Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media - although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.

The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody's Investors Service concludes that, from among the three countries, Sweden is most at risk of an - ultimately unsustainable - asset bubble…

"The Riksbank has not been successful in engineering higher inflation, while Sweden's GDP growth continues to be among the strongest in the advanced economies," says Kathrin Muehlbronner, a Senior Vice President at Moody's.

"At the same time, 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 October 2016, the Riksbank’s Governor, Stefan Ingves, spoke in grave terms to the FT about the impact of negative rates on house prices.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

Last month, we revisited Sweden’s housing bubble (see here) pointing out.

…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.

On Monday, Reuters reported that SEB’s Housing Price Indicator suffered its second biggest ever drop this month.

Swedes turned less optimistic on the housing market in November, a report showed, after figures suggesting a long run of price rises may be coming to an end amid signals that authorities will squeeze mortgage borrowers to reduce the risk of a crash.

Monday’s Housing Price Indicator from banking group SEB posted its second biggest drop ever, declining by 39 points and lagging only a steeper fall 10 years ago. According to SEB, 43 percent of households expect prices to rise over the coming year, down from 66 percent the previous month. The number expecting prices to decline doubled to 32 percent.

The Reuters piece quoted SEB saying that the indicator signaled a slowdown but “does not yet signal outright declines”. A day later and we have clear evidence of outright declines. Here is a summary of the key prices changes for October 2017 versus the previous month in the NASDAQ OMX Valueguard-KTH Housing Index - known as the HOX.

• Prices for housing prices in Sweden as a whole declined by 3.0% versus September;
• House prices in Sweden fell by 3.2% and apartment prices by 2.8%;
• Stockholm house prices fell 4.0% in October and apartment prices by 3.4%; and
• Gothenburg house prices fell by 1.6% and apartment prices by 1.2%.

With the market starting to crack, we can rely on the regulators, as usual, to take action after the fact. From a Reuters report yesterday.

Sweden’s financial watchdog has proposed a further tightening of mortgage repayment rules to keep a lid on spiralling debt that could spell danger for the cooling property market and the wider economy. A surge in building and tougher mortgage rules have put the brakes on a 20-year bull run in the Swedish property market, but authorities remain concerned that debt levels among the highest in Europe are still rising. The country’s Financial Supervisory Authority (FSA) on Monday proposed new rules to force the biggest borrowers to make larger mortgage repayments in an effort to reduce risks.

“Prices have risen more than 30 percent in the past three years and the risk level is elevated,” FSA chief economist Henrik Braconier told reporters.

Reuters reported this comment from Braconier.

“It is not a catastrophe if prices fall a little.”

And we agree…but what if they fall a lot.