Are Swedish House Prices Too High?

“Are Swedish House Prices Too High?”, June 2022, paper.

Abstract

Some international organizations state that Swedish house prices are too high relative to fundamental determinants. The European Systemic Risk Board, with estimates provided by the ECB, states that owner-occupied housing is overvalued by about 55% (ESRB, 2022b), the largest overvaluation in the EU and EEA. The European Commission (2021c) states that the overvaluation is at least 30%. These assessments affect the warnings and recommendations that the organizations issue for Swedish economic policy and determine the negative house-price shocks in stress tests of Swedish banks by the European Banking Authority. 

But the large overvaluation assessments are mainly due to the use of unreliable and misleading indicators, namely the deviation of price-to-income and price-to-rent ratios from their historical averages. They disregard the role of mortgage interest rates and lack scientific support. According to a large housing literature, the user cost of housingnot the purchase price – is the appropriate measure of the cost of living in owner-occupied housing, the cost of the housing services that the dwelling delivers. 

New improved estimates of user costs for Swedish owner-occupied houses are constructed. The user-cost-to-income ratios have fallen over time and are now substantially below their historical average, even after recent mortgage-rate increases. With an appropriate correction for a preference-shift toward larger and better homes during the covid crisis, also user-cost-to-rent ratios have also fallen substantially below their historical average. This is inconsistent with any overvaluation. If anything, it points to undervaluation of Swedish housing. This is indeed consistent with the everyday experience of Stockholm owner-occupiers of apartments, namely that they live more inexpensively than renters in rent-controlled apartments.

It is shown that the problem of misleading indicators and overvaluation assessments is not restricted to Sweden but concerns several countries in the European Union. The relevant and informative indicators presented in the paper allow more reliable and appropriate  valuation assessments.