Rising interest rates combined with high household indebtedness worldwide could cause a general collapse in real estate markets. The case of Sweden is particularly interesting because it could generalize to a large part of the developed world.

Sweden’s fall in house prices accelerated in October as the Nordic country gripped the worst real estate crisis in three decades. Fueled by soaring inflation and rising rates, property prices have fallen 14% from a peak reached the start of the year. The crisis is unusual in a country where previous corrections have been superficial and short-lived, and many young homebuyers have never experienced a property crash.

As in Ireland in 2007, the price fall has yet to start in a certain number of countries. But the level of transactions fell extremely low, fueling the risk of a brutal crash. With the risk of a recession, the situation could quickly turn into a veritable economic cyclone within one or two quarters.

In October, the HOX Sweden house price index fell by 3% compared to the previous month. The declines are driven by single-family homes, particularly vulnerable to soaring electricity prices. A report released last week by the Maklarstatistik organization of estate agents showed that the fall in prices is twice as significant in the southern electricity areas, which suffer from a deficit and high tariffs, as in the far northern part of the country with an abundance of hydroelectric power.

Another aggravating factor is the energy crisis affecting Europe today and which is expected to persist or even worsen in 2023. Despite this, the Swedish central bank is expected to raise its key rate by 75 basis points at its next meeting on November 23, following an entire one percentage point hike in September.

In 2008, Irish property prices collapsed by more than 50%, causing a general crisis in the country, with GDP falling from +5.31 in 2007 to -4.49% in 2008. The ECB should reflect on this example before embarking on a rate hike that aggravates an already tense situation.