The Swedish property bubble might be on the verge of bursting right in front of our eyes. The spikes in the interest rates act as needles that might burst the bubble. Property prices are declining due to the uncertain economic conditions and measures the regulators take to control inflation.
Swedish house prices have fallen to the lowest since the spring of 2020. Since 1995 house prices in Sweden have gone up three times compared to the doubling in Norway and Finland.
(Image source: GlobalPropertyGuide)
According to Johan Engstrom, the Chief executive of Fastighetsbyran, after the global financial crisis, the fluctuation in the real estate market has been so sudden that the homebuyers choose to wait for a better opportunity. However, the future of the market is bleak.
Inflation at its highest and consumer prices at their peak has not boded well for the economy. Inflation causes an increase in construction costs that causes construction companies to cut down labor costs. It further adds to weakening purchasing power. Cut down in labor hikes up unemployment.
200% of household income is the current debt of the Swedish people. They are already overburdened with paying off debts. It becomes challenging to pay off the debts or invest in purchasing houses when your budgets barely let you buy essentials.
Inflation has been rising and has peaked at its 30-year high. The Swedish central bank has hiked the interest rates to control it. The real estate market reacts inversely to interest rate hikes, evident in the current scenario in the largest Nordic country.
In May 2022, the prices of apartments in the greater Stockholm region fell by 2% compared to a 1% decline in the housing sector. Besides, Pia-Lotta Svensson, a realtor, said that the supply doubled as soon as the media reported recent inflation.
“Today’s report confirms that the dramatic increase in interest rates is causing stress on the housing market,” Nordea analyst Gustav Helgesson said in a note to clients. “We expect a volatile second half of this year as households continue to adjust to the new interest rate environment.” He added that prices could fall more than the 10 percent decline that Nordea has projected by the end of 2023.
Swedish construction sector experienced a 50% hike in prices relative to consumer goods; it is way higher than the neighboring countries. The building material costs went up by 60% more than average consumer prices. Outside of Sweden, the building material costs increased around 10% more than the average consumer prices. This sharp rise in construction material prices added fuel to the rising consumer prices. Since consumers still kept purchasing real estate the demand kept rising whereas supply did not follow at that high pace.
(Image source: TradingEconomics)
European Commission and the Swedish House of Finance have put together policymakers and researchers to mitigate and resolve the current crisis. Although the situation may seem ugly and the price adjustments may be drastic, more supply in the housing market will theoretically ease the situation. Yet the major question remains, how is the government dealing with easing the growing inflation?