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Sweden’s housing market “may already be turning” but the country’s banks should be able to ride out any downturn despite rising investor jitters in recent weeks, according to Moody’s.
The ratings agency said a potential stumble in housing markets poses “some risk” for banks in Sweden, Canada and Australia, after a decades-long boom accompanied by rapidly-rising household debt.
Sweden has led the way, with property prices rising an average of 144 per cent between 2000 and 2016, but recent data suggest the trend may finally be coming to an end, with prices beginning to fall and developers pulling some plans to sell new apartments. Investor concern about the potential impact of a downturn has exacerbated the recent decline in the Swedish krona, and prompted the heads of two of the country’s largest banks to move to reassure investors that their institutions can absorb the impact of any downturn.
Analysts at Moody’s supported the banks’ assertions that their conservative mortgage books will limit some of the damage from any downturn, noting that a “substantial correction would lead only to limited losses on mortgages, as the banks benefit from a range of safeguards”.
However, the bigger danger, according to the ratings agency, is that a housing downturn would likely cause a broader economic slowdown that could have a more serious impact.
A prolonged period of very low economic growth, or an outright recession, would lead to weaker confidence, household spending, investment (including construction) and an uptick in unemployment. This would affect companies and households’ repayment ability. This would also likely impact the commercial real estate segment, which tends to be negatively affected by price declines on the residential housing market, and consumer-sensitive corporations. We expect banks to generate higher loss rates on CRE and other corporates than banks would incur on their mortgage books.
The ratings agency identified many of the same risks in Canada and Australia, though house prices have not yet started to turn there.
Still, it said that banks in all three countries are currently very profitable, which should be enough to cover overall losses “in most scenarios”. Assuming earnings remain unchanged, Moody’s said Sweden’s banks could handle loan losses of up to 1.4 per cent – from just 0.1 per cent at the moment – before eating into their capital.