Nordic banks, particularly those in Sweden, are facing elevated mortgage risks as house prices in the region decline faster than elsewhere in Europe, data suggests.

Residential property prices fell 7.8% in Sweden in the third quarter, steeper than the 0.36% decline in the previous quarter, data compiled by S&P Global Market Intelligence shows. This is compared with a 1.79% decline in Norway, an 11.4% increase in Iceland and a 2.20% rise in the U.K.

House prices in most European countries, including Norway and Denmark, are set to decline in 2023, according to S&P Global Ratings, while mortgage rates increase rapidly due to central banks tightening monetary policy in the face of rising inflation.

Sweden, whose central bank aggressively raised rates in 2022 and has warned it may raise them further, is among the nations most exposed to a rapid increase in mortgage rates, in part due to a high proportion of mortgages with variable rates, according to the Jan. 11 Ratings report. European Central Bank data suggests that banks are tightening lending standards due to higher mortgage rates, crimping loan growth.

Above-average household debt — together with a predominance of variable-rate mortgages and declining house prices — is creating especially high mortgage risk in Sweden and Norway, according to a Jan. 11 Scope Ratings report.

Impact on profits

Swedish banks' profits could be impacted by lower mortgage volumes and cost pressures, Ratings warned in a report in November 2022. Mortgages represented some 36% of total lending by Swedish banks, according to the agency.

Nordic banks are among those with the highest density of mortgages in Europe, according to Market Intelligence data. Retail mortgages comprised more than three-quarters of Sweden-based Länsförsäkringar Bank AB (publ)'s total loan book, while Norway-based Sparebanken Vest's loan book is 73.73% retail mortgages.

Retail mortgages also made up 58.2% of the loan book of Swedbank AB (publ), which has the largest market share of mortgages in Sweden, at the end of 2021. All in all, Swedbank's retail mortgage loans amounted to approximately €96.35 billion. Meanwhile, peer Svenska Handelsbanken AB (publ) held about €116.11 billion of retail mortgage loans as of 2021-end.

Loan growth slowed across the Nordic region in 2022. In Sweden, loan growth was 3.7% in November 2022, down from 5.2% a year earlier.

Banks have tightened credit standards for loans to households for house purchases, according to the ECB's third-quarter 2022 lending survey. This marked the third straight quarter of tightening, driven by higher rates and higher mortgage interest rates, the survey found.