2007-09-27

Swedish Housing Still a Bubble

My view is still that Sweden is in a housing bubble, like most western European countries. Signature "ju" asked me on a forum why I don't compare to incomes, which have risen in Sweden over the last years. So I did some more number crunching, and here's an improved version of my Swedish housing bubble graph, with a green line for inflation adjusted mean income. I've also included housing price data up to Q2 2007 and trend lines (thanks to "Kons" for suggesting trend lines).
(Data source SCB. FPI=Fastighetsprisindex småhus, Mean Income=Sammanräknad förvärvsinkomst. 1975=100 for housing prices, 1999=100 for incomes)
As you can clearly see, housing prices in Sweden have risen much faster than the average income (I only have income data for 1991-2005), so while inflation-adjusted incomes have indeed risen, we are still in a housing bubble. How far will housing prices fall?
  • A fall down to the trend line is about 30%.
  • A fall down to the average for 1975-2003 is about 45%.
  • A fall down to the lows of the early 1990's is about 55%.
This is the whole of Sweden, and obviously the bubble is worse in "hot" housing spots. So I've made a corresponding graph for housing prices in the Stockholm area (thanks to "Kons" for suggesting this).
As you can see the graph is slightly more "bubblish" than for the whole of Sweden.
  • A fall to the trend line is about 30%
  • A fall to the average for 1975-2003 is about 55%
  • A fall to the lows of the early 1990's is about 65%!!
Many people will of course say "it can never happen, there will always be a strong demand for housing in our capital city", but I boldly predict today that inflation-adjusted housing prices in Stockholm will probably on average go down by 65% over the next few years. Be warned, and don't forget where you heard it first. And I might even be optimistic. Considering the excesses on the upside, we could very well have similar excesses to the downside when the bubble finally bursts. And if you don't believe it could happen, don't forget that history has proved that all bubbles eventually burst, even though few believe it is possible when on the upward slope of the bubble.

Now housing bubbles burst slowly, so the process will take a few years to play out. I expect "experts" to call a bottom in housing many times during the coming years, but prices will still keep on falling.

Now what effects will such a large fall in housing prices have on the economy? Large effects, of course. Many people will be stuck with loans way bigger than the value of their home. But maybe we should ask the question the other way around - what economic events could trigger such a large fall in housing prices? Read what I have previously written on this blog about potential dangers in the world economy, and you will get some hints about what might cause such a powerful recession.

Speaking of housing bubbles, the top economic advisor of the Spanish prime minister came up with some unbelievable quotes last week:
A residential real estate slump in Spain, where prices have almost tripled since 1997, is "unthinkable," the top economic adviser of Prime Minister Jose Luis Rodriguez Zapatero said. [...]
"To talk about severe adjustments or a meltdown in prices is ridiculous," Taguas said in response to reports pointing to an end of the Spanish real estate boom. "That sort of crisis is unthinkable." [...]
The Spanish banking system is also solid enough to withstand rising financing costs triggered by the fallout from the surge in defaults in the U.S. subprime mortgage market. A run on mortgage- lenders such as Newcastle, U.K.-based Northern Rock Plc or funding difficulties like those at Countrywide Financial Corp. in the U.S. are "unthinkable" in Spain, Taguas said.

Remember those quotes and remind Mr. Taguas about them in a few years' time!

11 comments:

  1. Population control28 September, 2007 09:59

    Taguas's use of such vehement denial is symptomatic of a Spanish government which in actual fact holds the exact opposite sentiment. They are only doing what they can to mitigate the impending Spanish housing crash, which will in part be triggered by the unwinding of the British housing market. The Spanish housing bubble has in large part been inflated by foreign (mainly British) speculation.

    A large part of the population will believe (or want to believe) that the excessive increase in house prices has been warranted. These people will, no doubt, seek comfort in the manipulative words of those in power.

    On the other hand, those who are willing to face the harsh truth of reality, understand these words for what they are: double-speak aimed at fear-control. Those who can think for themselves will do best to close any high-risk positions/investments related to the housing market as well as to lock-in any profit they may have made from this "irrational exuberance™".

    /Eyes open

    ReplyDelete
  2. Interesting chart. Would it be possible to add the interest to the graph?

    Also would it be interesting to se the figures on a longer term, for example from the beginning of the 19th century. They are intersting for comparision even though the standard is different and the country is agricultural.
    I think they are available on the SCB home page.

    Official statistics in Sweden tend to be over to short term to show that nothing has changed to the worse (ex. kriminalitet)
    /Gustaf

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  3. Unfortunately I can't find figures for FPI before 1975. KPI is available way back.
    I don't see that adding the interest rate would really add anything valuable to the graph. I might take a look at it when I find the time.

    ReplyDelete
  4. Hi,

    Thank you for the interesting analysis. I have a few questions, though.

    1) How did you reach the specific conclusion of 65% (instead of, say, 30% - in accordance with the trend line)?

    2) Does the high conversion of inner-city "hyresrätter" (right of tenancy) to "bostadsrätter" (tenant-ownership) affect your analysis?

    2) I have seen estimates suggesting a population increase of 200 000 in the coming 10 years (no source unfortunately, but according to SCB the area saw an increase of 24 129 inhabitants between December 2006 and September 2007, which seems to partially support the analysis). Taking this into account, do you still come to the same conclusion?

    Regards,
    /Victor S

    ReplyDelete
  5. Victor S,
    Thanks for your comments.
    1) Because 65% is down to the lows of the early 1990's.
    2) The conversion of apartments from renting to owning does not affect my analysis. I'm not looking at the causes for the coming price drop, I'm just looking at the price trend and saying it's an unsustainable bubble. Though of course more owned apartments means more available on the market, which could affect prices downwards.
    3) Population changes do not affect my conclusion. Economic hard facts will probably force people to live on less square meters per person. The recent population increase trend for Stockholm might also change.

    ReplyDelete
  6. Victor S,
    1) and... looking at the trend of waves over the years, we should have had begun downturn in prices around 2002, but instead the prices continued upwards. A higher top above mean historical values tends to revert down much harder.

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  7. Any update on this data?

    A graph of the current situation would be great!

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  8. I have now updated the Swedish housing price graph. The article is only in Swedish, but the graph should be understandable for anybody.
    Updated Swedish housing price graph and analysis.
    Uppdaterad graf och analys av den svenska bostadsprisbubblan.

    ReplyDelete
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  10. Its been 5 years since you wrote the post... And you predicted a 65% fall...I don't know how you did that... But I really hope prices fall... But seems like its not going to!

    ReplyDelete