Swedish homes 25pc overvalued

Swedish housing is overvalued by as much as 25 per cent after prices accelerated at a faster pace than disposable income, according to Standard & Poor's.

The divergence, which resembles an imbalance before a property slump 20 years ago, may either require prices to decline or salaries to rise at a faster pace, S&P analysts Sean Cotten and Alexander Ekbom said in an interview in Stockholm.

"Looking at the crisis in the early 1990s, prices rose much faster than incomes before there was a correction," Ekbom said. "Looking at the situation now, prices have gained more than the increase in disposable income, even though real income has had a good development."

Sweden has taken measures to stem growth in mortgage lending and house prices as concerns rose of a bubble developing. The steps include limiting mortgages to 85 per cent of property values and tripling risk-weighting, or the cash banks must set aside to protect against mortgage defaults.

While the steps have helped slow loan growth, house prices are still surging and consumer debt has risen to a record high of more than 170 per cent of disposable income, according to central bank data.

The financial regulator said this month that it may start forcing households to pay down mortgages should credit growth rise. Central bank governor Stefan Ingves and finance minister Anders Borg have called for increases in risk weighting on mortgages after the regulator tripled the ratio to 15 per cent this year.

Ekbom said a risk weighting of between 24 per cent and 30 per cent would be more suitable, taking into account the performance of the economy and housing market developments.