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.
“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.