Housing Shock Conjures Swedish Crisis Ghost

(Bloomberg) -- The country that over the past decade sailed through the financial and European debt crises largely unscathed is now being confronted by a specter from its dark past. 

Sweden’s housing market is cooling fast, raising concerns that the Nordic nation will face a repeat of the real estate crash in the early 1990s that brought the economy and its banks to their knees, broke the krona and had government officials haggling with foreign creditors.

“It’s hardly a minor drop like in 2008 or 2012 that worries households, companies and authorities, but what’s really frightening is a scenario where we’d face a re-run of 1992,” said Johan Javeus,  chief strategist at Swedish lender SEB AB, in a recent report. “There are both similarities and important differences between then and now.”

Back then, a commercial real estate crash spilled over to the rest of the economy, driving down home prices by 20 percent, according to SEB.

What’s similar now to then is that Sweden has seen a boom in housing construction. That surge may now be fading, with some of the most expensive projects in Stockholm being postponed and high-end developers selling off or adjusting assets.

One pressure point could be bank financing for real estate companies. Another could be the bond market, where property companies listed on the Nasdaq OMX Nordic main market have amassed outstanding bonds of more than 70 billion kronor ($8 billion), according to data from Catella.

But much is now different. Sweden now faces a housing downturn from a position of strength, with quarterly growth averaging 0.9 percent over the past three years. In the run up to 1992, Sweden’s economy was moribund, barely expanding.

That means, of course, that confidence in the economy is healthier, with manufacturing optimism currently at its highest level in almost 50 years.

But what about unemployment, which is much higher now at more than 6 percent versus just above 3 percent back in early 1991? The difference is largely structural, according to SEB. Besides, unemployment is currently falling, while back then it was on the way up.

While bank capital levels for specific banks in the 1990s is now hard to come by, today Sweden’s banks have the biggest capital buffers in Europe. That’s because regulators and policy makers have been vigilant to avoid another crash. After stress tests last year, the financial regulator said that the banks now “have resilience against a sharp deterioration of the economic environment.”

Today’s record-low mortgage rates also contrast starkly with the situation in the early 1990s. The average variable mortgage rate was 14.5 percent then, while today it’s 2.1 percent, according to SEB. That means households are spending far less, relatively, on their mortgages than they did back in the early 1990s.

While that could change if rates start rising rapidly, there are no indications that that will happen, according to Javeus. 

Sweden’s central bank, which raised rates to 500 percent in 1992 in a failed effort to protect the krona, currently has its benchmark set at minus 0.5 percent. It has flagged that any potential rate increase will come at the earliest in the middle of next year and predicts the key rate will remain below zero well into 2019, all else equal.

The person in charge at the central bank, Governor Stefan Ingves, is also the same man who helped clean up the banks after the collapse more than two decades ago. While he has been cutting rates over the past three years to avoid deflation, he hasn’t fully taken his eye off the risks in the housing market.

“What happens in the housing market is something that we keep an eye on and that may matter at some point,” Ingves said in an interview this week with Dagens Industri.

 

©2017 Bloomberg L.P.

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