Negative interest rates in Sweden have caused a situation where soaring house prices have become an “unnecessary reality,” a chief analyst at Nordea bank has told CNBC on Friday.
“The Riksbank could easily change tack if they wanted to, nevertheless growing house prices is an unnecessary reality which we have to live with,” Henrik Unell, chief analyst with Nordea, said in a phone interview.
Sweden’s central bank, the Riksbank, had raised eyebrows among investors in recent years by becoming one of the economic pioneers of negative interest rates. Denmark, Switzerland and Japan’s central banks have all since followed suit. And it is this that which has significantly contributed to soaring house prices, argues Unell.
He went onto add, “You really have to be in complete denial if you do not see the correlation between lower interest rates and increasingly high housing prices.”
House prices skyrocketing
According to Svensk Maklarstatistik, a property and trade association of Swedish real estate agents, single-family home prices spiked by 10 percent year on year in September, with apartment prices jumping up by 7 percent year on year.
Sweden’s house prices have skyrocketed since the late 1990’s which has subsequently resulted in household debt rising to among the highest in the world. In relation to gross domestic product, GDP, household debt jumped up to 84.60 percent in the first quarter of 2016.
In comparison to the U.S. household debt in the world’s largest economy decreased in the first quarter of 2016 to 78.4 percent. Though the US is managing its housing prices more effectively, housing supply is likely to become a catalyst for prices rising further still.
Media black-out
Anna Breman, chief economist at Swedbank, argued that Sweden’s housing market is finally showing signs of slowing down, in part, thanks to changes to repayments introduced in June by the Swedish financial supervisory authority, which took over regulation of home loans from the Riksbank three years ago.
She told CNBC in an email, “Housing prices are still increasing but at a much lower rate as compared to a year ago. It will take some time to fully assess the impact of the new amortization requirements.
“But I am optimistic that they will be effective in calming the markets in Stockholm and Gothenburg where house prices have increased the most.”
Sweden’s central bank, declined to comment when contacted by CNBC as their economists have entered a media black-out period ahead of the nation’s next monetary policy meeting on Wednesday 26th of October with the decision to be announced the following day.
Main game in town
Breman projected that the Riksbank would hold the repo rate at -0.50 percent though does expect the bank to extend its current quantitative easing (QE) program through until the second quarter of 2017. The current QE program is scheduled to finish at the end of the year.
Unell agreed that the central bank is likely to extend its bond-buying program on Thursday 27th of October but added that, as a result of poor inflation figures in Sweden released recently, a rate cut of 10 basis points further into the negative territory should be expected.
“Monetary policy is the main game in town and (Sweden’s) Riksbank can immediately slow down the housing market if they so choose,” Unell said.
Source: CNBC
