Sweden's housing market has never been as hot as it is now

Oslo

SWEDEN'S housing market is now hotter than ever before, exposing weaknesses in the extreme policy mix pieced together by the world's oldest central bank.

House prices in Scandinavia's biggest economy jumped 17 per cent in March from a year earlier to their highest, with a record number of homes sold in the first quarter, data published on Wednesday showed.

The price development has fed discomfort at the Riksbank, which - like its peers - has had to commit to ultra-low interest rates to steer the economy through the pandemic. But the financial imbalances festering beneath the surface have prompted Sweden's top central banker to paint a somewhat unnerving picture of what is really going on.

"It's like sitting on top of a volcano," governor Stefan Ingves said recently, referring to all the debt households have built up to pay for their homes. "I've been sitting on that volcano for many, many years. It hasn't blown up, but it's not heading in the right direction."

Consumer borrowing in Sweden reached 190 per cent of gross disposable incomes at the end of last year. Mr Ingves has monitored that growing pile of debt for years, watching for tremors that could signal danger ahead.

There is plenty of evidence Sweden's housing market is in the middle of a boom. On Thursday, real estate classifieds portal Hemnet said it was planning an initial public offering in Stockholm this quarter. The company says it expects annual revenue growth of as much as 20 per cent.

There is little doubt that the Riksbank's policies have contributed to the imbalance. The housing market development is in large part "driven by expectations of low interest rates for a long time to come", said Bjorn Wellhagen, the chief executive of Maklarsamfundet, a Swedish lobby group that focuses on the property market.

And it is not just interest rates, which the Riksbank has held at zero throughout the pandemic. The bank's purchases of the covered bonds that pay for home loans now make up the lion share of its 700 billion krona (S$109.2 billion) quantitative easing programme.

Policymakers at the world's oldest central bank do not have an easy way out, since raising rates is not on the cards for at least three years, according to their own forecasts.

Mr Ingves also said that it would not be a big problem if inflation exceeds the Riksbank's 2 per cent inflation target "for a number of years".

Bloomberg economist Johanna Jeansson said: "The Riksbank is focused on the outlook for inflation, and won't be using its policy rate to cap the increase in house prices or credit growth. Stemming financial imbalances from the housing market will be up to Sweden's financial watchdog (the Financial Supervisory Authority) or, preferably, the government which has the power to initiate structural reform." BLOOMBERG