Swedes on a Debt Binge Now Face Test of Rising Mortgage Rates

Sweden’s housing market is decoupling from monetary policy as mortgage rates are starting to rise after a four-year swoon.

While the central bank last month pledged to keep its benchmark rate unchanged until early 2017 at a record low of minus 0.35 percent, some banks are increasing loan rates to cover rising funding costs amid concern over the red-hot housing market. That could put the pinch on the Swedish consumer.

“To have interest rates this low isn’t sustainable,” Hans Lindblad, director-general of the National Debt Office, said in a Nov. 4 interview. “Above all, young households don’t realize that in normal times interest rates may be 4-6 percent, not 2 percent, and that’s something that households need to be able to handle.” 

Warnings of the risks building in Sweden are growing more frequent, with a number of bank executives and regulators sounding the alarm and the central bank revealing plans to cut its exposure to mortgage debt. Borrowing in Sweden has risen at twice the rate of economic growth since 2009, driving housing prices up almost 50 percent.

Sweden’s state-owned mortgage lender SBAB on Nov. 5 increased its home-loan rates by as much as 0.10 percentage point, saying that loan rates may have bottomed amid “upward pressure” from rising funding costs and future capital requirements. SEB AB also on Sept. 1 adjusted its pricing “to mirror the real cost for its funding.” 

Covered Bond Yields Rising

The reversal comes after almost four years of sinking mortgage rates. The average rate on new home loans was about 1.58 percent in September, down from more than 4 percent in December 2011 when the central bank reversed course and started to ease monetary policy after a period of tightening.

Tor Borg, SBAB’s chief economist, said he expects mortgage rates to remain low for a while and that households can manage an increase because of high savings and margins. Sweden will “probably and hopefully” have a period of about one year “with fairly stable interest rates, and then a slow rise in interest rates, so that households have time to adjust,” he said. 

Still, the situation could get “problematic” if rates were to rise very quickly or be increased earlier than forecast, said Borg.

Lindblad is more concerned.

“To have five-year mortgage rates of 2 percent with inflation expectations near 2 percent implies real interest rates that are close to zero,” he said. “That doesn’t agree with economic theory.”

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