Nordic Heat Wave: Recent Housing Market Developments in Denmark and Sweden

Notwithstanding comparable macroeconomic and financial conditions, institutional settings and housing policy frameworks, Denmark’s and Sweden’s house price dynamics have differed markedly during the past decade. This note analyses recent housing market developments in these countries, explains the policy responses given by the authorities and provides policy conclusions. While there is a potential and growing overvaluation of house prices in Sweden accompanied by strong rise in household indebtedness and growing share of vulnerable mortgage loans; house prices in Denmark have been growing more in line with their fundamentals, accompanied by gradual deleveraging of households and a declining share of vulnerable mortgage loans. Related policy challenges appear to be more pressing for Sweden, but policy gaps exist in both countries with respect to mitigating the risk from excessive house price movements. Most importantly, both countries would benefit from the reduction of the high tax incentives for building up housing debt, from further measures to ease restrictions on the housing supply side and the revision of the property tax system in Sweden. Regional house price divergences need to be closely monitored particularly in Denmark. The large share of vulnerable mortgage loans, i.e. variable, interest-only (non-amortised) mortgage loans, particularly if combined with high debt-to-income levels poses a risk by making a significant proportion of households in both countries vulnerable to unexpected changes of macroeconomic conditions.