Economy Lab

Not just in Canada: Housing bubble debate grips Scandinavia

STOCKHOLM — Special to The Globe and Mail

The Norwegian fishing village of Stamsund. House prices in Norway have soared by about 120 per cent since 1996. (Hakon Mosvold Larsen/Associated Press)

If one issue distinguishes the optimists from the pessimists in this capital city, it is the housing market – or more specifically, the spectre of a “housing bubble.”

There is no question that Scandinavians have experienced a housing market boom in recent years, with prices rising by about 140 per cent between 1996 and 2010 in Sweden and 120 per cent in Norway.

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And yet neither country has experienced the sort of devastating bust that followed similar booms in Ireland, Spain and the United States, begging the question: is a correction inevitable?

“It is the topic that comes up again and again and again,” said Tina Mortensen, economist at Citigroup. “Especially in Norway, where house prices continue to soar month after month.”

A recent report from the International Monetary Fund suggested house prices were overvalued by 15 to 20 per cent in Norway while last year, Sweden’s National Housing Credit Guarantee Board said home prices in this country were 20 to 25 per cent higher than they should be. Though Swedish prices have eased by 6 per cent from their peak in 2010, Ms. Mortensen believes Sweden’s market is still over valued by as much as 20 per cent.

Household debt has skyrocketed alongside housing costs, rising to 170 per cent of disposable income in Sweden and a stunning 207 per cent of disposable income in Norway. By comparison, Canadian household debt stands at just over 150 per cent and the U.S. level was about 160 per cent on the eve of that country’s housing crash in 2007-08.

So, why no Spanish-style bust? Unlike in the United States, the majority of debt issued before the crisis was taken on by the richest portion of the population – those less likely to experience shocks such as sudden unemployment. Household savings have been rising alongside borrowing and net wealth has held steady despite the increase in housing prices. And unlike in Spain and Ireland where a frenzy of building led to a glut in housing supply, the level of construction has remained unusually low in the Sweden and Norway due to high costs and government regulation.

Still, one need only look to Denmark to be reminded that no boom lasts forever. Despite sharing many economic attributes with Sweden and Norway, Denmark nevertheless has endured an 18 per cent drop in housing prices since mid-2007, a deep recession and concerns about the health of its banking sector.

“Given the widespread pattern that booms are followed by busts, there is cause for concern, in our view, for Sweden and Norway,” Ms. Mortensen writes in a recent report.

“Even if a major housing collapse is not yet inevitable, in our view it should be a matter of great urgency for authorities in Sweden and Norway to seek to cool their housing markets soon, in order to reduce risks that housing markets become even more overextended.”

Others are less concerned. Though authorities in Norway have identified house prices as a potential threat to financial stability, a study by the Swedish Riksbank was skeptical of bubble worries, noting that price movements could be explained by fundamentals such as low nominal interest rates.

Credit in Sweden is growing by 9 per cent a year compared to income growth of just 4 per cent, a level that is “clearly too much,” said Andreas Jonsson, a senior economist at Nordea Markets. However, a government-controlled rental market has discouraged the kind of housing speculation that fuelled bubbles elsewhere. And even in 2011, when the stock market plunged amid the euro zone debt crisis and mortgage costs rose 50 per cent in Sweden, house prices fell only 4 per cent, he added.

“It think that’s a clear sign of resilience,” said Mr. Jonsson. “It’s hard to see from here what would prompt any significant downward correction.”