House prices in Sweden are falling – but still far from bottoming out

The interest rate increases have had a notable effect on the Swedish housing market, and many analysts predict housing prices will continue to fall.

The interest rate increases are hitting the housing market prices hard at the moment. Photo by Lawrence Chismorie / Unsplash

However, for the moment, property sellers are slowing down the development.

“The sellers find it difficult to accept the new situation,” professor of economics at Södertörn University Mats Bergman explained.

Sweden’s central bank (Riksbank) has been raising the key interest rate since Spring, and in line with that, prices in the housing market have fallen.

Several banks, including the Riksbank, predict that prices will plummet by 20 percent from their peak level.

“One should remember that what happened during the pandemic was not healthy either. We are comparing ourselves to a unique period where the market was completely crazy, and we also had low interest rates and low inflation. You might even be able to talk about a normalisation instead of a disaster,” Claudia Wörmann, housing economist at SBAB, noted.

Interest rate effect

The interest rate increases are hitting the housing market prices hard.

But the price increases of food, energy, and fuel also make consumers more cautious, leading them to wait when it comes to buying a home, according to Cecilia Hermansson, a Swedish researcher focusing on real estate and finances.

“It is quite a dramatic development for many, both in terms of interest rates and prices,” she said.

The fact that prices have not fallen further, despite most people expecting the policy rate to land at just over 3 percent next year, is due to the fact that there is resistance in the market, Bergman notes.

“The sellers find it difficult to accept the new situation and are resisting the price drop. We see this, among other things, in the fact that it takes longer before homes are sold. The sellers are holding out and hope this will be a temporary slump,” he noted.

It’s hard to predict when things will turn around, Hermansson added.

Bergman, on the other hand, thinks the market could bottom out sometime in 2023.

“If the scenario surrounding the key interest rate is correct and the interest rate levels off in the Spring, and if the economic downturn is not particularly severe, then the market will probably stabilise next year. But it is difficult to predict,” he told the news bureau TT.

When could housing prices rise again?

For prices to rise, the situation must become more stable, and the world economy needs to start recovering, according to Hermansson.

“(For the prices to rise), I think we need to get signals that the Riksbank is starting to lower interest rates, that inflation is low again, and that it won’t rise again next winter,” she pointed out. 

Bergman does not believe that housing prices will rise in the same way as they have in recent decades once prices have stabilised.

“Prices have risen to a level that is very high in relation to incomes. My prediction is that we cannot count on 20-30 years of rising prices,” he concluded.

Member comments

  1. Unfortunately the Riksbank, along with most central banks, are doing the wrong thing at the moment. The current inflation is driven by factors which raising interest rates will have little to no effect on.

    Many central banks have government-set mandates to target inflation above or below a certain threshold, regardless of the underlying cause. It’s pure madness to damage economies in this way.

    One thing I’ve learnt over time is that no matter how experienced, how influential they are, nobody really knows what they are doing in the world of economics and finance. There are just too many variables and it’s impossible to predict how people will act. Everyone is ultimately winging it, it’s quite frightening.

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Experts expect more interest rate hikes in Sweden

The inflationary pressure seems to be easing. But the central banks in the Western world aim to implement interest rate increases for a while longer.

Experts expect more interest rate hikes in Sweden

Next week, interest rate increases are expected from the Federal Reserve System (FED), the European Central Bank (ECB), and the Bank of England – and the Swedish Central Bank (Riksbank) is expected to follow suit.

Signs that the unusually high inflation in the United States is beginning to moderate means that the American central bank, the FED, is now expected to slow down the pace of interest rate increases.

The first interest rate announcement of the year from FED chief Jerome Powell and his board on Wednesday is, according to the average forecast among analysts, expected to amount to an increase of 0.25 percentage points – to a total of 4.50-4.75.

Eight raises in a row

If that turns out to be the case, the FED will have raised interest rates at eight meetings in a row. As recently as December, it was adjusted up 0.50 to a 15-year high – following a historic streak of three consecutive rate meetings with 0.75 percentage point hikes.

In order to end interest rate hikes, Powell wants, among other things, to see more reactions in the economy, especially when it comes to the labour market in the United States.

The ECB and its chief, Christine Lagarde, have put a lot of effort into sounding hawkish in the run-up to the interest rate announcement on Thursday. Among other things, they stated that there might be several increases of 0.50 percentage points this year.

This is also the average forecast for their colleagues at the Bank of England in London, which are also expected to announce that they will raise the policy rate by 0.50 points on Thursday.

Increase expected in Sweden

On Thursday, February 9, Erik Thedéen’s first interest rate meeting at the Riksbank since he took over as Riksbank governor at the turn of the year will take place.

Most analysts expect an increase in the policy rate of 0.50 points.

“The journey to the Riksbank’s two percent target is long,” Handelsbanken’s chief economist Christina Nyman noted when she presented a new economic forecast this week.

Her main scenario is another increase from the Riksbank in April to a key interest rate of 3.25 before there is a pause in interest rate increases.

Nordea’s economists also expect 3.25 to be the peak in the interest rate cycle we are in now. But their colleagues at Swedbank believe that, on top of this, there will be another increase in the policy rate this summer, to 3.50.