland, the ECB’s 1 percent benchmark rate may be misaligned to the Nordic economy’s needs.
“For preventing bubbles, it would of course be good if Finland had its own monetary policy,” said Mikko Forss, an economist at Roubini Global Economics in London. “Still, it’s not enough alone, as has been argued also by central banks in Sweden and Norway. Regulation is probably the best tool.”
The three economies are otherwise poised for some of the EU’s strongest rebounds. Finland’s GDP may expand 1.5 this year, after 2009’s 8 percent contraction, the government estimates. In Sweden, the central bank expects output to grow 3.8 percent this year after last year’s 5.1 percent slump. Norway’s mainland GDP, which adjusts for energy and shipping revenue, will expand 1.75 percent this year, rebounding from last year’s 1.6 percent decline, central bank estimates show.
According to RBS, risks to the property market are greater now than before the credit crisis, as households are both more indebted and more exposed to rate changes.
“It is very important to take the risks associated with the high-leveraged households into account, as it is the marginal buyers that basically set the price on the house market,” Magnusson said.
To contact the reporters on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net; Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net
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