Sweden’s growing housing bubble

16 Oct, 2016 at 16:18 | Posted in Economics | 5 Comments

House prices are increasing fast in EU. And more so in Sweden than in any other member state, as shown in the Eurostat graph below, showing percentage increase in annually deflated house price index by member state 2015:


Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices during the last three decades there are reasons to be deeply worried. The indebtedness of the Swedish household sector has also risen to alarmingly high levels:


Yours truly has been trying to argue with ‘very serious people’ that it’s really high time to ‘take away the punch bowl.’ Mostly I have felt like the voice of one calling in the desert.


Where do housing bubbles come from? There are of course many different explanations, but one of the fundamental mechanisms at work is  that people expect house prices to increase, which makes people willing to keep on buying  houses at steadily increasing prices. It’s this kind of self-generating cumulative process à la Wicksell-Myrdal that is the core of the housing bubble. Unlike the usual commodities markets where demand curves usually point downwards, on asset markets they often point upwards, and therefore give rise to this kind of instability. And, the greater leverage, the greater the increase in prices.

What is especially worrying is that although the aggregate net asset position of the Swedish households is still on the solid side, an increasing proportion of those assets is illiquid. When the inevitable drop in house prices hits the banking sector and the rest of the economy, the consequences will be enormous. It hurts when bubbles burst …


  1. From my perspective as a carpenter/contractor, housing bubbles are a nice thing. It just really sucks when they pop though.

    It was nice here in the U.S. being a carpenter during the boom until about the middle of 2006. At least in my area of the country. It was very comforting to know that when you finished a project that two or three or more were waiting. Had I been a better business man, I could have made a lot of money I suppose. Oh well. That all changed very rapidly when the housing market collapsed. Luckily for me, even the best buildings require periodic maintenance. But many, many people were completely S.O.L. after 2006.

    So I think you are right to be concerned about housing bubbles and would like to know more about what you propose to counter-act them or at least the bust part of them. Hiking interest rates across the board does not seem to me to be a reasonable solution, although I don’t know much about the specifics of the economy in Sweden. What do you propose?

  2. I see that for the individual, Interest costs paid to Swedish or non-Swedish lenders are deductible.

    That’s an incentive to be in debt.

    Replace it with an incentive to pay down debt: Allow, for example, a tax credit equal to say 50% of the extra payments made against mortgages (or debt in general). Design the thing so that the tax benefit of the new system is equal to the tax benefit of the old system, for starters.

  3. Where do housing bubbles come from? There are of course many different explanations, but one of the fundamental mechanisms at work is that people expect house prices to increase, which makes people willing to keep on buying houses at steadily increasing prices.
    Not to be too picky, but I’m not sure consumer expectations and consumer willingness on their own constitute “a mechanism”. A mechanism might come into it when the would-be home owners go to a bank to borrow the money to buy the house, aka a mortgage, and the bank asks for documentation of household income and an appraisal of the value of the house. Now, the bank has to follow some rules for how much they will lend and, in effect, set a bound on how much they are willing to let the borrowers pay for the house. That is an institutional mechanism for forming housing prices. Case by case, in assessing creditworthiness of borrowers and appraising the value of the properties, someone is actually calculating on the relation of household income in a neighborhood to housing prices and / or rents in an objective way. It isn’t just a consumer subjective assessment of own willingness to pay that governs housing prices; it is this institutional process that may well be under the control of banking regulators. It isn’t a Walrasian auctioneer crying tatonnement, but it is how price formation happens. And, if the process has been corrupted, so that prices are no longer tethered reliably to household incomes and just inflate — if price formation goes wrong and prices are “wrong” — do not reflect fundamentals — then resource allocation will be distorted in other respects and, eventually, le deluge, the crash.
    The bank isn’t buying houses, presumably; the bank lender is certainly not interested in housing as a durable consumer good. The bank is managing the borrower’s risk, practicing an arbitrage of sorts, based on its ability to manage its own large portfolio of mortgages and securities and profiting on the difference between lending long and borrowing short. If the bank switches from portfolio lending to faith-based frauds of the I’ll be gone, you’ll be gone variety, then the economy is in trouble, as your charts seem to indicate, as important prices can no longer be relying upon.

  4. It sure is gonna suck when the babyboomers start dying and their property start to flood the market. Thats going to be worse than when they retired and lowered their spending.

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