The Great Scandinavian Housing Bubble

House prices in Scandinavia have gone up more or less continuously since the early 1990s.

Last time house prices crashed in Norway was in 1986. Back then, the price of an average house fell by 50% before finally reaching the bottom, and it was not before 1996 that house prices reached the same nominal price as at the top some ten years earlier.

Adjusted for inflation, house prices in 1996 were still substantially lower than in 1986.

Today, we are witnessing a similar crash to the one we saw in 1986. How far the house prices will fall in nominal terms remains to be seen. However, a fall of at least 50% relative to gold is almost certain. The house bubble today is larger than the one in 1986. The fall, relative to sound money, is therefore very likely to be bigger.

The culprit behind the inflated house prices is of course the central banks in Scandinavia.

Faced with an appreciating currency, relative to the Euro, Scandinavian central bankers decided to lower interest rates. This is a move believed to have the effect of lowering the value of a currency. However, much to the central bankers' surprise, lowering the interest rate did not weaken their currencies.

The Scandinavian currencies remained strong throughout the period in which their central bankers kept lowering the interest rate, and the reason for this is quite obvious in retrospect.

The low interest rates made it increasingly lucrative to buy real estate. House prices started to rise. Foreign investors took note of this. Wanting to get into the action, they moved their cash from under-performing countries to the much better performing Scandinavian countries.

To do this, the foreign investors had to buy local Scandinavian currency.

Rather than deterring foreigners from buying Scandinavian currency, the low interest rates encouraged foreigners to do so. The lower the interest rate, the more investors piled up on real estate.

The result of this has been a real estate bubble far larger than any one ever recorded in Scandinavian history. In Sweden, the inflation adjusted peak of the current bubble was more than twice as high as previous peaks.

Now that the peak is in and house prices are falling, Scandinavian currencies are rapidly falling too.

Foreigners are selling real estate. The money that they obtain is sold for other currencies.

The central bankers are now in a predicament. Having encouraged people to take on debt, household debt is at an all time high. If interest rates are moved up, a lot of people will get in trouble. However, if interest rates are kept low, foreigners will keep on selling their currency. Import prices will go up, and everybody will be poorer.

Having failed to make the Scandinavians any better off during the boom, the central bankers are now in a situation where they will either make everybody worse off by keeping interest rates low, or make every house owner a lot worse off by rising interest rates.

Reflection in a soap bubble

By Brocken Inaglory. The image was edited by user:Alvesgaspar - Own work, CC BY-SA 3.0, Link