As Swedish central bank fights deflation, housing bubble worries mount

Sun Nov 1, 2015 7:41am EST
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By Johan Sennero and Simon Johnson

STOCKHOLM (Reuters) - House buyers in Sweden have never had it so good, at least by some measures. But cheap credit and spiraling prices may be creating a bubble - one that could send the country's economy reeling when it bursts.

Sweden now has one of the fastest growth rates of any developed economy. Inflation is near zero and official interest rates are below zero. Home buyers can take advantage of interest-only loans and a variety of tax breaks.

On the other hand, consumer debt is about 175 percent of disposable income, one of the highest rates in Europe. Housing prices keep rising - apartments in Stockholm cost around $6,350 per square meter, on a par with London's $6,750. Most Swedes would take a century to repay mortgages at current rates.

"The prices are just crazy," said 37-year-old Cathrin Wentzel.

She was looking at a one-bedroom, 44-square-meter flat built in the 1930s in the chic Kungsholmen area of Stockholm. It featured a fireplace and balcony and had a view of the water. Asking price: 3.8 million crowns ($446,000). Wentzel reckoned she would need to offer at least 500,000 crowns more than that.

"I won an auction last week, but even though I offered 900,000 crowns more than the starting price, the seller withdrew the apartment," said Wentzel, who runs her own marketing company. "They did not think the bid was enough."

The Riksbank's decision this week to keep rates lower for longer just extends a bonanza of cheap money that has fueled the real estate prices and borrowing. But the central bank is caught in a dilemma.

Leaving rates so low only encourages home buyers. But raising them enough to tamp down the housing frenzy would also slow an inflation rate that is already flirting with zero and has dipped into outright deflation.   Continued...

The Swedish national flag flies in front of a house near the town of Sodertalje, south west of Stockholm, Sweden, in this June 5, 2014 file photo.  REUTERS/Cathal McNaughton/Files