Sweden is facing its ‘day of reckoning’ as house prices plummet

Sweden’s property prices are facing a serious drop as the country’s central bank governor warns of lofty household debt levels.

House prices in Sweden have risen fairly reliably over the last decade. This has been buoyed by ultra-low interest rates in a system where around half of people’s mortgages are financed with variable rates and many of the rest are on short-term fixed rates.

But now property prices are tumbling. And this downturn is not surprising given the “dysfunctional” nature of the market, according to Stefan Ingves, the outgoing governor of Sweden’s central bank, the Riksbank.

“I’ve persistently time and time again said that the debt level in the household sector is just way, way too high and there will be a day of reckoning and eventually rates will go up, and now rates have gone up,” Ingves told CNBC’s “Squawk Box Europe” in an exclusive interview Tuesday. 

“What you see happening now is almost exactly what you would expect to see happening, and that is that households have to pay more and the interest rate sensitivity … is much higher,” Ingves added, which makes interest rate payments higher for a huge number of Swedish households.

The pandemic effect

During the Covid-19 pandemic, house prices across Europe continued to rise, and Sweden was no exception. Demand for property skyrocketed as working from home and a preference for domestic vacations prompted people to upsize their spaces.

On average, house prices were up as much as 30% compared to the pre-pandemic level of January 2020, according to Nordea Bank, as the Riksbank started purchasing mortgage bonds, trying to bring rates down and adding fire to an already hot housing market.

But now prices are falling, dramatically.

“As of November we are seeing prices nationally in Sweden fall 13% from the peak in February. That’s the largest downturn on the housing market since we had a big economic crisis in the nineties,” Gustav Helgesson, an analyst at Nordea, told CNBC.

Home prices fell by 15% between the peak in March and November of last year, according to financial services company Valueguard, as reported by Nordic corporate bank SEB.

Central bank rate hikes

In 2022, Sweden’s central bank undertook an aggressive interest rate hiking cycle that ricocheted through the property market.

In February, the Riksbank signaled its policy rate would remain unchanged at zero, and predicted an eventual increase for the second half of 2024. But in the bank’s next monetary policy statement just three months later, the rate was raised to 0.25%.

“They really just shifted from that meeting to the next one in April and started their hiking cycle,” Helgesson told CNBC.

Rates continued to increase throughout 2022, going from 0.25% to 0.75% in July, to 1.75% in September and 2.5% in November.

“This took many households by surprise … and…