The economic situation in Sweden right now is extraordinary, and a new note to investors from HSBC says that Swedish housing may be in a bubble that “is not sustainable.” Here’s the macro picture:
- 3.9% GDP growth, year on year.
- House prices up 18%.
- Interest rates are set at -0.35%.
- And the government isn’t doing anything about it.
Low interest rates fuel bubbles by making money cheap to borrow. All that extra money drives up prices. Normally, a central bank would respond to rocketing house prices and 4% growth by raising rates, in order to calm the market down. But the Swedish Riksbank has been reluctant to do that for fear of derailing the economy. Instead, it wants new regulations on mortgages to force Swedes to pay down the principal on their debts. Right now, Swedes are shrugging off their mortgage debt and using the extra cash to buy stocks and bonds. If the economy runs into trouble, those two factors — high mortgage debt and tumbling equities — could magnify a recession. The Riksbank doesn’t have the power to require mortgage pay-downs, and the government hasn’t given that power to the Finansinspektionen, the financial regulator.
HSBC economist James Pomeroy wrote in a recent note (emphasis ours):
We’ve long argued that the Swedish economy does not warrant further stimulus, but that the Riksbank would continue to ease given the low inflation rate. The economy is the fastest growing in the developed world (3.9% y-o-y in Q3) and house prices continue to accelerate and are now up 18% y-o-y across the country. Under normal circumstances, one might expect the Riksbank to be hiking rates but — given ultra-loose ECB policy — rates are being kept much lower.
As positive as the story appears for early 2016, there are plenty of reasons to be concerned about the medium term. The pace of acceleration in the housing market points to a bubble.
Here’s the chart, showing house price growth back where it was before the 2008 crisis, even though economic growth is only at half that level:
Pomery’s writing on Sweden is becoming increasingly alarmist. He says a mere drop in housing prices could trigger a full on recession:
… The housing market continues to pose significant risks for the Swedish economy. With prices now up 18% on the year and no sign of macroprudential measures coming into force, we worry that this is not sustainable. Should the housing market roll over at any point in 2016 (or 2017) the impact on the economy would be severe. Estimates from the National Institute of Economic Research suggest that a 20% fall in house prices would lead to a recession-like impact on consumption and unemployment, with a smaller fall still having severe economic consequences.
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