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Sweden’s Worst Housing Slump Since 2008 Is Ripe for Sanity Check

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Newly built apartment blocks sit beside a waterway in the Sodermalm district of Stockholm, Sweden. Photographer: Johan Jeppsson

Sweden is in the worst housing-market downturn since the global financial crisis. But with bigger bank buffers and an economy that’s growing much faster than the rest of Europe, analysts, regulators and politicians all say everything will be just fine.

First, there’s the reason behind the price correction. It’s not caused by economic or financial distress, but by a surge in construction (initially to meet excess demand). Sweden is now a buyers’ market, with construction at its highest since the 1990s. The economy is growing much faster than most of the rest of Europe, with high confidence levels, strong government finances and declining unemployment.

Sweden also boasts some of the world’s best-capitalized banks, and the regulator has pushed through several measures to curb debt growth.

The country is “resilient to a slump in house prices,” according to Anna Breman, the chief economist at Swedbank AB, the country’s largest mortgage lender.

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

Falling Unemployment

Sweden's jobless rate is on a downward trend as employment rises

Source: Statistics Sweden

Swedish unemployment is falling, with the rate now at its lowest since before the crisis in 2008. And even if the housing downturn hits growth and jobs in residential construction, the effect will be limited since other areas of the construction industry, where labor shortages are large, will soak up those workers, according to Swedbank.

Population growth, in part driven by immigration, is also helping, and “contributing to a greater need for public investments” in daycare, schools, senior care, hospitals and infrastructure, according to Breman. After passing the 10 million mark early last year, Statistics Sweden forecasts that another million people will be added by 2026. 

And Sweden can afford the extra investment, thanks to its budget surplus.

Population Boom

Sweden's population is expected to grow by more than 1 million within 10 years

Source: Statistics Sweden forecasts

Meanwhile, Swedes are getting richer. According to SEB AB, households’ net wealth increased by 1.3 percent during the third quarter to a record 14.2 trillion kronor ($1.72 trillion). 

Danske Bank A/S economist Michael Grahn said this creates a “a good buffer” and the savings ratio is also “extremely high, part of which is liquid and could probably be used in case of emergency.”

Andreas Wallstrom, an analyst at Nordea Bank AB, says Swedish household finances “remain highly favorable, with low interest rates and solid income growth, which should give support.”

Record Low

Swedish mortgage rates have fallen to record lows and are expected to remain low

Source: Statistics Sweden

Mortgage costs have plunged to record lows in recent years after the central bank cut rates below zero in a bid to boost inflation. Klas Danielsson, the chief executive officer of state-owned mortgage lender SBAB said in a December interview that “interest rates will probably continue to be low for a long time, so those of us who own a home will continue to be able to afford to pay our housing costs” even if home prices fall further.

Cost Decline

Interest burden for Swedish households has fallen amid declining mortgage rates

Sources: Riksbank and Statistics Sweden

Note: Measures rate costs as percentage of disposable income

As for the banks, history suggests Swedish loan losses will remain low even if the housing market crashes (though their earnings could be hurt by lower lending volumes). 

Households in Sweden, unlike in the U.S., can’t just walk away from mortgages they can no longer afford. They have to continue to pay their debts, or sell their homes. Sweden also differs from the U.S. in that those who become insolvent can fall back on the country’s generous welfare system, which provides support to people struggling financially or with unemployment.

In neighboring Denmark, which shares many traits with Sweden, the overall economy kept on ticking even after a housing bubble burst in 2007. Unemployment there reached a high of 4.6 percent in 2012, and foreclosures were negligible.

So what exactly will be hurt by a home-price slump? Conspicuous consumption will probably take a hit, and economic growth will likely slow as housing construction declines.

“Historically, there’s been a strong (positive) correlation between private consumption and home prices,” Wallstrom said. “Also, housing investments would certainly decline in such a scenario.”

Grahn said history suggests that a 10 percent drop in home prices means a 30-40 percent decline in residential construction over two years. “As residential construction has added about 1 percentage point to GDP growth over the past couple of quarters, unchanged residential construction activity would take away as much,” Grahn said. “A decline in activity would take away even more. In addition, housing-related private consumption (furniture, white goods, etc) would probably also decline.”

Still, the “rather mild downturn” seen in the housing market so far “should pose no major risk,” Wallstrom at Nordea said. “We will probably see lower GDP growth in 2018 and 2019, but still a rather benign economic environment.”

Sliding Prices

Swedish home prices fell 7.8% in 3 months through Dec., steepest drop since late 2008

Source: Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden

(Updates with housing price data in fifth paragraph.)
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