Is The Scandinavian Property Bubble Scare Over?

Over the last few years, the Scandinavian region has been criticized of having set things in motion for a potential property bubble that could burst in few years. Three of the region’s main capitals have experienced a ramp-up in housing demand which has led to an increase in property prices.

This comes despite the fact that the Scandinavian economy is currently undergoing one of the challenging times in several years after the central banks of the three countries (Norway, Sweden, and Denmark) lowered base interest rates to record lows. In fact, the base interest rate in both Sweden and Denmark has already entered negative territories.

This has encouraged investors and interested home buyers to engage aggressively in the property market thereby intensifying the bid activity. In Norway, the base lending rate is currently pegged at 0.50% after it was lowered from 0.75% in March this year. Low interest rates lead to lower lending rates and by doing a simple perusal of mortgage rates on this Norwegian loan broker supports the case with offers starting at as low as 7.5%.

Ideally, this means that due to the affordability of investment capital, investors are willing to bid higher for properties by using the spare change they save from the low cost of capital. However, this has raised concerns over the potential long-term effects on the Scandinavian economy. Although the three nations have somewhat indicated that they will keep the rates low for the next few years, an unexpected uptick could have devastating effects on borrowers.

As an example, when the US increased interest rates from 0.25% to 0.50% in December last year, lending rates increased from 3.25% to 3.50%. This means that the cost of borrowing increased in tandem with the increment in the base interest rates.

The same could happen for one or two of the Scandinavian countries thereby leading to potential credit risk, which in turn could lead to defaults. This is what analysts are fearing could cause a property bubble in the Nordic region.

“We are worried about people not being aware that the situation we are currently in is not a normal situation [for interest rates],” Steen Bocian, chief economist at Danske Bank told reporters last year. “The longer it lasts the more people will get used to it. It is this change in expectations that builds up a bubble.”

On the other hand, Hilde Bjørnland, a professor of economics at BI business school in Oslo expressed concerns saying that what was really worrying was “that we will have a recession and the housing bubble will burst and the recession will be much worse.”

About 14 months down the line, things appear to have cooled a little. So is the Scandinavian property bubble scare finally over? Or, as Bocian pointed out, have people become used to the new situation? Whichever the case, it sure does seem like the new normal could still lead to a major bubble burst in the property market should the economies of the three Scandinavian nations continue to dwindle.

Norway has tried to toughen lending rules and this is demonstrated by the sampled lending rates, which vary from 7.5% to about 8.99% versus a base interest rate of just 0.5%. This compares to U.S. lending rate of 3.5% and a base interest rate of 0.5%.

However, the relatively high Norwegian mortgage rates also have flipside effect on the economy. Interest is a tax deductible expense, which means that consumers could take advantage of this to invest in the property market thereby lowering taxable expenditures.

Conclusion

In summary, the Scandinavian property bubble may appear to be less threatening compared to the situation a year ago but the appearances could be deceiving, which means that the three economies are not off-the-hook yet.