So I recently wrote an article for The Conversation in which I describe how the capital share of GDP has increased across advanced economies. This is an important issue because capital income is highly concentrated in society. More than 80% of the U.S. stock market value is hold by the top 10%. The increase in the capital share effectively means that capital income is growing at a faster rate than labor income, which leads to higher inequality. A big driver of the capital share seems to be the real estate sector. Historically, real house prices have been fairly constant for a very long time, meaning that house prices have not increased faster than the rate of inflation, thus leaving little room for real gains. The situation changed dramatically in the postwar period. Real house prices have more than tripled in recent decades across advanced economies. The graph below shows the average real house prices for a smaple of 17 advanced economies from 1870 until today.
1) Asset price bubbles are fairly unpredictable, at least when it comes to the exact timing of the burst.
2) Rapid credit expansion seem to be the best predictor of asset price bubbles. It is not very surpising that credit booms can be associated with speculative frenzies in asset markets like stocks and real estate. Again, the exact timing of the bust, however, cannot be predicted. In the words of Keynes: "The market can stay irrational longer than you can stay solvent."
3) In that sense, Sweden seems to be at a relatively high risk, given that the country experienced rapid house price appreciation as well as a large increase in private leverage at the same time.
4) While some people "predicted" the American housing bubble, other countries have experienced much stronger price increases without a subsequent collapse. A few experts have predicted an Australian housing bubble for more than a decade, but so far prices just continue to appreciate. Of course, it is to be expected that some point in time house prices might fall, maybe even significantly. This, however, will not prove the prediction of a bubble right. Unfortunately, the media and society reward wrong predictions. If one guy predicts a housing bubble burst for 10 years in a row and in year 10 it finally hapens, everybody is saying: "This guy knew it all along", even though his success rate is nly 10% (he made 9 false predictions). A more reasonable person predicts no hosuing burst and he is right 9 times out of 10, a success rate of 90%, while in the 10th year something quite unpredicatable happens, a global financial shock or a crisis, leading to large decline in house prices. Media and society reward the first person and punsih the second even though it should be the other way around.
What could lead to a Swedish house price bust?
1) Sweden is a small and open economy. A large international shock (like a global trade war or a financial crisis in the Eurozone) would have a significant impact on the economy, which in turn could lead to a domestic house price bust.
2) The Swedish Riksbank's interest rate is still below zero. However, inflation is now rapidly apporaching the Riksbank's 2% target. An increase in interest rates will definitely have a negative effect on house prices as well as make credit more expansive, which could exacerbate the impact. A rapid tightening cycle might also lead to an economic downturn, which again could lead to a bust in the housing market.
However, I strongly believe that the Riksbank can start a moderate tightening cycle without creating a recession and/or a housing bust. Furthermore, it should be noted that real estate prices have appreciated the most in the large agglomerations like Stockholm, Gothenburg, and Malmö. In these areas supply has been very inelastic whereas demand continues to increase, thus explaining higher prices. In the end I believe that a big part of the housing price increase is simply a demand-supply story and not a bubble story as everybody else continues to insist. Predicting a housing bubble year after year without any evidence whatsoever is not helpful. One day prices will fall again, which does not mean though that the bubble story was ever right to begin with. Goldman's estimate of a Swedish housing bust seems to be way overblown.
Source for the house price and credit data:
- Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. "Macrofinancial History and the New Business Cycle Facts." In NBER Macroeconomics Annual 2016, Volume 31. University of Chicago Press, 2016.
- Knoll, Katharina, Moritz Schularick, and Thomas Michael Steger. "No price like home: Global house prices, 1870-2012." (2014).