Sweden: Property market headed north – Deutsche Bank

Sweden have the hottest property market as comparative data updated by the OECD last week show that Sweden has taken the pole position from New Zealand this year, with Swedish real house prices now double their thirty-year average, explains Robin Winkler, Strategist at Deutsche Bank.

Key Quotes

“More significantly, unlike runners-up New Zealand, Australia and Norway, Sweden has seen valuations rise far above pre-crisis peaks.”

“The international comparison stresses the urgency for the Riksbank to normalize policy. If valuations continue to rise fast, structural downside risks to SEK can no longer be ignored. In line with the typical negative relationship with house prices, the Swedish current account has deteriorated over the past decade. Positive wealth effects from rising house prices have combined with exceptionally low real rates in raising consumption ratios. Hence, if the Riksbank leaves policy normalization too late, it runs the risk of triggering not only a house price correction but also a sharp drop in domestic demand.”

“But growing financial stability risks are only one reason why we expect the Riksbank to start hiking rates sooner than currently priced, that is before July 2018. Two recent developments matter more acutely with a view to the next meeting on 26 October. First, some board members including Floden have indicated that the government's expansionary budget for 2018 would need to be taken into consideration at the next meeting, implying that it exceeded previous Riksbank assumptions. Easier fiscal policy going into the election year and beyond provides the Riksbank with a tangible pivot to justify tighter monetary policy.”

“Second, Governor Ingves last week implicitly acknowledged that services inflation could be overshooting forecasts. Recall that board members attributed strong prints in June and July to a steep increase in volatile prices for package holidays. But the last print for August was again stronger than the Riksbank forecast despite softer prices for package holidays. This suggests that the recent increase in services inflation is broad, durable and driven by strong domestic growth. Importantly, a day after Ingves' comment, the services PMI for September came in exceptionally strong at 63.8. We thus expect strong details in this week's inflation print for September to justify a re-assessment of services inflation as being persistently stronger than previously forecast.”

“To sum up, we remain long SEK against EUR and CHF in anticipation of a hawkish Riksbank turn by year-end. While hardly contrarian, our impression from recent client marketing is that SEK longs are far less extended than in the summer.”