'Toxic cocktail' threatens Nordic housing market
Years of ultra-low interest rates are leaving their mark on housing dynamics across the Nordic region, where Nordea Bank AB now warns that markets may be reaching a tipping point.
"This combination of rising home prices and a pick-up in new construction could be a toxic cocktail if prices start to fall," Helge Pedersen, chief economist at Nordea in Copenhagen, said in a report published on Monday.
Across much of the Nordic region, households have built up debt as they take advantage of low, and even negative, rates to finance home purchases. With demand boiling over, property developers have responded by adding supply.
To address imbalances, regulators passed a number of measures in Sweden, Norway, Denmark and Finland. Now, with the prospect of historically-lax monetary policy being unwound in the foreseeable future, the question is where the region's property markets will land.
"Only when monetary policy is tightened and interest rates rise, will the stability of the Nordic housing markets really be tested," Pedersen said.
Nordea characterises Sweden's housing market as "wobbly" and asks the question whether we're seeing "the beginning of the end of the 20-year bull market?"
The bank notes that housing starts for apartment buildings are at the highest level since the beginning of the 1970s, but there are signs demand is cooling down.
Economist Andreas Wallstrom also says it's "questionable" whether a general housing shortage exists. "Looking at the trend in the number of homes and comparing this with population growth over an extended period, we find a housing surplus," with the exception of Stockholm, he said.
The interest-rate outlook is for "fewer rather than more rate hikes" when the Riksbank starts to unwind years of stimulus. Meanwhile, there's political reluctance to push through tougher measures to curb debt, such as smaller deductions on households' interest costs.
The regulator said last Monday it will move ahead with a proposal to tighten amortisation requirements for the most indebted households. If approved by the government, the new rules would take effect in March.
Overall, Nordea sees "relatively stable" house prices but warns that the "risk picture" has changed with a bigger chance for price declines.
A survey published last Monday by SEB AB showed an index measuring house-price expectations in Sweden slumped to 11 in November from 50 in October. It's the lowest reading since early 2013 and the steepest monthly decline in a decade.
Market participants are now eagerly awaiting fresh numbers due on Tuesday, when Valueguard and Svensk Maklarstatistik publish home-price data for October.
In Norway, Nordea sees signs of a "cool down, no meltdown". House prices have risen more than 200pc since the beginning of the 2000s, but the average median household income after tax is up just 90pc over the same period, while home-loan rates are considerably lower than they were back then.
Since April, home prices in Norway have dropped about 3pc. "We believe home prices will fall somewhat further before they bottom," Joachim Bernhardsen wrote in the report.
"But even if we take an aggressive view and assume that prices fall 5pc beyond our forecast, they are still at the spring-2016 level and still 20pc above the bottom."
In Denmark, "historically low financing costs and steady employment growth are some of the factors driving the housing market upturn," Nordea economist Jan Storup Nielsen wrote. He also notes that Danish authorities are learning from past mistakes and implementing stricter lending standards.
"This represents a major departure from previous policies and will likely help reduce the risk of a new housing bubble," he said.
In Finland, the main issues are growth in household debt and large regional gaps in price developments, Nordea said.
The steady rise in indebtedness is "somewhat worrying, even if current debt levels do not yet pose a problem," Pasi Sorjonen wrote in the report.
"Viewed more widely, the disparity in prices has the makings of human tragedies" leading to large differences in wealth across the country, Sorjonen said.
Outside of the Nordic nations meanwhile, Iceland has seen its housing market soar by 56pc since its 2009 crash. But one of the island's biggest property investors says there's more to come, and is adding to its exposure.
"There is a growing demand, and the market is going to be supported by a lack of supply for the next few years," said Gisli Haukksson, co-founder and chief executive officer of GAMMA Capital Management Limited, an investment fund which manages more than $1bn in assets. He says lower interest rates will also help.
"Both real and nominal interest rates have been dropping quite fast in Iceland," Haukksson said in an interview in Reykjavik.
The central bank is due to announce its next rate decision on Wednesday. It cut the benchmark seven-day term deposit rate by a quarter of a percentage point, to 4.25pc, last month. After its 2008 economic meltdown, real house prices in Iceland fell by a third in the space of two years.
But the island's meteoric recovery has drawn investors' attention, especially since the central bank exited capital controls this year.
After contracting about 7pc in 2009, the economy grew more than 7pc in 2016. Growth is being driven by booms in tourism and construction. The central bank says house prices are unlikely to drop as long as the lack of supply continues.
With assistance from Christian Wienberg.