Another Housing bubble in the making

Another Housing bubble in the making

Scandinavian capitals powerless to contain property prices and fears of housing bubbles in the three Scandinavian capitals are rising, fueled by unprecedented negative and record low interest rates in Denmark, Norway and Sweden.

Stories of frenzied bidding rounds and record-high prices are causing concern among policymakers and economists, as central banks in all three Scandinavian countries appear set to keep interest rates at historically low levels for several more years.

  

The Central bank and many prominent economists feel that the longer it lasts the more people will get used to it. It is this change in expectations that builds up a bubble.

With the official interest rates well into negative territory in Sweden and Denmark and at a historic low in Norway. Many fear that the damage could be great when rates do rise or the economy’s slowdown.

With the lack of growth in the economy and weak macro-economic factors in the European Union and major economies of Asia slowing down there is a strong possibility of recession and if the housing bubble will burst and the recession will be much worse.

Prices of houses in Copenhagen have risen by almost 35% in the past year and are up almost 80% since 2011, in Denmark you can get a mortgage at a fixed net rate of just 2.9 per cent for 30 years, while average household debt is equivalent to three times their disposable income the highest in the world.

In Norway, apartment prices have rocketed more than ten times since 1992. With crude prices falling and Norway being a predominate petro based economy, cost of housing has continued to gallop ahead, with a record number of dwellings sold in June 2015.

The situation in  Copenhagen is such that property brokers are selling houses to investors without the investors even seeing the property as the market for real estate is so hot now mainly due to the easy credit available from the banking system at very low interest rates. With these kinds of rising household prices along with rising household debt there is a huge threat to the overall financial stability of the economy.

As the interest rates continue to tumble, Sweden’s Riksbank cut its main policy rate to minus 0.35 per cent last month; Denmark’s deposit rate is at minus 0.75 per cent; while Norway has cut rates twice since December to a record low of 1 per cent.

With these kind of low interest rates and tax deductions allowed for interest payment in all the three Scandinavian countries, there is a very high possibility that this could be the next housing bubble that could burst some times in the near future and add to the worries on the overall macroeconomic fragile world situation. 

_ Farzan Ghadially