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July cut didn't boost house market sentiment further

SEB’s Housing Price Indicator for Sweden declined marginally in August to 62, from 64 in July. 70 per cent of households expect home prices to rise in the coming year.

Given the Swedish central bank’s aggressive 50 basis point rate cut at the July 3 meeting it is a bit surprising that sentiment declined. It should, however, be observed that the level in August was in parity with the historical peak. Also, falling equity markets probably exerted downward pressure on expectations. The survey was conducted during July 29-Aug 6, i.e. coinciding with recent rising geopolitical risks and the setback in global stock markets.

Uncertainty about rising lending costs from regulatory measures may also have weighed on sentiment. Signals during summer suggest that stricter rules for amortisation are becoming increasingly likely as a way to dampen households' appetite for new lending. A continued decline would likely be a relief for the Riksbank, the central bank, and mitigate concerns that current very expansive monetary policy will contribute to an even faster build-up of debt among Swedish households.

Close to record levels

At current levels the Housing Price Indicator remains close to the all-time-high level of 65 in June 2007. The indicator continues to signal a strong momentum on the Swedish house market and suggests that home prices may accelerate further in the short term. Rising optimism on home prices has up until now primarily been reflected in rapidly rising prices on flats while prices on houses have lagged. Now, house price trends appear to have picked up with prices increasing by 6 per cent year-on-year in July, according to recent data from Statistics Sweden.

The survey also shows that households have downwardly adjusted their rate expectations following the repo rate cut to 0.25 per cent. Households now expect the repo rate at 0.45 per cent (July 0.84 per cent) in a year's time, i.e. slightly above what's reflected in for instance the Riksbank's own repo rate path which shows rates unchanged for most of next year. Interest to fix rates remains low at 4 per cent.