Norway and Sweden both saw house prices fall in 2017 after years of strong growth. What is the current situation in Nordic housing markets and what were the factors that led to the price correction?
We do not expect a ‘hard landing’ for Nordic housing markets. In our view, prices are more likely to stabilise than decline further.
Nordic housing market has been buoyant for the past 20 years
In 2017, GDP in Norway and Sweden grew faster than the EU average rate. Faster growth, low interest rates and tight commercial and residential sector supply/demand balances should support these countries’ real-estate markets in the longer term. So, any spill-over effects to their real economies from the recent house price correction should be limited. That said, due to the increase in supply of new, high-end apartments and stricter mortgage regulations, there is a risk that the correction might continue through 2018.
House prices in Sweden and Norway had been rising for 20 years, mainly driven by population growth boosted by migration and the urbanisation trend, as well as a general supply deficit due to limited new-build activity. Higher disposable household incomes combined with record-low mortgage interest costs also contributed.
Sweden and Norway were among the few countries that did not materially suffer major house price declines during the global financial crisis. Prices quickly resumed their upward trend when central banks began to cut interest rates in 2008 and accelerated as rates fell further.
House prices – Stockholm
Source: Valueguard-KTH Housing Index HOX, Alfred Berg Asset Management, as of 31/12/2017. Note: the Stockholm House Price index is based on data from Swedish Mäklarstatistik AB, which compiles data from the Swedish real estate agents. The index gives a very adequate picture of price trends.
House prices – Oslo
Source: Macrobond, Alfred Berg Asset Management, as of 31/12/2017. Note: Avg. M2 (TKNOK) = average square meters in 1 000 Norwegian krone.
What caused the Nordic housing slowdown?
The recent concerns about the Swedish housing market originated when prices began to decline in August, particularly in Stockholm. In Norway, prices were weakening for even longer, since mid-spring 2017. The downturn in both countries was seen mainly in urban areas where the construction of new apartments is at its most prolific and debt-to-income ratios are the highest.
We believe the downturn is primarily due, not to changes in fundamental demand, but rather to the increase in the supply of high-end property and tighter policies limiting mortgage credit both in terms of the amount and eligibility criteria. Norway curbed mortgage lending in early 2017, while in Sweden, higher amortisation requirements based on debt-to-income ratios will enter into force in March 2018.
Macroeconomic indicators support a stable Nordic housing market
The overall macroeconomic environment looks favourable in Sweden and Norway. The global economy is enjoying a synchronised cyclical upturn, which benefits both these countries’ export-driven economies. Strong GDP growth, falling unemployment and expansionary fiscal and monetary policy have led to robust growth in disposable incomes, while household savings are high, especially in Sweden.
Banks in both countries are well capitalised with generally sound lending practices. In addition, strong public finances in Sweden and Norway would act as a buffer, should the threat of a future economic ‘hard landing’ arise. Monetary policy will likely only be tightened slowly with low interest rates in Sweden and Norway expected to persist this year, keeping the cost of capital low.
Household finances are strong
One concern is that the downturn in residential prices might hit consumption growth. Although debt levels have risen significantly in recent years, household savings have remained relatively high for a long time. Sweden has an aggregate household savings rate of more than 15%, which is high both historically and by international comparison. The Norwegian savings rate is lower and has been falling in recent years, which makes Norway more vulnerable to changes in household spending.
Since interest rates are likely to remain low and unemployment is falling, we believe that for the foreseeable future, Swedish and Norwegian households’ high savings ratio and debt servicing ability (interest costs in the context of disposable income) are likely to limit the risk of a large price correction.
Gross household savings rate 2002-2017 (%)
Source: Macrobond, as of 31/12/2017
Resilience to a slowdown in construction
Residential construction has been a key driver of economic growth in Norway and Sweden. Looking ahead, the contribution to GDP growth from residential investment will be smaller, but we expect this to be offset by improving export conditions, a supportive global growth trend and higher public spending.
Alfred Berg: a Nordic real-estate specialist
Alfred Berg has a long tradition and solid expertise in Nordic real-estate investments. We screen listed Nordic small-cap companies in the real estate and construction segments that have exposure to the housing market, mainly within the more stable rental market.
Breakdown of the investment universe for Nordic small caps (%)
Source: BNP Paribas Asset Management, Carnegie Nordic small cap index, as of 31/01/2018
Among the listed Nordic construction groups, only one has an international profile; most of the others are purely local. Home-builders have the most direct exposure to a housing market correction. In addition, there are various companies whose business depends on residential construction activity such as building materials supply and installation firms.
Within our Nordic Small Cap strategy, while we have limited exposure to companies in the construction sector, including residential property builders, we also have exposure to commercial real-estate segments that continue to offer good opportunities given the undersupply of attractive locations. The strong upward trend in commercial rents in the past two years has yet to feed through to the stock of contracts in the coming years.
In our view, the shape of housing markets in the Nordics does not constitute a major threat to the health of Nordic equity markets generally. Direct exposures to property markets are limited in our investment universe and we do not expect meaningful repercussions from the recent correction in 2018.