The latest bubble warning: Swedish house prices

There is mounting evidence that bubbles are forming again everywhere across the globe as easy money makes itself felt in asset prices. The latest evidence comes from Sweden where Europe’s lowest home loan rates have pushed up the price of residential property.

At issue is the extremely loose monetary policy in Sweden that is an outgrowth of both recession in Sweden and a massive exposure by Swedish banks to the Baltics which are presently in depression. Sweden’s central bank, the Riksbank, has cut interest rates to near zero and is charging banks interest to keep reserves on deposit. Meanwhile, the bank has also embarked on a policy of quantitative easing in order to get credit flowing again.

In my July post, “Sweden: negative interest rates and quantitative easing,” when Sweden went negative on interest rates, I wrote:

Pretty aggressive plan, if you ask me. Will it work, though?

Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money.  The world is awash in money and the incentive to borrow is huge.  So, is the Swedish announcement qualitatively different?  On some level, it is not.  Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented.  This does make events in Sweden something to watch.

So, if you have been watching, what you have seen is a financial sector which is still critically weak – so much so that the federal government has been having secret meetings with the banks to get together a game plan in a worst-case scenario in Latvia, the worst of the lot in the Baltics.

But, even so, while the real economy is in recession, one has to conclude that the aggressively expansionary policy by Sweden’s central bank is reflating asset prices in a major way. Experts are now sounding the alarm as house prices hit new highs.

Below is a translation of yesterday’s Dagens Nyheter article reporting on the warning.

Experts warn: Sweden risks housing bubble

Europe’s cheapest home loans, tax cuts and a continued housing shortage. These are some of the reasons house prices are rising to new record highs in Sweden – right in the middle of a raging recession. Now a growing number of experts warn of a new housing bubble.

Swedish mortgage customers are sitting pretty. The Riksbank’s key interest rate of  0.25 percent is unique in Europe. By comparison, the corresponding rate is 1.25 percent in Norway and Denmark, 1.0 percent in the euro area and 0.5 percent in Britain.

Variable interest rates in Sweden are currently about 1.6 percent. As DN Economics related a couple of weeks ago, short-term rates are 2-3 percentage points higher in countries such as Denmark, Germany and Britain.

Swedish low-cost mortgages are the main cause of the housing rally. House prices fell sharply after investment bank Lehman Brothers’ bankruptcy caused the financial crisis in September last year. But since the start of the year, they have risen again. Prices of flats are now 5 percent higher than a year ago. And house prices have gone up 2 percent.

Reduced income tax and the abolished property tax have also contributed to the housing rally. Likewise concerning the shortage of housing.

In 2008, there was construction of 21 500 apartments in Sweden, which was considered low. This year, new construction is expected to decline by one third, according to Swedish Construction Federation.

Six months ago many experts warned that rising unemployment could lead to falling prices in the housing market. Now they are warning of a housing bubble instead.  Nordea Chief Economist Annika Winsth has repeatedly warned of inflated prices, and SEB’s CEO Annika Falkengren said recently that she felt that both house prices and the stock market have risen too fast in the past year.

In its monetary policy report last Thursday, the Riksbank wrote, "there is evidence that house prices at present are slightly above the level that is sustainable". It also speaks to the dangers of "over-optimistic expectations about interest rates" and "more expansive lending".

Despite the warnings the banks’ barometers tell of housing prices that will continue to rise in Sweden for many months to come.

I see this ending in a very bad way.


Experter varnar: Sverige riskerar bostadsbubbla – Dagens Nyheter

  1. Anonymous says

    Very true! Add to that, with (even with the tax cuts as mentioned in the article) the disposable income in Sweden is VERY low compared to other countries in Europe. Income taxes are one of the highest in the developed world (after denmark…). So, when the rates start raising we will see a double whammy on the propery market: high unemployment and people cant afford to pay their mortgages because of high rates.

  2. Christopher Pavese says

    Unfortunately, the story appears to be the same across the developed world. Americans are so focused on the “demise of the dollar”, but are our western peers really any better off? I am more comfortable with the “all mighty” buck in my pocket than a “krash-prone” krona. At least are housing bubble is no longer inflating . . . nor do we have an imploding Eastern European neighbor to worry about.

    If global reflation requires competitive devaluation, what is the result when all of our goals are the same? Perhaps this is a better question for Nash?

    As Winston Churchill once stated, “The dollar is the worst currency, except for all the alternatives.”

    1. Edward Harrison says

      That is the same line George Soros is now using to say he sees a dollar crash against other fiat currencies as unlikely. What happens to the dollar (or the euro or SEK) versus gold, oil or commodities is another story.

      1. Christopher Pavese says

        Exactly! Couldn’t agree more. See our thoughts on gold at

  3. aitrader says

    Good points, couple of additions:

    Reduced income tax and the abolished property tax have also contributed to the housing rally

    Income taxes have been reduced less than 1% on average. There is still a property tax but it has been changed to a flat rate with a maximum cap of 6,000 Swedish krona (about $950 USD currently).

    The property bubble is almost exclusively in Stockholm and its suburbs, which is the engine and hub of economic activity in the country. Stockholm and suburbs had a population of about 1 million folks in the mid-1990’s. It is now a bit over two million. Sweden has a population of about 9 1/2 million so this is about 20% of the country.

    The Swedish banking sector is being sucked into a bubble domestically due to the effective negative interest by the Swedish Riksbank. This would be foolish enough on its own if the major banks here didn’t also have serious risk exposure in Eastern Europe.

    A double whammy, where Eastern Europe devalues and defaults skyrocket and domestic defaults climb as well, is a distinct possibility. I’d say we are looking at mid-March when something like this could come to a real head. Odds-wise I give it 50-50.

  4. Christopher Pavese says

    Ed – wondering if you have any specific data on UK housing along the same lines that pointed to extreme overvaluation here in the states (i.e. price-to-median household income, price-rent, etc.).


    1. Edward Harrison says

      I ususally follow Nationwide’s monthly surveys and they have good price-to-rent charts that show the market is still overvalued. Take a look on their site and go through the press releases and you will see the charts in the PDFs attached.

  5. Mark Wadsworth says

    “Reduced income tax and the abolished property tax have also contributed to the housing rally.”

    Well, hurray for reduced income tax, but if you reduce a property tax, that can only lead to one thing …

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More