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Sweden's GDP data was an absolute stinker. GDP fell by 2.4% YoY. So is this a big flashing neon warning sign for other countries, or unique to Sweden?
So, we wrote about Sweden back in February here 👇
Sweden will be an excellent case study and potential 'leading indicator' for the rest of the world as refinancing windows loom larger.
The vast majority of Swedish mortgages will need to be refinanced at higher rates this year.
Because Sweden's not a particularly large or significant player in global terms, there's limited Western media coverage of their economy.
However, the property market is under serious strain on the back of higher interest rates. SBB, one of Sweden's biggest landlords has already been taken to the woodshed...
SBB's share price fell by 95% over the course of 18 months...
Sweden's actually the perfect case study in what people think should happen when a central bank starts raising rates.
When people talk about the rate-sensitivity of the economy, it's largely the debt/mortgage structure.
While in the US, most have locked in mortgages at low rates for the full-term, Sweden has mainly floating (variable) rate mortgages.
Morgan Stanley released a very detailed report on the housing cycle and summarised the rate sensitivity argument...
State of Play: Riksbank’s rate hike cycle has been felt by the housing market fairly significantly, as around 43% of mortgages are floating rate, and hence the pass-through is much faster than in other economies.
Housing prices have fallen already by around 15% from the peak, although are still above pre-Covid levels. Housing turnover was also down in March by 30%Y, possibly showing the impact of the continuation of Riksbank’s hiking cycle.
The share of interest expenses of Swedish households in their interest income has been on a rise, and is above the share seen before the pandemic, but historically at relatively low levels.
TL;DR, the change in mortgage rates has hit sooner in Sweden because fewer mortgages have fixed interest rates. Housing prices are well down already, but the cost of debt servicing (amount of interest payable) is still low.
Morgan Stanley see more risks ahead too...
- The pass-through of the policy hikes will still be coming through to mortgages in the upcoming months
- the economy is expected to slow down after a relatively good 1Q23 (this was before today's horrific GDP data)
- More hikes are expected from the Swedish central bank (Riksbank)
And a lovely little self-reinforcing loop awaits...
In Sweden, mortgage costs are included in the CPI basket — creating a counter-intuitive pro-cyclical relationship between rates and that component of housing inflation.
Finally, they expect the rate of house price declines to slow, with prices falling a further 5% in coming months
There have been some signs of housing stabilization recently, with the SEB housing price indicator pointing to smaller house price decreases going forward.
However, we expect house prices to fall further throughout 2023 and recover only in 2024 — indeed, we expect a further 5% contraction in prices.
As for new supply... Not much happening there:
Construction fell in 2022 and is expected to continue its decline in 2023 due to lower demand and higher construction costs.
That's also reflected in the NIER survey of hiring expectations. Almost back to Covid levels!
Which is another ominous sign for the economy. The saving grace has been the strength of the labour market but as hiring intentions fall and consumption weakens, can we depend on that continuing?
Consumption is weak, optimism about the future is waning... I mean, take a look at the key points from this Nordea report on the survey.
- Headline Economic Sentiment Indicator (ESI) declined to 87.5 in July, 12th consecutive month below the neutral level 100.
- Manufacturing confidence fell to 97.1, into contractionary territory for first time since August 2020.
- Construction sector confidence weakening rapidly, declining by a full 12.7 points in just two months.
- Household confidence continued to recover, albeit at a slow pace, far below normal levels at 72.3.
- Inflation expectations were unchanged at 6.8%.
- Interest rate expectations rose.
- Profitability expectations declined for the fifth straight quarter.
It's a grim picture. But what does it mean for other economies?
If Sweden's only the 23rd largest economy in the world, who cares?
As long as the big guns are OK, no big deal right?
Sort of. Let's be clear here. I'm not implying causation...
But I am pointing out the impact of rapidly rising interest rates on a rate-sensitive economy.
As time goes on, the rate sensitivity of other economies will increase. Fixed terms will end, and refinancing at higher rates is painful.
We looked at the UK as a potential canary in the coalmine for this, but it could be Australia or Canada too...
Bloomberg reported on Zoopla's data: UK Home Sellers More Open to Price Cuts as Costly Mortgages Hit Demand.
"the number of would-be buyers contacting agents about purchasing a home tumbled by almost a fifth in the past two months"
Perhaps more worryingly is the regional echoes of the 1990's, that we touched on here. According to Zoopla:
“The impact is not uniform across the country,”
“Southern England is set to experience above average price falls while some areas may not post any price falls at all.”
Compare those comments to this on the new (back in the '90's) concept of negative equity...
Daniel Dorling of Newcastle University estimated that by October 1992, 15 percent of those who borrowed in 1989, 30 percent of those who borrowed in 1990, and 20 percent of those who borrowed in 1991 had negative equity. The proportions ranged from 1 percent in Scotland to 41 percent in the greater London area and 31 percent in the outer Southeast.
Let's hope history doesn't repeat.
The main takeaway here is that economies are starting to struggle as rates gradually pass through.
The US is in an exceptional position due to their tendency towards long term fixed rate mortgages.
The EU has less of a mortgage issue, but bank lending has dropped off a cliff...
Policymakers still see a path towards a soft landing.
To me, this is that path...