New Ekonomistas post (in Swedish). Here is an English translation.

There is a lot of talk about housing prices in Sweden. As Jesper Hansson has noted in an Ekonomistas post recently (the post is in Swedish), the news becomes misleading if it reports housing-price growth that neglects the seasonal pattern and seasonal adjustment. It is also common to show graphs of nominal housing prices that give a misleading impression. Graphs of real housing prices and housing prices in relation to disposable income give a more balanced impression.

Figure 1 (as usual, click on the picture to see a larger one) show a common figure over housing prices according to the so-called HOX index by Valueguard. The figure shows price indices for nominal prices of owner-occupied houses, condominiums, and a total value-weighted price index for owner-occupied houses and condominiums together.

Since the index is set to 100 for 2005 (when the series started), the figure gives a rather dramatic impression, especially over the price development of condominiums. From 2005 to now nominal prices have increased by 100 percent for condominiums and by 50 percent for owner-occupied houses. Total nominal housing prices have increased by 62 percent. The value of owner-occupied houses is larger than that of condominiums, so the owner-occupied houses get more weight than the condominiums in the total index. If you want to scare someone with price developments for housing, this is a good picture. On average per year, prices of condominiums have increase by 8,5 percent, prices of owner-occupied houses by 5 percent, and total prices by 6 percent.

However, nothing says that 2005 is a particularly relevant reference point. The abolished wealth tax and strongly reduce property tax with a ceiling on the municipal property tax has had a big effect on housing prices. These changes have probably had their full effect by 2007, which makes it a relevant reference point. Assume that you take August 2007 as a reference point and set the index at 100 for that month. We see the result in figure 2. It shows that, during the 6 years from August 2007 to August 2013, total housing prices have increased by 15 percent, consisting of 12 percent for owner-occupied houses and 23 percent for condominiums. On average per year this is 2.4, 2, and 3.5 percent, respectively. These are more moderate increases.

But figures 1 and 2 both show nominal prices. For most purposes, real prices, that is, prices relative to the CPI, are more relevant than nominal prices. The real prices as are shown in figure 3. There we see that real housing prices have increased very little during the 6 years since August 2007, by 6 percent in total, consisting of 3 percent for owner-occupied houses and 13 percent for condominiums. On average per year, this is only 1, 0.5, and 2 percent, respectively.

We also see that real housing prices fell much from August 2007 to November-December 2008, in total by 15 percent, consisting of 13 percent for owner-occupied houses and 22 percent for condominiums. After that it took real prices one year for owner-occupied houses and two years for condominiums to recover to the same level as in August 2007.

The housing-price fall 2007-2008 can be seen as a stress test in real time of how borrowers may react if housing prices fall considerably. During the crisis 2008-2009, export, investment, GDP and employment fell substantially, while household in spite of this and the housing-price fall held up consumption pretty good. This indicates that housing-price falls need not have large consequences for private consumption.

But housing prices in relation to disposable income are at least as interesting and relevant as real housing prices. Figure 4 shows the ratio between housing prices and disposable income.

We see that prices fell substantially relative to disposable income between August 2007 and December 2008. We also see that prices relative to disposable income have not yet recovered, with the exception of prices of condominiums (flats). Total (aggregate) housing prices relative to disposable income are now a full 10 percent lower than in August 2007, a fall consisting of 14 percent lower prices of owner-occupied houses (houses) and a bit more than 2 percent higher prices of condominiums. On average per year, this is -2, –2.5, and 0 percent, respectively.

[In the original post of October 7, in figure 4 I had by mistake had divided nominal housing prices by real disposable income instead of nominal disposable income. Since nominal disposable income has increased by 30 percent since August 2007 but real disposable income has only increased by 17 percent, this makes a significant difference. Above I have now (December 7) inserted the correct figure 4 (“Flats”, “Houses” and “Aggregate” in figure 4 refer to the same as “Total”, “Owner-occupied houses” and “Condominiums” in figures 1-3).]

The main impression is undeniably that housing prices, except for the fall 2007-2008, have evolved somewhat weaker than disposable income since 2007. I consider it a reasonable assumption that housing costs and housing prices going forward in the longer run may evolve approximately as disposable income. This is consistent with the share of housing costs in consumption and disposable income being approximately constant.

It is noticeable what a different impression real housing prices in figure 3 and housing prices relative to disposable income in figure 4 give compared to that of nominal housing prices in figure 1. When it comes to assessing possible risks with how housing prices evolve, it is not enough to choose one particular picture, such as figure 1, which may give a one-sided and exaggerated picture. It is important to see the whole picture. It is as when it comes to possible risks associated with household debt. It is not enough to just look at debt – this will be misleading. It is important to look at the whole picture – at the total balance sheet of  total balance sheet of the households as well as at the distribution  of debt, assets and net worth over different income groups (links are to Ekonomistas posts in Swedish).