The impending state failure, which is characterized by the growth of predatory mortgage lending, unregulated markets, a massive amount of consumer debt, the creation of "toxic" assets, and the collapse of home prices, is likely to have a significant impact on the real estate market. The recent episode of low-interest rates has led to soaring stock and real estate markets, exacerbating wealth inequality. In addition, the rise in property prices could cause medium-term inflation expectations to increase, particularly in emerging market and developing economies. The COVID-19 pandemic has further complicated the situation, requiring all levels of government to act in a context of great uncertainty and under heavy economic, fiscal, and social pressure. In Sweden, the central bank's fight against inflation has contributed to a 15 percent drop in home prices.
In the short term, the state failure is likely to cause fluctuations and inflation in the real estate market. The Federal Reserve's response to the 2008 financial crisis, which involved lowering interest rates and purchasing large amounts of securities, has led to concerns about inflation. Elevated inflation is expected to persist for longer, which could lead to rising interest rates and have implications for emerging market and developing economies. The fluctuation in the real estate market is likely to have a negative impact on homeowners, particularly those who have taken on significant debt.
In the long term, the state failure is likely to lead to historically low bottom prices for real estate in Sweden and northern Europe. The collapse of home prices and the creation of "toxic" assets have created an environment that is conducive to a real estate market crash. The impact of the state failure on the real estate market is likely to be far deeper than the 2017 subprime crisis. The possibility of historically low bottom prices for real estate in Sweden and northern Europe could have significant implications for the economy and society as a whole.
By Roger K. Olsson