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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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EXPLAINED: What can foreigners in Sweden do about the weak krona?

The Swedish Krona last week hit a record low against the dollar, hammering the international buying power of anyone earning their salaries or holding assets in the currency. We asked Johan Löf at Handelsbanken what they can do.

EXPLAINED: What can foreigners in Sweden do about the weak krona?

How low is the krona right now? 

On Tuesday, September 27th, the krona to dollar exchange rate hit an all-time-low of 11.37, easily beating the previous record low for the currency of 11.04, which it reached at the nadir of the dot com bust back in 2001. At the time of the financial crisis in 2008, a dollar would have got you less than 6 kronor, meaning the currency has almost halved in value in less than 15 years. 

A euro now gets you 10.9 kronor, which is not quite a record, with it briefly topping 11.4 in 2009, but more than it has been for most of the past decade. 

The only major currency which is more or less stable against the krona is the pound, which will now buy about 12.39 kronor, down from 13 in February, but above the levels of around 10.5 the pound hit shortly after the UK voted to leave the European Union. 

Why is the krona worth so little? 

Johan Löf, the head of forecasting at the Handelsbanken bank, told The Local, that the krona always tended to take a hit at times of financial uncertainty. 

“The krona is a relatively small currency much like the Swedish economy is a relatively small economy,” he said. “You could compare it to a small boat sailing the big ocean, so when you don’t go on the course that you thought you were going, it can be a bit of a shaky ride,” he said.

“Right now with financial market conditions being volatile, with a lot of uncertainty and risks, the Swedish krona takes a hit. Investors and various agents of the economy don’t want to hold so much of this smaller currency. Instead, they they go to safe havens like the US dollar.

“So even though there are fundamentals that would suggest that the Swedish kroner will strengthen again over time, for the time being and for some foreseeable future, we think that the krona will remain quite weak.”

How are foreigners living in Sweden affected? 

It very much depends on their individual financial situation: which currency they earn their salary in, which currency they hold assets in, and which currencies they have the highest outgoings in. 

People who live and earn in Sweden, but travel regularly to countries with stronger currencies, or perhaps send remittances back to family at home, are likely be negatively affected, Löf said. 

“It makes you lose purchasing power in these other countries: you get fewer goods and less services for the money that you have in the Swedish currency.”

It’s a similar situation for people or small businesses based in Sweden, who need to, or perhaps only want to, buy goods outside of Sweden. 

On the other hand, for people who have substantial savings abroad in dollars or euros, this might be an opportunity to convert them into kronor for use in Sweden.  

“If you have savings abroad, and you feel the need to use some of those savings, when you then sell your foreign currency to buy Swedish kronor, then you will get more Swedish kronor,” Löf explained. 

What can foreigners living in Sweden do to lessen the impact of a weak krona? 

Change the currency in which you get paid 

The best way to protect against currency exchange shocks is to make sure that you’re paid in the same currency that you spend in, so if you live in Sweden but have a lot of your outgoings abroad, it’s an advantage to be paid in dollars or euros. 

If you’re considering getting a new job, perhaps favour international employers that can pay you in one of the major currencies, or if you work for a big international company, perhaps you can ask to be paid in a different currency. 

Get freelance or part-time work outside of Sweden

If you work as a freelancer, or have some spare time for additional work, consider getting part-time freelance gigs with companies abroad that pay in euros or dollars. The lower the krona sinks, the higher your real wage when you spend in Sweden. 

Time major spending for the best point in the market 

If you have savings in kronor and are considering, for instance, buying a holiday house abroad, it is probably worth waiting until the kronor has strengthened and the Swedish economy is back growing strongly. 

Similarly, if you have savings outside of Sweden in euros or in dollars, and have been planning on buying a property in Sweden, now might be a good time to consider doing so (although it may be worth waiting a few months until interest rate rises have been fully reflected in reduced Swedish property prices).

Get a multiple currency account 

It can be helpful to have an account in multiple currencies, such as those provided by banks such as Wise and Revolut. Keeping any cash in a combination of dollars, euros and kronor can reduce your exposure to any single currency. 

The advantage for foreigners living in Sweden is that you can set up US dollar, Euro and Pound accounts, each with their own local bank number, which you can use to receive and make payments domestically in each country. 

With the krona so low right now, it may not be a good idea to convert all your assets from krona to euros or dollars right now, as the currency is probably more likely to strengthen than weaken over the coming year.