Falling Swedish Housing Prices Again

I think it's about time I updated the English version of my Swedish housing bubble diagram and analysis from September 2007.

The following is based on articles from my Swedish language blog from the past year or so.

At the end of 2010 real house prices in Sweden fell quarter over quarter for the first time since the first quarter of 2009. According to Statistics Sweden's "Fastighetsprisindex småhus" and CPI, inflation adjusted house prices fell from the third to the fourth quarter of 2010. The falling prices have continued during the first quarter of 2011. See diagram below for prices in the whole country and in the Stockholm area.

For comparison I've also included real wages. The Swedish housing bubble is credit driven, as you can see if you compare housing prices, wages and household credit. In 2007 I thought we had seen the top, but during the financial crisis of 2008 the Swedish central bank, Riksbanken, took interest rates down sharply, and since Sweden was relatively mildly hit by the crisis the Swedes started bidding up housing prices even more using borrowed money at low interest rates.

The question now is - have we seen the real top in the Swedish housing market this time? I find it hard to see any factors that could inflate the Swedish housing bubble further, so this time I definitely call it a top.

There are always "fundamentalists" who argue that there is no housing bubble in Sweden, citing for instance supply and demand showing that there is not enough housing in for example Stockholm. However, housing price increases in Sweden are not limited to the large cities. Percentage-wise prices have even increased more in some smaller towns. Sweden also has among Europe's largest dwelling area per capita, even compared to neighbours such as Finland.

What the "fundamentalists" also miss is that this is really a household credit bubble, which happens to manifest itself in housing prices. It also manifests itself in household consumption, which continues unabated in Sweden, though there are recent signs of a softening. This of course drives the strong Swedish GDP increase, which however is largely driven by credit-fuelled household consumption. If household credit expansion should stand still, Swedish GDP will no longer increase.

Now it's not just Sweden that still has an unpopped housing bubble. Our neighbours Norway and Finland also do. Denmark's bubble popped in 2007, however, which has caused the demise of nine smaller Danish banks, but has so far left the large banks relatively unscathed.

Norway's bubble is bigger than Sweden's, and Finland's is smaller, using 1993 as the base year. All the Nordic bubbles are larger percentage-wise than the American one. One cannot help but wonder what will happen to the Norwegian bubble, considering that Norwegian oil production has been falling for about ten years now.

Also read the Australian blog Macrobusiness' recent analysis of the Swedish housing bubble.