Swedish home prices fall most since pandemic as rates rise

A slide in Swedish housing prices accelerated last month as rising interest rates and an uncertain economic outlook has started weighing on the largest Nordic nation's property market.

In May, the HOX Sweden housing-price index decreased by 1.6 per cent from the previous month, which is the largest drop since the pandemic in April 2020. It follows a 0.5 per cent decline in April, and prices look set to continue falling this month, according to Valueguard, which compiles the index. The 12-month gain of 2.9 per cent was also the lowest since April 2020.

The data spotlights the complex choices faced by the Swedish central bank as it tries to curb inflation, which has surged to a 3-decade high. Most economists now believe the policymakers who are meeting next week will have to accelerate plans to increase borrowing costs. That would put growing pressure on homeowners as their mortgages are set to become more expensive.

"Today's report confirms that the dramatic increase in interest rates is causing stress on the housing market," Nordea analyst Gustav Helgesson said in a note to clients. "We expect a volatile second half of this year as households continue to adjust to the new interest rate environment." Prices could fall more than the 10 per cent decline that Nordea has projected by the end of 2023, he added.

The risks associated with Sweden's housing market have long been at the centre of attention, as decades of virtually uninterrupted price increases have fuelled fears of a bubble. Riksbank Governor Stefan Ingves has even likened dealing with the frothy market to "sitting on top of a volcano", as the debts of Swedish households have ballooned at a pace that clearly exceeds any from the Group of Seven economies.

That concern was only exacerbated during the pandemic, when Swedes who escaped the health crisis fairly unscathed economically, chose to invest more in homes, sending housing prices sharply higher.

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The boom is now rapidly reversing, and last week, a closely watched indicator of Swedish home prices tumbled the most since the onset of the pandemic. Now, 47 per cent of households expect prices to drop, marking an increase of 23 percentage points from the previous month, according to a survey by SEB.

"The Valueguard data for May confirms a trend that we have seen for a while, indicating that a new pricing level is about to be established following a sharp increase during the pandemic," Svensk Fastighetsformedling AB's chief executive officer Erik Wikander said in a statement.

In the first half of this month, apartment prices in the capital, Stockholm, fell by 3.3 per cent, according to Valueguard. BLOOMBERG