Sweden: Housing Vulnerabilities Likely To Rise Again, But Slowly

With inflation normalising, the Riksbank, the Swedish central bank, will likely start cutting its main policy interest rate soon. This will support Sweden's real GDP growth and the recovery of the housing market. But as monetary policy becomes more accommodative and the economic recovery accelerates, credit growth for housing will regain momentum. Over time, vulnerabilities including high household debt and property price overvaluation could rise again, but mitigating factors exist to limit the risk of this in the near term. Nonetheless, Sweden's household debt, slightly below 200% of net disposable income, is among the highest in the European Union (EU), and house prices, although partially downward correcting after the fast pace of growth seen during the pandemic, remain elevated. High household debt, in the context of still overvalued property prices, makes Sweden somewhat more vulnerable to macroeconomic instability.

This commentary focuses on the main factors that could mitigate the rise in already-elevated levels of housing prices and household debt.

The still large supply of housing and moderate growth in incomes will reduce the pressure on house prices, which are expected to grow moderately in 2024-2025. Moreover, we do not expect interest rates to return to the low levels seen over the last ten years and, therefore, credit will remain expensive, dampening loan demand. In fact, the Riksbank is most likely to ease monetary policy only gradually as new geopolitical tensions could result in a slower-than-expected drop in inflation. As a result, new and outstanding borrowers will face elevated interest rates in the coming years. The majority of borrowers have a mortgage at variable rates with a short interest rate fixation period. Finally, recent projections point to just steady growth in population going forward, and this, along with a less supportive labour market, could further contribute to a more contained rate of growth in new mortgage lending.

Key Highlights
-- Housing prices are expected to rise again but more slowly than during the pandemic
-- Property market imbalances leading to housing price overvaluations and higher household debt are likely to emerge over the medium term
-- Expensive mortgages, steady population growth, and a less dynamic labour market are likely to limit the build-up of imbalances

“A dovish Riksbank could translate into in an increase in imbalances again in the housing market leading to higher prices and household debt over the medium term,” said Carlo Capuano, Senior Vice President, Morningstar DBRS, Global Sovereign Ratings. “But housing price peaks seen during the pandemic are unlikely to be reached soon, as households have to adapt to high interest rates for a prolonged period, while imbalances in the supply and demand of housing will be more contained”.