House price bubble set to burst?

Jul. 07, 2015

– It’s going to be worse before it gets better. For a long time I felt that no – this is not a bubble. But now I’m less confident. Households seems to still expect further price increases and that’s a typical sign of a bubble, says Peter Englund, Professor of Finance at Stockholm School of Economics.

Peter Englund’s colleague Marieke Bos, visiting research fellow at the Swedish House of Finance from Stockholm University, moved to Sweden from the Netherlands about ten years ago. She draws many parallels to the situation in her home country before the financial crisis hit and housing prices fell sharply.

– It feels like the Swedish market is about ten years behind the housing market in the Netherlands. What I’m most worried about is the effects this situation has on society. The insiders are benefitting from the costs that outsiders are paying. This is for example one thing that makes it more difficult for immigrants to integrate into society, says Marieke Bos.

House prices are extremely dependent on the genereal economic development and the situation now is not a direct problem for the banks, but it makes households vulnerable.

– The real problem behind this is the institutional set-up feeding the vicious circle with continuously rising prices and increased debt. Politicians need to address the problem and at the moment it’s almost like they don’t want to bear the political cost so instead they let young people and immigrants bear the cost, says Marieke Bos.

Both Peter Englund and Marieke Bos believe that the best way to deal with the situation is to introduce what they call a “pathway” of changes. Gradual and clearly communicated policy amendments to ensure a transparent process and a slow adaption to new conditions for all market participants is, according to them, the alternative that is most likely to succeed and not create the shock that could trigger the downward spiral that we tried to avoid in the first place.

– Let’s say that we decide to reduce the interest rate deductability from 30 to 20 percent. The way to do that is to communicate the 20 percent goal and gradually lower the deductability every year by one percent. That way, it reduces uncertainty and it gives people the opportunity to make structural changes in for example their budgets, both through changes in spending and in labor market supply, says Marieke Bos.