Economic Factors
The tightening of monetary policy with sudden interest rate hikes has made it more difficult for new buyers to afford homes. The cost of borrowing for existing home owners with short fixed-rate periods is thus higher. Sweden’s reliance on variable-rate mortgage lending makes it highly sensitive to interest rate changes.
In addition, the Swedish economy has experienced a slowdown and high inflation. It is leading to lower real disposable incomes and higher mortgage burdens. As a result, households are finding it more difficult to afford housing. This economic downturn has had a significant impact on the real estate market, leading to a decline in real estate demand and construction activity.
The Decline in Swedish House Prices
In 2022, the Swedish housing market experienced a significant decline in prices. The national house price index fell by 3.33% during the year, the worst performance since 1993. Adjusted for inflation, house prices fell by a staggering 13.35%. The rapid cooling of the mortgage market and rising mortgage rates have made this decline worse.
The decline in house prices has not been uniform across all regions of Sweden. Greater Stockholm, the country’s capital, experienced a sharp 5% decline in house prices in 2022, the largest decline since 2018. Greater Gothenburg and Greater Malmö also experienced declines of 4.5 percent and 5.3 percent, respectively. However, some regions, such as Northern and Central Sweden, saw modest increase in house prices of 6.5%.
Investment Trends
With the recent downturn in the Swedish real estate market, investment trends have also changed. Investors are monitoring the market closely, and there has been a decline in the share prices of Swedish banks and real estate investment trusts. The cooling-off period has created new opportunities for potential buyers. But caution is advised due to the uncertain economic climate.
Despite the recent decline in house prices, Swedish real estate remains overvalued. Stockholm, in particular, has experienced a price collapse that has taken it out of the bubble zone but still leaves it in overvalued territory. In addition, Swedish households are highly indebted, with a significant proportion of households having mortgages. The ratio of loans to net income has risen in recent years. Thus, the concerns about the sustainability of household debt levels are rising.
Outlook for the Swedish Real Estate Market
The Swedish real estate market is expected to remain subdued in 2023, reflecting the ongoing economic downturn and persistently high inflation. It is crucial for policymakers and stakeholders to closely monitor the situation and take appropriate action to ensure financial stability. The IMF and the European Commission have forecasted cessionary conditions that pose challenges for the market.
While the short-term outlook may seem bleak, the Swedish real estate market has a history of resilience. As the economy stabilises and inflationary pressures ease, there is potential for a gradual recovery in the market. The availability of affordable housing and sustainable mortgage lending practises will be key factors in supporting future growth.
