Elections, Interest Rates and a Strong Housing Market

What will matter most for the housing market going forward, the election outcome or interest rates? Erik Holmberg, analyst at Hemnet, shares his view on how politics, inflation and upcoming rate hikes may affect the housing market, and why it remains strong despite the uncertainty.

Elections, Interest Rates and a Housing Market Showing Strength

A general election, record prices and upcoming rate hikes. Right now there is a lot that could potentially affect the Swedish housing market. But the question is what will actually matter most.

Government formation is still ongoing, and it is not yet clear which policies will shape the coming years. There are of course differences between the parties' housing policies, not least in how they view the rental market and how housing construction should be stimulated.

In the short term, however, it is hard to see these issues having any major direct effect on the housing market. More important is the broader economic policy and how household finances develop. When more people are in work and households have greater financial margins, it usually also creates better conditions for a well-functioning housing market. Moderately rising house prices can also make it easier for people to act on their need to move.

Opinions naturally differ on which parties or political blocs have the best policies to achieve this. What they have in common, though, is that much of economic policy revolves around household finances.

Interest Rates Outweigh the Election

For the housing market, monetary policy is often even more important than fiscal policy. In other words: what the Riksbank does with interest rates.

And there, much suggests that we are facing a period of rising interest rates. The Riksbank has signalled several hikes, while other forecasters expect that rates may need to be raised further.

In a normal economic climate, this need not be dramatic. Rate hikes are often the result of a strong economy, where the central bank tries to dampen demand and keep inflation under control.

This time the picture is somewhat more complicated. Economic development is relatively good, but at the same time there is inflationary pressure that partly comes from rising energy and oil prices. This means that rates may need to rise even though inflation is not driven solely by an overheated Swedish economy.

That is an important difference.

How Much Can the Housing Market Handle?

The question, of course, is what rising interest rates mean for house prices.

My assessment is that today's housing market is showing such strength that it should be able to handle two or three rate hikes without any major drama. The situation becomes more uncertain if there are significantly more hikes than that – especially if they are driven by higher inflation and costs rather than by a stronger economy and rising incomes.

In such a scenario, household margins can be squeezed from several directions at once. That also increases the risk that house prices start falling again and that activity in the market declines.

But that is not where we are today.

On the contrary, the housing market is currently showing clear signs of strength. Selling times and supply are decreasing, the number of sales is at historically high levels, and apartment prices reached a new record level in September.

The Real Risk Scenario Is Further Away

The scenario that would be far more worrying for the housing market is stagflation, a situation where high inflation is combined with weak or negative economic growth.

In such a situation, the Riksbank ends up in a difficult position. Interest rates may need to be raised to fight inflation while the economy is already weak. For the housing market, the combination of rising rates, squeezed households and a deteriorating labour market could have far greater consequences.

However, that risk appears considerably smaller today.

There is therefore reason to follow both politics and interest rates closely going forward. But when it comes to the housing market, it is probably not the government formation itself that will determine the development. Far more important will be how the economy, inflation and above all interest rates develop.

And so far, the housing market is entering that period from a position of clear strength.