Sweden’s housing market boom likely over on lower mortgage rates, subdued income growth

Sweden's housing market boom is about to come to an end, suggested by several factors. Prices are expected to move sideways. The main reason is that mortgage rates cannot go much lower. Also, more subdued income growth and future regulations imply that prices will not rise much further. However, a sharp decline in prices might be prevented by sustained strong demand for housing and limited supply. Sweden's house prices rose 10% in 2015

The rise in house prices in Sweden in the past 20 years has concurred with a sharp fall in interest rates. This indicates that there is a close correlation between housing prices and interest rates. In future, the mortgage rates are unlikely to rise much, rather it is expected to remain at unchanged levels. However, the upward trend in prices will halt with the fact that interest rates will not fall further, assuming consumers have adjusted the housing prices to the current level of interest rate.

Meanwhile, housing prices might increase even if mortgage rates are stable due to consumers' increasing purchasing power. However, the outlook for consumer incomes is the weakest in many years. The National Institute of Economic Research projects disposable income per capita will not increase in the next four years. The forecast is based on Sweden's average household income level that is dragged down at present by lower incomes of refugees who arrived recently.

Also, Sweden has introduced more regulations. The new amortisation requirement is expected to be executed from 1 June 2016. This means that under the new regulation, consumers with loan-to-value (LTV) ratios of 70-85% need to amortise at least 2% of the purchase price. However, this new regulation is only for new loans. For newly built flats or houses loans are exempted. According to several observers, such as the Swedish Financial Supervisory Authority and the Riksbank, the proposal will have a very limited impact on the housing market in future.

Meanwhile, in the past 12 months, the Stockholm stock exchange's market cap has fallen by just over 20%. Consumers in Sweden have a somewhat strong exposure to the stock market. With a weak stock market trend, housing price growth will slow down. However, even if there are signs that prices will not rise more from the current levels, prices are unlikely to decline majorly.

This is based on fundamental factors such as low construction activity and the current high demand. Fundamental factors are likely to continue underpinning housing prices in 2016 and 2017; however, not enough to push prices higher.  The slowdown of housing prices will contribute to weakening consumer spending growth and household credit growth in the coming years. However, both will continue to be in positive territory.