Sweden is facing its ‘day of reckoning’ as house prices plummet

Sweden's spot prices are facing a superior driblet arsenic the country's cardinal slope politician warns of lofty household indebtedness levels.

House prices successful Sweden person risen reasonably reliably implicit the past decade. This has been buoyed by ultra-low involvement rates successful a strategy wherever astir fractional of people's mortgages are financed with adaptable rates and galore of the remainder are connected short-term fixed rates.

But present spot prices are tumbling. And this downturn is not astonishing fixed the "dysfunctional" quality of the market, according to Stefan Ingves, the outgoing politician of Sweden's cardinal bank, the Riksbank.

"I've persistently clip and clip again said that the indebtedness level successful the household assemblage is conscionable way, mode excessively precocious and determination volition beryllium a time of reckoning and yet rates volition spell up, and present rates person gone up," Ingves told CNBC's "Squawk Box Europe" successful an exclusive interrogation Tuesday. 

"What you spot happening present is astir precisely what you would expect to spot happening, and that is that households person to wage much and the involvement complaint sensitivity … is overmuch higher," Ingves added, which makes involvement complaint payments higher for a immense fig of Swedish households.

The pandemic effect

During the Covid-19 pandemic, location prices crossed Europe continued to rise, and Sweden was nary exception. Demand for spot skyrocketed arsenic moving from location and a penchant for home vacations prompted radical to upsize their spaces.

On average, location prices were up arsenic overmuch arsenic 30% compared to the pre-pandemic level of January 2020, according to Nordea Bank, arsenic the Riksbank started purchasing owe bonds, trying to bring rates down and adding occurrence to an already blistery lodging market.

But present prices are falling, dramatically.

"As of November we are seeing prices nationally successful Sweden autumn 13% from the highest successful February. That's the largest downturn connected the lodging marketplace since we had a large economical situation successful the nineties," Gustav Helgesson, an expert astatine Nordea, told CNBC.

Home prices fell by 15% betwixt the highest successful March and November of past year, according to fiscal services institution Valueguard, as reported by Nordic firm slope SEB.

Central slope complaint hikes

In 2022, Sweden's cardinal slope undertook an assertive involvement complaint hiking rhythm that ricocheted done the spot market.

In February, the Riksbank signaled its argumentation complaint would stay unchanged astatine zero, and predicted an eventual summation for the 2nd fractional of 2024. But successful the bank's adjacent monetary argumentation connection conscionable 3 months later, the complaint was raised to 0.25%.

"They truly conscionable shifted from that gathering to the adjacent 1 successful April and started their hiking cycle," Helgesson told CNBC.

Rates continued to increase passim 2022, going from 0.25% to 0.75% successful July, to 1.75% successful September and 2.5% successful November.

"This took galore households by astonishment ... and I deliberation that Swedish households … person been struggling to set to this rhythm and foresee these precise speedy and melodramatic complaint hikes from the Riksbank," Helgesson said.

Emil Brodin, an economist from the National Institute of Economic Research, said the grade of the rises were "a spot much than radical expected" and that it had "gone much rapidly than radical thought."

Helgesson characterized the alteration arsenic a correction, alternatively than a bursting bubble, "but it is simply a achy and precise accelerated correction," helium added.

Thomas Veraguth, caput of planetary existent property strategy for UBS Wealth Management, described the correction arsenic "a earthy accommodation that is chiefly explained by macroeconomic factors."

20% driblet successful 2023?

A further argumentation complaint summation is anticipated for February, with the benchmark wide speculated to deed 3%, starring economists to foretell a further downturn successful spot prices.

Nordea Bank estimates a 20% driblet successful location prices from highest to trough.

"This is arsenic a nonstop effect of the Riksbank's accrued involvement rate. They've accrued from 0% to 2.5% and we expect them to proceed to summation the argumentation rates to 3% successful February," Helgesson from Nordea told CNBC.

Handelsbanken besides anticipates a dip successful prices.

"Our contiguous forecast is that lodging prices volition proceed to autumn implicit the coming months and stabilize lone erstwhile owe rates person peaked during the spring," Christina Nyman, caput of economical probe and main economist and Helena Bornevall, elder economist, astatine Handelsbanken, said successful emailed comments to CNBC.

The National Institute of Economic Research besides expects a further driblet successful the adjacent mates of months that volition settee aboriginal successful the year.

"We expect the prices to proceed declining passim the archetypal fractional of 2023 and past a stabilization of the prices, which is based connected the involvement rates not moving further up. So fundamentally erstwhile the involvement complaint is stabilised, we don't expect prices to proceed declining," Brodin said.

But determination is downside hazard to the 20% estimate, according to the main economist of SEB, Jens Magnusson.

"We bash expect [house prices] to driblet a fewer much percent points … So it could spell from 20% to 25% perhaps, but if that happens that would mean that it's beauteous overmuch the pandemic uptick that is being reversed," Magnusson told CNBC.

Sweden isn't the lone European state experiencing a plunging spot marketplace post-pandemic, with immoderate economists forecasting a akin downturn of betwixt 20% and 25% successful Germany.

A instrumentality to pre-pandemic figures

The dip successful the marketplace is simply a correction that puts Swedish spot backmost to its pre-pandemic state, according to immoderate economists.

"We had astir 20% increases during those 2 pandemic years, truthful evidently that is the archetypal happening that volition spell present and I expect beauteous overmuch each of that to vanish and to decrease," Magnusson said.

"As of present prices are inactive astir the level astatine which we entered the pandemic," Brodin told CNBC. "Basically the summation successful location prices during the pandemic is erased," helium added.

But the outgoing Riksbank politician signaled that the bumpiness successful Sweden's lodging marketplace stemmed from much cardinal issues than conscionable a pandemic-induced fluctuation.

"We person not been hiding thing connected the broadside of the cardinal slope successful the structural difficulties that we person successful the lodging market," Ingves told CNBC.

"But astatine the aforesaid time, the governmental process has been specified that determination hasn't been a willingness connected the governmental broadside to benignant retired these issues and that's wherefore we are wherever we are," helium added.

The Government Offices of Sweden did not instantly respond to a CNBC petition for comment.