EU warns of house prices

Sweden risks a disorderly housing market correction, warns the European Commission in its annual review of the Swedish economy, reports Reuters. The risk comes from persistent house price growth and that the policy implemented by Swedish authorities has not been sufficient.

The Commission wants to see housing tax reforms, steps to increase the rate of new housing construction and deregulation that leads to a more effective use of existing housing stocks. The Commission recommends gradually lowering the tax deductibility of mortgage interest payments.

Growth in danger zone

After several years of dramatic price rises, Sweden is now one of the countries at risk of a collapse in house prices, resulting in GDP growth slowing down.

House prices have risen, in real terms, by over 30% in Sweden and New Zealand in the past three years, accompanied by rising household debt. Now, according to credit rating institute, Moody’s, the two countries are most exposed to falling house prices.

Jens Magnusson, from SEB, says the warnings are correct but that the conclusions can be qualified. He points out that price increases in Sweden do not mainly come from speculation and that lending is distributed so that those with the highest incomes borrow the most.

Moody’s report also points out that Sweden’s social safety net provides a cushion for households but means greater economic exposure if things begin to get shaky.

Borg predicts housing price crash

It is no longer a question of if, but when Swedish house prices are going to crash, warns former Finance Minister Anders Borg. “I do not see how it can be avoided,” he said at DI Bank conference on Tuesday, claiming that Sweden’s debt and its housing shortage have exceeded levels that mean a future price fall is inevitable. In turn that will hit growth when indebted households cut down on consumption.

Anders Borg wants rent levels for new builds and existing rental properties to be reformed to stimulate the pace of construction, the possibility to build at height in urban areas and curb the potential for municipalities and neighbours to put a stop to planned construction.

In response Finance Minister Magdalena Andersson agreed that the price of rents is an important factor for the development of house prices and that rising household debt constitutes a clear macroeconomic risk. However she does not believe the house price fall is around the corner.