Swedish households may be forced to sell their homes for less than the purchase price, experts warn.

Record-low interest rates have caused Swedish housing prices to swell rapidly. Experts now warn of declining prices and that many households may be forced to sell their homes for less than the purchase price.

Housing prices in many parts of Sweden, such as greater Stockholm, is back at last year’s peak and a clear majority of the Swedes believe real estate prices will continue to swell during the upcoming year. As long as the Riksbank keeps stimulating the financial markets with low interest rates households will get more and more used to cheap loans – which boosts prices further.

“For many households it’s difficult to realize how it would be if the interest rate level was considerable higher and the loans much more expensive”, Cecilia Hermansson, Chief economist at Swedbank, told The Swedish Wire, warning that politicians and the central bank are laying the foundation of future problems.

On Tuesday Sweden’s financial watchdog warned that “a large number of households may experience payment problems” due to an overheated housing market. Since interest rates are expected to increase sharply within the next one to two years, and unemployment is continuing to rise, a large number of households may experience payment problems.

“It is likely that such a scenario would press housing prices downward. Households may then be forced to sell their homes for less than the purchase price”, the Swedish Financial Supervisory Authority wrote.

“The largest risks are naturally shouldered by new lenders entering the housing market with little or no capital to contribute”.

Annika Winsth, Chief economist at Nordea, told The Swedish Wire that the Riksbank must halt its “crisis politics” and adjust interest rates to a gradual recovery of the economy.

“The Riksbank has to take a look at the housing market. There’s a serious risk of future difficulties”, she said.

The country’s export-driven economy gives signs of recovery as more and more industrial companies state that the decline in demand has bottomed out and that they are now beginning a gradual recovery.

Still, central bank Governor Stefan Ingves has not signaled that the key interest rate will be adjusted but rather kept at a record-low 0.25 percent until autumn 2010 “to enable a stable development on the economy “ and spur consumer prices after half a year of deflation.

Finance Minister Anders Borg said last week that the housing market poses a “serious” potential risk to the economy. Even Svante Öberg, the Riksbank’s First Deputy Governor, recently warned of a “risk that a bubble will build up and eventually burst”.

Economists at Citigroup in London has also warned that the Swedish central bank’s plan to keep interest rates at a record low risks fueling a house price bubble.

“They’re in some kind of denial,” Tina Mortensen, an economist at Citigroup, told Bloomberg. “I’m quite surprised that they continue to keep this very dovish tone.”

According to Nordea’s prognosis the Riksbank will make its first hike of the interest rate in April. Then there will be four gradual increases until the key rate reached 2 percent autumn 2010. Nordea’s prognosis is in line with other Swedish banks’ estimates.

Two weeks ago Norway became the first European country to raise interest rates this year in the global financial crisis. The Norwegian central bank raised its key demand deposit rate by a quarter of a point to 1.50 percent, the first step in what is expected to be a gradual tightening in monetary policy.