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Why is Sweden seeing ‘biggest drop in house prices since Lehman’?

Housing prices in Sweden are dropping much faster than most experts predicted, with one analyst calling it "the biggest drop since the Lehman crash". How long prices continue to fall for and how should buyers and sellers react?

Why is Sweden seeing 'biggest drop in house prices since Lehman'?
Apartments on Kungsholmen in Central Stockholm. Photo: Fredrik Persson/TT

How fast have house prices in Sweden been falling? 

Property prices have been dropping considerably faster than most analysts expected.

“We are on the way to having an extremely dramatic half year,” Nordea’s analyst, Gustav Helgesson, told TT. “It was expected that they would go down, but this is still very dramatic. In one month, we’ve had the biggest fall since the Lehman crash.” 

Stockholm is where the falling trend has hit the hardest, with property prices dropping around 8 percent over the last three months.

Historically, prices are lower and more volatile during the summer months and if you take this into account, the drop is only 2.2 percent. 

What’s driving the fall in prices? 

House buyers in Sweden have just witnessed “one of the biggest increase in interest rates for households in modern times”, Helgesson pointed out, adding that his bank did not expect interest rates to drop anytime soon. Their forecast is instead that the policy rate will be at 2 percent by the end of year, a substantial increase from today’s 0.75 percent.

Nordea now believes that the drop in property prices will continue, and that towards the end of next year, prices could drop by 10 percent, more even than in March. 

According to Robert Bergqvist, senior economist at Swedish bank SEB, the price drop is bigger than analysts originally anticipated: “Obviously the interest rate hikes have had a very big effect,” he said. “People believe this is the end of low interest rates, and then there’s also a continuing worry over inflation”. 

According to an indicator published by Sweden’s SEB bank, only 31 percent of those interviewed believed that prices would continue to rise in the coming year, an 11 percent decrease on last month. Around half of those interviewed believed instead that prices would fall.

“We are heading towards a very dramatic six months, or at least until the end of the year. Housing prices are depressed, interest rates have a lot of power and in the short term, rates have not increased as much as they are going to”, Helgesson said. 

So could the falls be permanent, or at least take years to recover? 

Prices are unlikely to stay this low for very many years, Bergqvist said, pointing to the continuing housing shortage in Sweden. 

In SEB’s survey, 204 out of 290 reported that there was shortage in the housing market in May. This could lead to price increases in the future unless new housing is built, he predicted. 

“It is not necessarily positive: if there are no building developments, there is also a loss of growth and people can’t move into places where jobs are available. Our demographics show that we must continue building, otherwise prices will stay high”, he said.

How should buyers and sellers react to the falling market? 

Bergqvist underlined that people still tended to have a different perception of market, depending on which side of the property sale they stood. Sellers tended to still have a lot of optimism, while buyers were more pessimistic.

This, he said, was creating an unbalance in the market, which Berqvist predicted would slow down the housing market in the coming months, and then lead to continuing declines, as sellers slowly accepted lower prices. 

Bergqvist advised sellers who have already bought a new house to be as flexible as possible on the price they get for their old one. 

“The most important thing to try to get out of the place you are trying to sell as fast as you can,” he said. “It’s not the time to look back and have too high expectations. It’s best not have two properties”.

He also underlined the importance of having a margin when selling, warning that it is always hard to hit the highest or lowest price possible when negotiating the sale of a property.

“But if you wish to have your property in the long run, then it’s not too important what happens with house prices in the short term perspective,” he said. 

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Inflation rate dips in Sweden for first time in seven months

The inflation rate in Sweden fell in July for the first time in seven months, according to official data from Statistics Sweden (SCB), indicating that rate rises may be having an impact on rising prices.

Inflation rate dips in Sweden for first time in seven months

“Lower prices for electricity and fuel contributed to the inflation rate sinking for the first time since January,” said Carl Mårtensson, a price statistician at the agency, in a press release.

The official inflation rate for July this year was 8 percent, down from 8.5 percent in June, and below the consensus estimate of economists at 8.3 percent.

The fall was almost exclusively the result of falling prices for electricity and fuel, with the price of electricity falling by 8.3 percent month on month and the price of petrol and diesel falling 5.6 percent. Excluding energy prices, the inflation rate rose to 6.6 percent from 6.1 percent in June. 

Olle Holmgren, Chief Strategist at Sweden’s SEB Bank said that while inflation pressure remained high, the numbers were cause for hope. 

“Inflation pressures remains high, but the composition of price changes gives some hope that the strong upward trend could be losing some steam,” he wrote in a comment

He noted that the fall in fuel and electricity prices had been offset by an “extremely strong upturn in food prices”, 13.5 percent year on year. 

Alexandra Stråberg, chief economist at the Länsförsäkringar insurance company, however, said that she did not think that the dip in headline inflation meant that the risk of rising prices was over. 

“Unfortunately, it probably hasn’t turned the corner yet,” she told TT. “This is only a short pause.” 

In the chart below from SCB’s press release you can see how four out of the agency’s inflation indexes have dipped in July, after a year of steady rises. 

The index which excludes energy prices, however, has been rising steadily since December. 

Source: Statistics Sweden