During the first three months of 2010 household mortgage debt increased at an annualized rate of 8 percent, one of the highest rates of increase worldwide.
“We have a debt-price spiral within the housing market. Sweden is among the OECD countries with the greatest increase in housing loans. There is a causal link between rapid debt growth and subsequent deep economic crisis,” said Bengt Hansson, an analyst with BKN, to the TT news agency.
It is one of the conclusions of a new BKN report on the dangers of the current Swedish mortgage market with the board standing by its assessment that house prices will decline by 20-30 percent within 3-5 years.
“Household mortgage debt is expected to exceed 2 trillion kronor ($251 billion) this year. They are very vulnerable to interest rate shocks and the recent rapid indebtedness has compounded the situation,” said Bengt Hansson.
Much of the Swedish mortgage stock is held in variable rate mortgages, with 80 percent of new mortgages in March 2010 variable, up from only 45 percent as recently as March 2008. Ten years ago only every fifth household chose a variable rate for their mortgage.
The difference between variable and fixed interest rates since the late 1990s has been about 1.5 percentage points according to BKN but is currently uncompetitive for many mortgage holders, especially those with larger loans.
“Many households would gain from fixed-rate mortgages, not all, but it is especially heavily indebted households who are vulnerable for higher interest rates. But there is currently a lack of possibilities to fixed rates in the longer term at competitive conditions,” the report states.
BKN warns that home-owners will sooner or later have to face up to higher interest rates, which are currently at record lows as a result of the finance crunch and subsequent public debt crisis.
“The Riksbank expects a “normal” repo rate in around three years of 4 percent, which means mortgage rates of around 7 percent,” said Bengt Hansson.
Hansson argued that Swedes should be given the alternative to fix their interest rates for terms of up to 30 years, which he observes, is the case in the US and Denmark.
“This concerns mainly young and highly-leveraged households, who are unable to manage interest rate volatility,” he said.
The risks of the mortgage market are not reserved to individual home-owners and house prices, Bengt Hansson argues, warning that the whole Swedish economy could be exposed to instability.
“The countries which have had rapidly increasing levels of indebtedness during the 2000s are also those countries which have had the weakest economic development during the finance crisis,” he said.
The new report is not the first by BKN to warn of a house price crash and The Local reported on similar concerns expressed in February.
The February report’s findings were rejected as unfounded by economists at state-owned mortgage lender SBAB who argued that interest rate rises will not come as any surprise to households and will be gradual, allowing mortgage-holders to adapt to higher housing costs.
Sweden’s Financial Supervisory Authority (Finansinspektionen -FI) however appeared to heed warnings over the increased debt burden when it submitted a proposal in May that banks limit the amount offered for new residential mortgages to 85 percent of a property’s market value.
“It is about protecting households from over-borrowing and about slowing the growth in borrowing, which is not a good thing in the long term,” said Financial Markets Minister Mats Odell on receipt of the proposal.
The new guidelines are expected to come into force from October 1st.