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Economists reject 'housing bubble' report

Peter Vinthagen Simpson · 26 Feb 2010, 14:55

Published: 26 Feb 2010 14:55 GMT+01:00

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In an article published by business daily Dagens Industri on Friday, Tomas Pousette and Tor Borg at SBAB reject as too simplistic BKN's explanation that rising interest rates will cause the Swedish housing market to nosedive.

The pair, who are employed as economists at the state-owned mortgage lender, said the idea that rising interest rates will increase mortgage payments is "no surprise" and that most market commentators have incorporated this in their projections.

Pousette and Borg argue that Riksbanken rate hikes will not come as a surprise to households as the rates will tick up gradually - taking three years to "normalize" at around 4 percent.

The pair also questioned BKN's interpretation of statistics it claimed to show that Swedish households have been mortgaging their homes for alternative investment or consumption to the tune of 45 billion kronor ($6.3 billion) per annum over the past decade.

The SBAB economists argue that it is very difficult to ascertain how much of this money has been used for maintenance and repairs of existing properties and thus the amount extracted is probably much lower.

They recognise that there would have been much more cause for concern had this money been used for the consumption of cars, holidays and food.

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Furthermore the pair also point out that household savings rates have climbed steeply during the finance crunch and that mortgage holders have a significant buffer to guard against the added burden of rising interest rates.

"The forecast from BKN of a 20 percent decline in housing prices is thus excessively pessimistic," they conclude.

Peter Vinthagen Simpson (news@thelocal.se)

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Your comments about this article

14:15 February 27, 2010 by Jan M
A couple of problems with their arguments.

1. They work for a state-owned mortgage lender. This means that their livelihoods depend on a housing bubble and mortgage activity. Unsurprisingly they claim there's no problem. After all why scare away potential customers? No ciustomers, no job.

2. It's possible to predict whether the markets and the public are viewing increased interest rates as 'no surprise'. If it's expected people's savings habits and spending habits will already be geared up to accommodating the impact of the increases. It's called forward thinking. If you look at personal debt levels in Sweden I don't think there's much evidence of either contingency saving or spending control.

Conclusion - vested interests have said exactly what you would expect vested interests to say.
18:23 February 27, 2010 by stoffer
@Jan M - I largely agree with what you say.

Generally, I think that availability of chap mortgages is skewing the market. It drives prices of apartments and houses beyond sanity. There is something like elasticity of demand and supply - cheap mortgages increase demand for apartments, that drives prices of apartments up, that in turn drives up demand for mortgages. Here, there is a problem - increased demand should drive price of mortgages up - but it doesn't. We end up with positive feedback system driving estate prices to cosmic levels. that is what happened in Spain and that is what happens in Central-Eastern Europe. Estate prices are way beyond sanity. The bubble in Spain has burst, but the bubble in Central-Eastern Europe hasn't - it wasn't blown enough. Price increase has stopped, but that's all. This scenario is actually possible in Sweden.
12:00 March 1, 2010 by Gordy
Whoa! Deja vu. Coming from Ireland where house prices in my area are down 40% from the peak in 2006 and still falling, I can only say that Sweden 2010 looks very like Ireland 2006!

As has been commented already so called "economists" working for mortgage lenders are the very last people you should listen to for sound advise on the direction of the market, here in Ireland they were the very ones who were saying that prices would not fall and the housing market would have a "soft landing" etc. Even now having been proven wrong they still implore people to buy by saying that the market has now bottomed, there has never been a better time to buy etc. etc. They do the devil's work.

Having spent a week recently house hunting around Skanör/Falsterbo/Höllviken it is my opinion that houses in that area are at least 25-30% overvalued at present.

The price of houses is all about confidence in the market, once confidence is undermined the market will fall, forecasts such as that from BKN of a 20 percent decline in housing prices helps to undermine confidence, other factors will no doubt also contribute.

Moreover the way that Swedish mortgages are structured with the so called "bottom loan" which is an interest only payment leaves Swedish mortgage holders much more vulnerable to increases in interest rate rises, especially those who have max'd out the size of their mortgage based on what they can afford to repay.

Interest rates are going to go up that's already been said by the Riksbank.

Trees do not grow to the sky! The price of houses do not always go up.

Sure there are plenty of places in Sweden you can find housing at good value (mostly rural), but in areas where there has been high demand in or near the main population centres the bust is coming and IMO a fall of only 20% is probably optimistic rather than pessimistic.
13:38 March 1, 2010 by tobias123
I agree with all the above comments, remember whats SBAB's definition of a housing crash ??? and thats the issue here - SBAB probably guage a housing crash via: homeownership, rathur than % falls - the devil is in the detail. The key looking forward is UNEMPLOYMENT - should this figure continue to rise, and interest rates as well it'll be interesting to see how the Swedish property market holds up then. And even more so what SBAB has to say about it !
09:10 March 9, 2010 by Kronaboy
Let us assume for arguments sake that the bubble bursts and the property market is left in taters, so what this isn't the UK where you have 70% owner occupier rates and 70% of the population will continue with their lives in their rented municipality apartments as if nothing has happened. Besides what you have to take account of is the Swedish bubble has already burst in Latvia, Poland etc.... With regards to comment regarding areas of high demand, have we seen the market collapse in Knightsbridge, Beverly hills????
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