Bubble? What Bubble? Nordic Economists Dismiss Housing Concerns

(Bloomberg) -- Scandinavia’s red-hot property markets may be showing signs of cooling, but rumors of a bursting bubble are greatly exaggerated.

That’s the consensus among local economists, who point to strong fundamentals and persistently low interest rates as evidence that the downturn is a "healthy re-balancing" rather than a harbinger of an imminent collapse.

"If you ask me what is the main risk to the macro scenario, I’d say it’s probably house prices," said Erik Bruce, senior economist at Nordea Bank in Oslo. "But I find it hard to see them dropping significantly with interest rates at this level, unemployment falling and optimism coming back."

Average house prices have shot up around 70 percent in both Sweden and Norway over the past decade (in Copenhagen they’ve nearly doubled since 2012, the year Danish rates first turned negative). After years of warnings about excessive debt and overheating from financial regulators and central bankers, they’re now slowing in both Stockholm and Oslo.

Bubble? What Bubble? Nordic Economists Dismiss Housing Concerns

The adjustment in Norway’s capital city comes as the government there has tightened lending standards in order to reduce speculative buying. "These measures have worked," said Bruce, noting that prices in Oslo are down 7-8 percent from their peak.

In Stockholm, it’s more about supply and demand. The number of apartments up for sale in the Swedish capital hit a nine-year high in October, but real estate agents say they are having problems unloading properties as buyers and sellers drift apart on price.

"New trends often start in Stockholm," said Nordea’s Sweden-based economist Torbjorn Isaksson, so we expect "house prices at the national level to level out, going forward."

Read more about Sweden’s housing-market correction

While the oversupply in the Swedish capital concerns mostly luxury properties, nationwide it follows an increase in construction that took off at the middle of the decade and accelerated amid mounting concerns of shortages, in turn exacerbated by a massive influx of refugee.

In September, S&P Global Ratings said high private debt levels (which it estimated at 180 percent of disposable income at the end of 2016), and the fact that more than half of all mortgages are at variable rates, mean a potential "house price correction could lead to a marked reduction in consumption," hampering Sweden’s economic performance.

For that to happen, something catastrophic would have to hit, say the economists.

The last time a Swedish housing bubble burst was a quarter of a century ago. Back then, the economy was in dire straits, with rampant unemployment and public finances in disarray (Denmark’s bubble last burst in the 2007-2008 financial crisis). Even then, the safety net of the region’s generous welfare state helped contain lending defaults.

Scandinavia’s economies are in a different place today, with Sweden experiencing solid growth and Norway finally recovering from years of depressed oil prices.

"The most potent driver" of house prices today "has been the combination of growing disposable income for households and record-low mortgage interest costs," Nordea said in a March research paper.

With the majority of new Scandinavian buyers having opted for a variable-rate mortgage, central bank tightening may prove sobering. But Norges Bank isn’t expected to raise rates before 2019, while the Riksbank’s latest rate path points to a first hike in the middle of next year. What’s more, it’s difficult to see a return to the double-digit inflation of the 20th century.

"Things are much more stable today," said Isaksson. The trend for house prices "should go sideways."

©2017 Bloomberg L.P.