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Swedish housing 'bubble' about to burst: agency

TT/Peter Vinthagen Simpson · 23 Feb 2011, 14:29

Published: 23 Feb 2011 09:57 GMT+01:00
Updated: 23 Feb 2011 14:29 GMT+01:00

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BKN, which is a government agency which administers government credit guarantee programmes for housing development, has forwarded its analysis in a new market report published on Wednesday.

"We have had a bubble for the past two years and it will deepen as the interest rates rise. When we return to normal interest rate levels of around 5.5 percent, it will start to become noticeable," said Bengt Hansson at BKN told The Local on Wednesday.

The report, entitled "Household debt in the wake of the financial crisis - an international comparison", argued that despite some adjustment in interest rates and bank credit margins, the housing market has not adapted to a tighter financial climate.

"Real house prices are still high in a historical perspective and there is much to indicate that house prices are to a great extent held up by artificial monetary policy-driven low interest rates," BKN wrote in its report.

Several observers shared BKN's view that mortgage interest rates will soon climb to 5.5 percent, but despite the interest rate progression BKN is concerned that household debt continues to accumulate at a rapid pace.

"Based on the fundamentals - such as income development and other factors - house prices are at unsustainable levels. We estimate that prices are around 20 percent above what they should be," Bengt Hansson said.

But this assessment is disputed by Hans Lind, a professor in housing economics at Stockholm's Royal Technical College (Kungliga Tekniska Högskolan - KTH) and rejects the notion of a current or future "bubble".

"The development of various countries indicates that it is very difficult to see what will happen. But if you look at mortgages in relation to disposable income then, for instance, Sweden's is only on half of Denmark's level," Lind said on Wednesday.

"But there are households that are willing to take significant risks and if it doesn't work then they'll have to sell their home. But if there are only a few who are forced to sell, it will not bring the prices down very much," he said.

BKN concludes in its international comparison that in several countries which have suffered dramatic house price falls, invested capital has all but disappeared, removing the scope for loan-fuelled consumption along with it.

According to BKN, Sweden's situation is similar and the current market conditions fulfil the criteria for rapid growth in debt, arguing that this is in itself is a contributing factor for a crash in the housing market.

"Sweden has been different from other European countries and the US for example; we had a little luck in that we had our crisis in the 1990s, construction got going later and there is currently a shortage of housing in the country," Bengt Hansson told The Local.

Story continues below…

"But indebtedness continues to rise in the same way though," he added.

BKN's report details that despite the introduction of a mortgage ceiling, there remains a high loan to value ratio on new loans, unlimited interest deduction, interest-only loans - all factors argued to further reinforce house prices.

The actual amortization periods for new Swedish home loans is now about 100 years for houses and nearly 200 years for tenant-owner apartments.

"This means that we believe that we don't need to pay off our house purchase. It is naive to believe that house prices can rise indefinitely," Bengt Hansson concluded.

TT/Peter Vinthagen Simpson (news@thelocal.se)

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Your comments about this article

10:28 February 23, 2011 by EtoileBrilliant
"No it won't burst, because this is Sweden and we're different" - the amount of times I've heard this it makes my ears bleed.
10:50 February 23, 2011 by HYBRED
So they increase the interest rate making the mortgage debt higher, like throwing bensin on a fire.

"It is naive to believe that house prices can continue to climb for ever," Newsflash; house prices DO climb forever. You think house prices are going to be the same or less in ten years? The BKN are total idiots.
11:19 February 23, 2011 by Keith #5083
"100 years for houses and nearly 200 years", is this a reflection of the improved physical health of the population? Or a reflection of the deteriorating financial responsibility consciousness of the population?

Either way, it is also a reflection on the behaviour of banks.

It is not good financial advice to help persons avoid the realities of life.

Of all the things one should first clear of debt, it is your home. There is no better feeling than to live in your own, paid-up, home.
11:22 February 23, 2011 by TheOriginalBlackMan
The U.S.A. continues to have this problem. With wages decreasing across the board; how can home prices continue to rise?

Someone is getting rich, yet it's only the few.
13:08 February 23, 2011 by eppie
Of course the BKN is saying this. With interest rates rising people will get in trouble and house prices will drop. Job for the central bank to make sure interest rates rise just enough to not create a backlash.
13:16 February 23, 2011 by Luke35711
When I first came here, one wise Swede told me: "we here get all policies and management philosophies that the US had, but 10 years later, after they have already been shown not to work". After five years, I regard this as the single most important piece of wisdom about Sweden.

So yeah, the next thing awaiting this little isolated country, after the whole civilized world has been through this already, is the bursting of the housing bubble.

One wonders how is the Swedish Tea Party going to look like, and who will be Sweden's Sarah Palin... Or are they in the parliament already?
14:00 February 23, 2011 by just a question
wait to see when the Norwegian housing bubble explodes. That is the highest bubble we have in the Nordic countries.
14:10 February 23, 2011 by Jules

Yes in the long term hoiuse prices are only going to go one way, up. Short term however I think we may see a dip, alot of people are mortgataged up to the hilt already and will not be able to afford a return to realistically sensible interest rates of 5-7%. A short term dip fuelled by interest rates and negative equity followed by renewed growth prompted by lack of housing and inflationary pressures. Is how I would see it.

@just a question

House prices may be very high in Norway but remember they are backed by huge North Sea oil reserves, just look at spiralling oil prices again this week. Norway has sufficient liquidity to sustain its prices and standards of living.
14:51 February 23, 2011 by eppie

Well sweden had a bursting housing bubble already some time ago (1990). Further I think Sweden is leading the western world in economic growth now. I hope for some good decission making so that we don't get another crisis here. Even though it would maybe strengthen swedens competetiveness in the global market.
14:56 February 23, 2011 by just a question
@Jules, that doesn't justify that they need to high the prices every week. When the oil is finished, the party is over. Housing is one of the fundamental rights of every human being. Here, in Norway or in Nigeria. Stop speculating with that!
16:10 February 23, 2011 by rfmann
So what exactly makes a particular mortgage rate range more "normal" or "reasonable" than any other?
16:32 February 23, 2011 by Borilla
Didn't Mr. Reinfeld just suggest that rentals be put on the market and be thrown into the mix also? If we have a bubble about to burst and drive down prices, leaving people with unmanageable mortgages, how does driving up the price in the rental market do anything other than exacerbate an already bad situation?
17:55 February 23, 2011 by Larry Thrash
I'll say it again. If the average person cannot afford the average house then a correction is in order. It's just that simple.
17:58 February 23, 2011 by sergisr
It reminds me of the situation in Spain four years ago, when economical gurus were repeating a thousand times the same mantras: "Construction is the best investment", "The price of housing never drops", "Our children will inherit the mortgages, as occurs in Japan", "Renting a home is a waste of money"...

Now, the Spanish bubble has burst, the price of housing has dropped dramatically, and 5 million people, in a population of 47 million, have lost our jobs.
20:05 February 23, 2011 by Luke35711

I wish you were right, but I am afraid the only thing this country is going to lead in the future is technology transfer to China. I have been here long enough to see how manipulative, arrogant, incompetent, and delusional decision-makers are in this country.
22:50 February 23, 2011 by stateohio905
@Luke35711; good point. The problem is not how people spend money, on housing or whatever, BUT how it's earned. Swedish economy must stay in a good shape and everything is in the place.

The USA real estate story is completely different. It is result of non control and how criminals used people's stupidity to become reach. So far not applicable to Sweden.
23:57 February 23, 2011 by Keith #5083

Your comments appear to disregard the salient fact that the Uk and USA, followed by many other western countries, used the 'Swedish model' (acquired in the early 90's) to resolve the financial crises of the past 2 years. Your 'wise Swede' also seemed to be unaware that Sweden rather than following catastrophic policies, showed the way to avoid them and restructure to deal with the resulting shambles where such methodologies had been ignored..

Swedish banks, currency, and innovation have survived the world financial crisis admirably.

You also appear to be unaware of some of the technological 'world firsts' currently happening in Sweden. With 70% forestation it seems a brilliant thing to be able to use waste product from timber to produce - diesel! Launching in April from a Swedish Petroleum company who have developed it (yep, Swedish not Chinese).

The avoidance of a 'housing bubble' was strongly helped by the requirement of 10% deposits and only 90% loans, something I believe happened 18-24 months ago. It's also interesting that you can still buy a house here quite cheaply and even at around 50% of it's rebuilding cost.

Nothing wrong with having a negative view, everything wrong when it disregards important facts.
01:09 February 24, 2011 by Luke35711
Well.. I sincerely hope my wise Swede friend was wrong. BTW, she and her boyfriend had to leave Sweden since to find work, despite having very good education and professional degrees.

As for the US, I think you are over-simplifying a bit. "Rethinking the Great Recession" is the best discussion of that crisis I've read so far, and it argues reasonably against simplistic victims-and-villains explanation:

09:03 February 24, 2011 by just a question
about the Norwegian bubble: http://www.dn.no/eiendom/article2089723.ece.

Read the comments of the Norwegian people complaining, wake up!!
10:58 February 24, 2011 by Keith #5083
Over-simplification is a key factor when attempting to unravel the curious, spurious and undoubtedly amoral behaviour of certain investing orgs, banks, etc.

There's a very simple rule: is it honest?

Most "experts and commentators" on both sides of the Atlantic have blown their credibility by being a part of the problem instead of watchmen/women sounding alarms. Of course, many are now scrambling to tell us that they 'hinted' at a problem, or "indirectly implied" there was a problem.Especially 'right-wingers' from publications like WashingtonPost,Newsweek. Even Bernie Madoff knew they knew!. It took the 'Swedish Model' to return some sanity to the scenario.

In Dalsland 7 years ago an average house, to build new, cost SeK.13,000 per sq.m. It is not hard to find houses in lots of land far cheaper than that.

Recent statistics in The Economist do not point to Sweden as having a worse than average unemployment problem compared with the rest of Europe.
13:41 February 27, 2011 by Marc the Texan
Keith, just to inform you of the provenance of the 'Swedish model'. Bo Lundgren admitted that they based it on the handling of the Texas Savings and Loan crisis of the 1980s. So yes they were still a few years behind. Maybe about 4.
01:45 February 28, 2011 by Keith #5083
#Marc the Texan

Thx for that info. I didn't know that. However, in mitigation of my ignorance I would plead that your gov didn't seem aware of it either and attribute the scheme/system to Sweden.'
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