Inside Sweden’s collapsing housing market – and how Britain could be next
Swedish house prices are falling at the fastest rate in the world as high interest rates destroy the pandemic property boom.
This autumn, mainstream house prices in Sweden have fallen by 14pc since their 2022 market peak, according to Knight Frank. This was the biggest drop in any of the 56 countries tracked by the estate agent.
In December, the state-owned lender SBAB recorded a 17pc house price drop since the spring. And experts say it could be a sign of things to come in the UK.
Even though interest rates have been rising for longer and are already higher in Britain, the housing market here is reacting more slowly because a much larger share of mortgages are protected by fixed-rate deals.
But Sweden is a major warning sign, which shows just how quickly it is possible for high rates to take the floor out of a housing market.
Pia-Lotta Svensson, of estate agent Fastighetsbryån, who works in central Stockholm, said: “I have been working in this market for 15 years and I have never seen it fall so steeply or for such a long period.
Oxford Economics, an analyst, has forecast that prices in Sweden will fall by 20pc – one of the biggest drops in the world, and much larger than the 12pc drop it expects in Britain. The Swedish forecast is second only to Canada’s, where Oxford Economics has forecast a 30pc peak-to-trough fall, but the remarkable thing about Sweden is the speed of change.
Two years of house price growth lost
Unlike the UK, Sweden does not have a buy-to-let market, which means that house prices here are typically much less volatile. “Normally we might have a shaky period for perhaps three months,” Ms Svensson said.
House prices plunged between April and August and then declined at a slower pace through the autumn, according to Svensk Mäklarstatistik, a data company owned by the industry association Mäklarsamfundet.
Now, in Stockholm, prices are at the same level as in December 2020, Ms Svensson said. The capital has lost two years of house price growth in little more than five months.
Johan Vesterberg, also of Fastighetsbryån, said nationally transactions have dropped by 25pc to 30pc from the summer to the winter. “Sellers won’t sell for the prices that buyers are prepared to pay,” he said.
The blow of high interest rates
Sweden’s market was soaring until spring 2022. “[The downturn] started with the war in Ukraine, then came the reports of high inflation, and the interest rate rises,” Ms Svensson said.
The war in Ukraine has been key because of its impact on energy prices, which have driven up inflation. Daniel Kral, of Oxford Economics, said: “In February last year, they were saying rate rises would not start until 2024. Then came the war and the picture completely changed.”
Kate Everett-Allen, of Knight Frank estate agents, said: “Sweden was one of the later markets to start raising interest rates and then they moved quite quickly.”
Swedish interest rates have been set at 0pc or less since 2014. In the five years leading up to the pandemic, they were negative. A sea change began in spring 2022. Since April, interest rates have jumped by 2.5 percentage points and will likely climb by a further 0.5 points in February. “That will be felt very quickly by households,” Mr Kral added.
Why Swedish homeowners are so exposed
Sweden is particularly exposed to the blow of high rates for three reasons, Mr Kral said.
First, it has extremely high levels of household debt – at 203pc of net disposable income, according to the OECD. In Britain, the figure in 2021 was 148pc - but this was still the 11th highest total in the OECD.
Second, the majority of mortgages in Sweden are on short-term fixed-rate or variable rate deals, meaning higher interest rates filter through very quickly into higher costs for homeowners.
More than half of mortgages issued in Sweden are on variable rates, compared to just 8pc in the UK, OECD data shows.
“Around 60pc of homeowners have a mortgage and 50pc of them will need to refinance this year. That will be a huge hit,” Mr Kral said.
This is because interest rates were falling in Sweden for so long after the financial crisis. “When rates are going down it makes sense to refinance frequently. The setup was for a really different macroeconomic situation,” Mr Kral said.
At the same time, the Swedish Government offers very little protection. “There is very limited fiscal support in Sweden because the Government doesn’t want to stoke inflation. Sweden has the lowest level of fiscal support by GDP in Europe,” Mr Kral said.
Extremely high house prices
Part of Sweden’s fast decline is because – just as in the UK – there was an enormous boom during the pandemic. “It was too fast, it was crazy – so crazy. I think that’s why it stopped, people just got scared,” Ms Svensson said.
But Sweden had also recorded extremely high house price growth not just over the pandemic, but over the last 10 years. In the past decade, Swedish house prices jumped by 94.6pc, compared to 75.3pc in the UK, according to Knight Frank.
As in the UK, mortgage offers last only six months, which means purchasers whose offers have expired have found their budgets suddenly reduced. “I have only client who had an offer to borrow 10m krona. Now, they have an offer for 8.5m,”
Ms Svensson said. Since their offer expired, their maximum loan size has dropped by 15pc. This is partly because of higher rates, but also because lenders have tightened their affordability requirements, Ms Svensson said. “You can’t borrow as much on the same salary anymore.”
Oxford Economics expects values will fall by a fifth, but Mr Kral said the drop could be larger. “If anything there are downsides to our forecasts. I think it will be 20pc to 25pc, easy.”
All eyes will be on the unemployment statistics. As in the UK, people in Sweden are grappling with soaring energy bills and a darkening economic outlook – but in Britain, the OECD expects the 2023 recession to be the worst of the world’s 20 largest economies, second only to Russia.