State warns of housing boom and bust

The National Housing Credit Guarantee Board (BKN) has warned that Sweden stands on the precipice of a house price crash. Record low interest rates and loose credit has expanded borrowing to unsustainable levels, the board argued in a new report.

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The board warns in the report, published on Tuesday, that when the bubble bursts house prices in Sweden can be expected to fall by 20 percent.

In its thrice yearly housing market report, the board has warned that a "price will be paid for the bubble" and predicts that a correction can occur suddenly "or through a more gradual process of inflation eroding the value of stagnant prices."

The board points out that since 2000 Swedes have changed their credit habits with regard to their homes.

"Households are extracting ever more capital from their homes through mortgage loans which are used to an increasing extent for investments other than housing," the board wrote in a statement.

Since 2000, Swedish households have borrowed an average 130 billion kronor ($18 billion) against their homes per annum, with only 45 billion kronor being used for housing investments (including purchase and renovation).

Between 1975-1999 Swedish households were more inclined to not only use disposable incomes to renovate and maintain their homes, they also used income to amortize.

The board, which is a national government agency under the Ministry of Finance, warns that the change in habits combined with easy credit, which has been sustained during the credit crunch, has led to a spiralling circle of increasing debt and inflating house prices.

The report declined to forecast exactly when this bubble was due to burst but predicted that the risk it would occur in the coming years was "very high."

Factors affecting the timing of the purported crash include "climbing interest rates or declining exports," the board explained.

It is also observed that Sweden is not unique in recording high levels of house price inflation over the past decade, with the deregulation of credit markets in developed countries and global imbalances identified by the board as the underlying causes of asset-price rises.

The difference between Sweden and many other developed world economies is however that many other markets have experienced a correction in recent years, while Sweden has not.

"Despite a large fall in GDP in 2009, Swedish house prices climbed over the year. With the backdrop of the macroeconomic situation this development can be considered surprising," the board observed.

The report warns that heavily indebted Swedish households are vulnerable to interest rates rises as well as asset price deflation.

Mortgage costs as a percentage of disposable income are currently at a record low 2.7 percent when comparing statistics from 1980, but leverage has increased from around 15 percent to close to 50 percent over the same period.

The National Housing Credit Board concludes that Swedish households could suffer a shock when interest rates rise only modestly.

"A normal mortgage interest rate of around 5.5 percent would make it significantly more expensive to live and motivates, according to our calculations, 20 percent lower house prices than today," Bengt Hansson at the board told news agency TT.

The parlous state of government finances in many the EU countries is a further factor that the board warns could shift a booming market into a bust.

"Aside from a new recession interest rates could be forced up strongly in the wake of the state financial crisis which has hit many EU countries very hard," Hansson warned.