In September of 2015, not long after Sweden followed the SNB and ECB in going "full NIRP", we warned that "Sweden Goes Full Krugman, Gets Massive Housing Bubble", in which we first showed the unprecedented surge in Swedish home prices, which have been the one asset class to "benefit" the most from the Riksbank's ultra loose monetary policy hoping to stimulate inflation, even as broader economic inflation failed to materialize.
Since then things turned increasingly more surreal for Swedish home prices, culminating with a very explicit warning from Moody's in March of 2016, in which the rating agency warned that as a result of NIRP, the country is most at risk of an "ultimately unsustainable asset bubble."
... the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent -- in the form of rapidly rising house prices and persistently strong growth in mortgage credit", adds Ms Muehlbronner. In Moody's view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends. In all three countries, households are highly leveraged, and while they also have high levels of financial assets, returns on these assets will be under increasing pressure if the negative interest and yield environment persists.
Moody's also said that "the Riksbank will find it difficult to achieve its objective of significantly pushing up consumer price inflation in a deflationary global environment, while the sustained and strong growth in mortgage lending and house prices risks leading to an (ultimately unsustainable) asset bubble."
Nearly a year and a half ago, we concluded that we expect "this latest warning to be soundly ignored because after all, what else can the central banks do in this global coordinated effort to stimulate economies with ever more debt, which by definition can only work if rates are not only at zero, but increasingly more negative."
Sure enough, since then nothing has changed in Sweden's monetary policy, and at its latest meeting, the Riksbank kept its repo rate at an all time low of -0.50%.
In some ways one almost commiserates with the Swedish Central Bank and its governor Stefan Ingves, the sad looking gentleman shown below...
... who over the past few years has lost monetary independence, becoming a hostage to the monetary policies of his neighboring central banks, especially the ECB. This was on exhibit most recently one month ago, when the Riksbank once again failed to even hint at a trace of hawkishness, while keeping its rate at -0.5% (even lower than that of the ECB).
And while markets have become increasingly convinced that Sweden’s central bank needs to abandon its extreme dovishness as the economy shows signs of overheating - Sweden's inflation recently and finally rose above the Riksbank’s 2% target - suspicions that the ECB will stick with its negative rates well into the future piles further pressure on the Riksbank to keep its own interest rates on hold.
You see, Sweden’s small size compared to the eurozone complicates the central bank’s decision-making: Ingves has repeatedly cautioned that making a move before its larger neighbor risks an unacceptable rally in the krona which could unleash a deflationary tsunami in Sweden... oh and lead to devastating downstream effect on the country's various asset bubbles.
Of course, going back to our discussion of Sweden's housing market, nowhere would the bursting of Sweden's unprecedented asset bubble be more concerning than in the country's home prices. And to get a sense of just how bad it could get, here is a chart from Nordea's Andreas Wallstrom, showing nearly 140 years of real house prices in Sweden's capital, Stockholm, with an emphasis on the exponential surge in the past 2 decades. As Wallstromg sarcastically points out, the big irony in this is that "the current monetary policy regime, which aims for "price stability", started in 1995."
Ah yes, presenting "price stability", aka the world's biggest housing bubble.
Perhaps the biggest irony here is that even Ingves knows how this ends. As the FT reported over two years ago, "Sweden’s central bank governor has warned that new crisis-busting tools policymakers are embracing around the world to counter asset bubbles and other financial dangers are susceptible to political inaction and turf wars. Stefan Ingves, governor of the Riksbank, said so-called macroprudential policies — such as capital requirements and leverage limits — had so far failed in Sweden where house prices and personal debt levels have soared to record levels."
“Macroprudential, particularly if markets are going up, up, up is about saying ‘no’. Apparently that’s hard to do,” Mr. Ingves said.
Ironically, to nobody more so than to Mr. Ingeves himself. And, as one senior banker added in September 2015, “To have such a low interest rate at the same time as Sweden has rather good economic growth and rapid increases in house prices — it seems crazy."
Two years later, the Stockholm housing bubble - as well as the global asset bubble - is the biggest it has ever been.