Goldman Sachs says Swedish property market heading for worst crash since 1990s banking crisis

The investment bank predicts housing prices will fall 10%, and is worried that even worse could be in store if interest rates rise faster than expected. Stockholm looks particularly stretched.

Sweden’s real estate market has been red hot in recent years, helped by the strong economy and the central bank’s negative interest rates. Residential property prices have risen by about 50 per cent just since 2012. They are now on average 70 per cent higher than the pre-crisis peak.

It has been a similar story in commercial property. A “prime” quality office in Stockholm cost Skr7,000 per square foot at the end of 2017, according to JLL, the property company. That is up 55% just since late 2015 and and 17% above the last peak seen in 2000.

But things have started to sour, and Sweden’s real estate market is one of the few in western Europe where prices are now falling. Swedish residential prices fell 9 per cent between August and December , and worse is to come according to economists at Goldman Sachs.

We expect a c.10% decline in quarterly Swedish residential property prices between 3Q2017 and 1Q2018 before stabilising (not bouncing), leading to a 1% increase for FY2017 and a 3% decline for FY2018. We expect declines to be slightly greater in Stockholm. Such a decline (based a quarterly data) is significant relative to the most recent: 2% in 2011, 7% in 2007/08 and 1% in 2001. However, risks remain skewed to the downside, in our view, particularly if interest rates rise faster than we expect.

This is a pretty negative outlook. If this property market price slide materialises, then it would comfortably be the biggest real estate downturn for Sweden since the early-1990s banking crisis.

Goldman Sachs says it is hard to pinpoint the exact reason for why the property market is now finally cooling, but points to the combined impact of more restrictive regulations from the authorities, and the Riksbank’s interest rate increases.

While Swedish residential property prices appeared high on many metrics, it is hard to be sure of the catalyst for these price declines. Macro-prudential policy introduced in the past may have had some effect. That said, the introduction of an amortisation requirement occurred some time ago and recent tightening has not taken place so far. Past rapid gains have maybe been another factor.

Increasing interest rates likely played some part, in our view. Previous recent downturns in Swedish residential property prices have coincided with periods of rising Swedish interest rates, though in those cases (2008/09 and 2011/12) there were also significant “fear” factors.

Higher interest rates are particularly problematic for Sweden’s property market because Swedish household indebtedness is extraordinarily high. The debt-to-income ratio has edged higher in every year since at least 2000 and reached about 15 times in 2016, according to Eurostat.

While low interest rates has kept the actual debt servicing costs muted, if they rise much further and Swedish households could “easily” be facing the highest debt servicing ratios seen since at least 1999, Goldman Sachs notes.

Goldman Sachs is a little less pessimistic on commercial real estate, pointing to “market anecdotes” that the Stockholm office market is holding up reasonably well thus far. But even there, it is notable how rents kept climbing through despite a rise in the number of vacant offices.

In fact, Stockholm office space is now twice as expensive as in Amsterdam, Berlin, Brussels, Hamburg and Copenhagen, and nearly as expensive as Paris. Only London is now comfortably more expensive.

That is not to say that Sweden’s property market is doomed. The economy remains strong, helping support incomes, yet the Riksbank is unlikely to jack up interest rates aggressively.

Nonetheless, Goldman Sachs is worried that even its pretty bearish outlook might prove too optimistic.

We believe the risks to our view are to the downside and potentially significant, given ongoing imbalances and the importance of low interest rate levels as a support for current prices.