Currency war could pop the Swedish housing bubble

10/09/2015 bubble , currency , deflation , Finance , housing , limits , war 0 Comments

"You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy]" - F. Soddy (Cartesian Economics, p. 30).

The Swedish Central bank (Riksbank) have cut the repo rate to -0.35% and bought another 30 billion SEK in government bonds in the belief that this will stave off deflation (i.e. import inflation). Which it won’t, since the global economy has taken a downturn and it looks like most economies now are facing recession or depression due to the deflationary collapse of commodities, capital spending and global trade. Most intelligent people know that GDP growth is over, since we live on a finite planet, and the reason for this latest bubble had to do with private sector borrowing to inflate consumption rather than productivity increases in the real economy. What professor Didier Sornette at ETH Zurich calls “The illusion of the Perpetual Money Machine” (2012).

The Riksbanks policy will not win over deflation (there are no winners in a global currency war), however, it will fuel the already overheated housing market in Sweden, with a risk of popping this bubble. The ultra-loose monetary policy will encourage Swedish households to take on more debt, despite them being overburdened by debt already. Household debt to disposable income is currently at 172% (see diagram). One can compare this to the famously over leveraged American households before 2008 which topped out at 130% of disposable income.

There should be plenty of people around today that actually remember the devastating property crash of the early 1990s, but it seems like most people have a short memory. In the early 90s the government had to step in and nationalise the banks while increasing public spending to keep the economy alive in the midst of soaring unemployment. It took at least a decade for the economy to recover and the state to restock its finances after that.

Property price index in Sweden (1986-2014) adjusted for inflation. Country average (grey), Stockholm (black), Göteborg (red), Malmö (blue). Credit: Rika Tilsammans

Sweden’s present housing boom started right (2000) after the recovery from the crisis in the 1990s. The boom was set off by low interest rates and a massive expansion of the financial sector with increasingly lower standards for issuing credit/loans. This have driven up prices to extreme levels, mainly in Stockholm, Göteborg, and Malmö, effectively forcing more people to borrow to afford housing in the inner cities. Property prices have been rising 8-9% per year on average for almost 20 years. During the last 12 months, prices have risen by 12% (average price per m2 SEK 32,692).

Even after 28 years of queueing it is impossible to get a rental flat in Stockholm. So plenty of people, or rather their parents, take on loans of SEK 1-3 million to buy a flat as small as 20-40 m2. Of course not everyone can afford to do that, so it's mostly the rich kids that stay in the city centre, in Södermalm, where all the other hipsters are. No integration there! Most of these youngster don’t have any savings. The only thing they have is their flat, speculating that asset prices will rise, seeing it as an “investment”. But of course it’s not real wealth, it doesn’t contribute to the real economy in any way, all it does is inflate property prices further.

Now, finally, mainstream media and Swedish authorities have started issue warnings about the housing bubble and a potential crash. Of course it’s too late to avoid it now. I guess everyone just love rising housing prices, no wonder since it's private and household debt that has driven GDP growth over the last decade in Sweden. So much for Anders Borgs famous “Swedish growth miracle”! Borrowing consumer demand from the future through credit creation is not equal to creating real wealth, it just implies we will be poorer (can consume less resources) in the future. After all, we live on a finite planet.