Less than a week after Sweden’s central bank cut interest rates, Standard & Poor’s said low borrowing costs are inflating a housing market that the rating company estimates is 25 percent overvalued.
“We have seen this imbalance and we think that over time we’ll have to come back to an equilibrium point” at which house prices are aligned with income growth, Alexander Ekbom, an analyst at S&P in Stockholm, said yesterday in a telephone interview.
Nobel laureate Robert J. Shiller warned as far back as January 2012 that Sweden’s property market was already in the grip of a bubble. The nation’s biggest banks say record property prices are being driven by a shortage of housing rather than an oversupply of credit. Yet according to Ekbom, “the most important variable” is “the low interest rate environment.”
Sweden isn’t the only Scandinavian nation struggling to restore balance to its real estate market, as Denmark and Norway also build record private debt burdens, Ekbom said.
Sweden, Norway and Denmark, which boast stable AAA credit grades at the three main ratings companies, have suffered the same fate as other rich nations including Switzerland as unprecedented monetary stimulus distorts their mortgage markets.
S&P today stripped the European Union of its top rating, citing concern that the bloc’s creditworthiness has declined. “A rating change on the European Union does not affect the sovereign ratings of individual member countries,” S&P said.
Policy makers in Sweden, the largest Nordic economy, have struggled to calibrate efforts to stem debt without suppressing economic growth and consumer prices. Yet with disinflation and even bouts of deflation, the Riksbank this week caved in to pressure to cut, easing policy for the first time in a year in a step that brought the repo rate to 0.75 percent.
The Riksbank’s move quickly fanned through to mortgage rates, which banks including Svenska Handelsbanken AB and SBAB cut by 0.16 percentage points on three-month loans. Nordea Bank AB, SEB AB and Swedbank AB also lowered their mortgage rates.
Consumer indebtedness has swelled as Swedes take on loans that don’t require them to amortize. The average household takes 140 years to pay down its mortgage, according to the Swedish Financial Supervisory Authority. The government, which faces an election in September, has shied away from drafting legislation that would require voters to reduce debt.
Across the Nordic region, “people are incentivized through the tax system to take on debt and to save in other instruments rather than amortize,” Ekbom said. “That’s also been a factor which one needs to look at when assessing why debt has been building up.”
In Sweden, households can deduct part of their interest payments from taxes. That’s something the government should look into limiting, according to Bengt Hansson at the Swedish National Board of Housing, Building and Planning, and Roger Josefsson, chief economist at Danske Bank A/S in Stockholm.
Riksbank Governor Stefan Ingves, who also chairs the Basel Committee on Banking Supervision, has repeatedly warned that Sweden’s record household debt level, at more than 170 percent of disposable incomes, is a risk that monetary policy can’t ignore.
Imbalances in Sweden’s housing market may ultimately be addressed through income growth rather than through a drop in property prices, Ekbom said.
“If there’s a correction, it doesn’t necessarily have to be through prices,” he said. “It could also be through income growth exceeding future house price appreciation.”