Swedish homes 25pc overvalued
With imbalance resembling that before '90s market crash, bank credit ratings under threat
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.
A real estate crash in the early 1990s led to surging loan losses for banks. Nordea Bank, now the Nordic region's largest lender, was created as the government nationalised Nordbanken and Gota Bank after credit losses wiped out their equity. In neighbouring Denmark, banks have needed emergency support after a slide in house prices in 2008 wiped out 62 community lenders in the following five years.
Sweden differed from Denmark because new building projects in cities such as Stockholm were not as numerous as those that were seen in Copenhagen, Ekbom said.
Apartment prices, which have more than doubled since 2000, increased 14 per cent in the 12 months to the end of August, according to data from Svensk Maeklarstatistik, which publishes monthly data on Swedish real estate. The price of single-family houses had risen 4 per cent since August last year, it said.
The central bank estimates private debt will grow to 177 per cent of disposable income by 2015.
While credit growth slowed to 4.5 per cent last year from a pace of more than 10 per cent from 2004 to 2008, borrowing is accelerating. Lending grew 4.8 per cent on an annual basis in July and August against 4.7 per cent in May and June, according to data from Statistics Sweden, the nation's statistics office. The expansion was 4.5 per cent at the start of the year.
Higher household debt meant S&P may lower Sweden to "3" in its banking industry country risk assessment from "2", Ekbom said. A rating of "1" denotes lowest risk and "10" the highest.
Smaller businesses, rather than the nation's banks, would probably be hurt the most by any correction in the housing market, Ekbom said.
"Household sector losses wouldn't explode if there isn't a very extreme shock, but consumption is likely to decline and that would hit small and medium-sized companies (SMEs) that don't have that much of an endurance capability," he said.