Sweden: More Signs The World’s Biggest Housing Bubble Is Cracking

We like to highlight that although Sweden’s property bubble is not the longest running (that accolade goes to Australia at 55 years), it is probably the world’s biggest, even though it gets relatively little coverage in the mainstream financial media.

A month ago, we noted that SEB’s housing price indicator suffered its second biggest ever drop, falling by 39 points, only lagging a steeper fall from ten years earlier. This month the indicator, which shows the balance between households forecasting rising or falling prices, fell into negative territory, dropping to -5 from +11 in November. Households expecting prices to rise has almost halved from 66% In October, to 43% in November and 36% this month. The percentage of households expecting prices to fall has risen from 16% in October, to 32% in November and 41% this month.

After the housing price indicator was published, the Swedish krona fell as much as 0.7% versus the Euro to 10.0118, its lowest level since 5 December 2017.

Not surprisingly, the focal point of Sweden’s property boom has been Stockholm, where the decline in the housing price indicator in December 2017 was precipitous. According to Bloomberg.

SEB says sharp drop in home-price expectations in Stockholm was main culprit behind the decline in its Swedish home-price indicator, with the indicator falling to -42 in the Swedish capital in Dec. from -6 in Nov. That means the Stockholm indicator is now close to the record low of -47 that was reached in Dec. 2008, at the height of the global financial crisis.

(SEB) says 63% of households in Stockholm now expect prices to decline in the coming year while only 21% expect an increase; that’s “a dramatic shift compared with only two months’ ago,”

Given the disproportionate rate of decline in December in Stockholm, SEB was minded to ask whether special factors are at work “rather than general drivers such as fears over rising interest rates or a weak business cycle”. Indeed, aside from south-eastern Sweden, the outlook in all other regions remains positive. With regard to Stockholm, the bank notes that a large increase in new supply of expensive residential property and what it terms “very negative media reporting” have had an impact. Whether that’s a fair assessment, or whether it’s realist reporting of a monumental asset bubble is a moot point. What is indisputable is that the number of Swedish homes for sale has surged in November 2017 compared with the same month last year.

SEB is still undecided on whether Stockholm is a leading indicator for Sweden in general, as Bloomberg notes.

Differences between regions are “unusually high and some of the factors that currently weigh on Stockholm could turn out to be of a more temporary nature, especially given a continued lack of housing, low rates and the strong labor market”

The official HOX/Valueguard house price data for November 2017 will be published on 14 December. Last month, the weakness in SEB’s housing price indicator preceded clear evidence of a decline in Swedish house prices and the likely end to the housing bubble. Average house prices for Sweden fell 3.0% in October versus the previous month, with Stockholm prices down 3.7%. SEB expects “continued small sequential declines and as regards Stockholm also year-on-year” when the data is published on Thursday.

Ahead of the data, some analysts are expecting a “November Noir” with the month-on-month decline comparable with or even worse than what was seen in October 2017. Previewing the announcement, Bloomberg explains.

Anyone with a stake in Sweden’s property market should make space for Thursday in their calendar. That’s when they’ll get fresh clues as to whether they are facing a temporary blip or the start of a full-blown crash…There are indications that the monthly drop will be as big – if not bigger – than October’s, when prices fell 3 percent, the steepest decline since the global financial crisis of 2008.

Nordea Bank AB expects a “November Noir,” with home prices declining 3 percent on a monthly basis and 1 percent on an annual basis. Property-listings website Booli, which is owned by mortgage lender SBAB, said on December 7 that the average selling price for Swedish apartments last month fell 3 percent from the same period a year earlier, led by a 7 percent drop in Stockholm.

While we wouldn’t like to second guess the outcome of Thursday’s data, we would strongly disagree that the fall in prices is already “close to the bottom”. Bloomberg found an analyst with an upbeat view.

All told, there may still be a glimmer of hope. “Looking only at developments over the past two weeks, prices have remained largely stable, both in the country as a whole and in Stockholm,” Nordea’s Andreas Wallstrom said on December 5. “This could be a tentative signal that we are close to the bottom and that our forecast of largely stable prices ahead is on track.”

What we are finding harder to fathom are the schizophrenic views of the normally glum looking Riksbank Governor, Stefan Ingves, who has presided over Sweden’s property boom for more than a decade. Bloomberg reports him arguing that a slowdown is “not a big concern”, which contrasts sharply the grave warning he gave to the Financial Times in October 2016.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

We have more sympathy with the latter.