Property more overvalued in Sweden than in US

This weekend I am at my wife’s family reunion so I haven’t have a lot of time for blogging. But, I caught an interesting article in Swedish daily Dagens Nyheter, which cites an IMF study which claims that property values in Sweden are even more overvalued than they are in the US. And this is a bubble which hasn’t even popped yet.

The article also provides a fairly good understanding of the present U.S. and European economic situation. Overall, one should see the article as further evidence that this is not a problem in the U.S. or UK alone, the housing bubble and credit crisis has global proportions. Europe is especially vulnerable in this next leg down of the crisis.

Below is my translation of the article.

House prices in Sweden more overvalued than in the U.S.

Johan Schück
The U.S. is a step ahead. But now, Europe is increasingly vulnerable, which has become apparent for Sweden. This applies to both the economic recession and the financial crisis, as well as in the case of house prices.

The decline in the U.S. economy has not reached the end. GDP growth was decent in the first half of the year: an increase of 2.2 percent. But this was partly a result of temporary tax credits that should encourage households to consume, and partly as a result of a depressed dollar rate, which supported exports.

Now, this [situation] does not apply anymore. Tax credits have come to an end and the dollar is rising against the euro and other currencies. Rising inflation forces also pressure interest-rates. The economic outlook looks worse.

The financial crisis in the United States rushes on, while the collapse in house prices continues. This summer, mortgage giants Fannie Mae and Freddie Mac got into difficulties, which forced the Treasury Department and the Central Bank, the Federal Reserve, to jointly step in. Indy Mac, a large mortgage institution in California, then fell on the ropes and was taken over by federal authorities.

Mistrust in financial markets is still high, which is marked by the large gap between the Federal Reserve base rates and various market rates. Prices of houses are still falling, which means that banks and mortgage companies face more risk.

Households are holding back consumption to save up a necessary buffer. The gradually increasing financial crisis is hitting production and employment more and more. The consequences will be felt for years, even when the cycle turns upward.

Events in Europe looks somewhat different. Here, the financial crisis came early, as a result of European banks’ investments in U.S. mortgage paper, which lost value. By contrast, it took longer for the business cycle to turn down and house prices to buckle.

This summer, however, recession has reached several of the large euro countries, including Germany where the economy had been doing quite well. In Britain, growth has come to a sharp end and in some European countries, including Denmark, production has contracted. Reduced exports to the United States plays some role, but a weak European market is still the main cause. High inflation has pushed up interest rates, which has put pressure on the economy. Even in Europe, house prices are falling, which households meet with increased savings.

The fall in price in Europe has not gone as far as in the United States. At present, it is in several European countries, including Sweden, where house prices are more overvalued than the U.S., according to an estimate from the International Monetary Fund, IMF.

The danger of further price decline in housing looks to be, therefore, greater in Europe, even if the correction does not need to be as drastic on all sides. The risks are increasing, however, that the crises in the financial sector as well as to the current economic downturn will be deepen.

Sweden appears so far to have done better than most euro area countries. A lot of Swedish industrial companies, focusing on global markets, have felt a tailwind. Strong public finances mean that there is space to support the economic situation, mainly through tax cuts, which is lacking in many other places.

Yet, it will be felt here too with weaker export performance and a depressed domestic economy, where inflation and high interest rates grits out of household purchasing power. A sharp drop in the Swedish house prices would make the situation much more difficult, especially if it is combined with an increase in unemployment.

There are different views on how deep the downturn will be. In its new forecast, Swedbank expects GDP growth of 1.8 percent this year and 1.7 percent next year – and even some reduction in employment.

Earlier this week came Sven-Arne Svensson at Erik Penser Funds came out with a more optimistic assessment that GDP growth will be 2.2 percent in 2008 and 2.4 percent in 2009.

In both cases, however, this means that Sweden has a chance to get on quite well, even if the economy loses pace. But as usual, there is great uncertainty. The only thing that is certain is that no predictions hold completely true because reality is in constant motion.

Bopriserna i Sverige mer övervärderade än i USA, Dagens Nyeter

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