Mortgages

Where’s the Next Sweden? Europe’s Housing Market…


A controlled burn of houses in rural Sweden

Swedish house prices slumped 15% in 2022, a dramatic reversal of a decade-long rally that’s threatening to push the country into recession. It may be the only European country facing a recession, as my colleague Johanna Englundh recently wrote. But its housing market isn’t the only one staring down an abyss.

EU statistics agency Eurostat announced house price data through the end of 2022 on Tuesday, and it shows the first quarter-on-quarter drop in the region’s house prices since 2015. Declines only happened in 15 of 27 EU countries; many others achieved new record prices. This is a good time to look at the wildly divergent situations found across the region’s real estate market. 

Since the European debt crisis, real estate prices have enjoyed a steady updraft due to ultra-low interest rates and easy access to credit. Now that rates have shot up violently, the fallout for house prices is proving highly uneven. As it turns out, the region is roughly divided into countries where mortgages are entirely variable, or have an initial fixed rate.


The data shows a region that’s split into two opposite norms of mortgage borrowing. French and Belgian borrowers are among the most insulated as their mortgages usually carry fixed terms for their entire duration. In Germany and the UK, multi-year fixed terms mean that borrowers don’t need to contend with higher rates until their current term is up. 

By contrast, borrowers in the Nordics and Eastern Europe opt to face the harsh winds of monetary policy from day one of their loan’s term. For Sweden’s red-hot housing market, characterised by stretched affordability, the impact of higher rates was instantly visible. 

Gradually loosening lending conditions by crisis-shaken banks have helped fuel this rally, and given rise to a region-wide trend where borrowing rose relative to spending power. Sweden stands out, with outstanding loans nearly twice as great as households’ disposable incomes. It’s not alone at the top: similarly extreme ratios exist in the Netherlands and Denmark. 

Countries that stand out negatively in these maps are likely canaries in the coal mine, and the effect is playing out before us: out of 30 countries of the European Economic Area (EEA) and Britain, four have experienced house price declines during 2022:

  • Denmark: Despite fixed-term loans being the norm and the Danish National Bank’s more dovish monetary policy than in Britain or the Eurozone, mortgage balances massively outweigh household incomes
  • Sweden: A perfect storm of stretched affordability, exposure to variable rates and break-neck price growth in the past decade
  • Germany: A steep price rally meets ballooning mortgage balances that dwarf salaries
  • Finland: Predominantly variable home loans meet an unfavorable ratio of loan balances to spending power 

Local house price dynamics are more complex and not always comparable, and not all of these countries are bound for a stark house price correction. Germany’s customary 10-year and 20-year fixed mortgage terms will shield most borrowers from the interest rate spike, so selling pressure will remain low absent a recession. Meanwhile, the prevalence of variable-rate mortgages in Eastern Europe hasn’t had the same effect as in Nordic countries where far greater amounts are borrrowed relative to household income. 

The start of something nasty?

The third quarter of 2022 was the peak of the European house price index. Thanks to Tuesday’s data, we can now map where prices are coming down the fastest, and the results match the previous maps of the greatest household debt burdens, vulnerability to interest rates and the steepness of previous price rallies.

The real housing crunch may be yet to come. Insecurity about the region’s banks brought on by the forced acquisition of Credit Suisse has “prompted banks to reevaluate who they lend to in the first place, both in terms of other banks and indeed clients,” Morningstar’s European equity strategist Mike Field wrote this week. A forecast of “a tightening of credit standards and a deceleration in the growth of lending volumes” also featured in remarks of ECB Vice President Luis de Guindos on Saturday.

What is certain is that it would be an uneven housing crunch. Europe’s national real estate markets are too different from one another for the region to experience a single downward motion like the US saw in 2007. To get a sense of where the risk is greatest, watch for signs of “Swedish conditions”. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.



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