Monetary policy and behavioural economics

Behavioural economics perspectives on the rise in inflation in 2021-2022

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Behavioural economics perspectives on the rise in inflation in 2021-2022

Falling prices and low turnover in the housing market

Published: 10 April 2024

For a long time prior to 2021-2022, interest rates had been very low and on a declining trend. During this period, the Swedish housing market had experienced strong price increases. During the pandemic, prices rose considerably, probably due to household saving patterns, as described above, and more time spent at home. The Riksbank policy rate remained unchanged at zero per cent, which meant that mortgage rates remained at about the same level as before.[42] See Sveriges Riksbank (2021) for a description. When the Riksbank began raising the policy rate in the spring of 2022, there was considerable uncertainty about how the housing market would react. It came under pressure from several sources, including rising interest rates and changes in behaviour as the pandemic faded – less time was spent at home.

Prices then fell over the course of 2022 but then levelled off, while turnover fell. Many homeowners who were about to move were faced with a completely new situation. The theory of reference values and loss aversion fits qualitatively well with what happened, as it predicts that falling prices are associated with low turnover (see Figure 3). According to this hypothesis, many households who bought when prices were high in previous years would have had difficulty selling their homes at a loss. At the same time, households that bought earlier and benefited from the earlier price increases would have been able to sell their homes more easily.

 

Figure 3. The housing marketAnnual percentage change (left) and thousands (right)

Note: Housing prices refer to the HOX Sweden price index.Sources: Valueguard and Svensk Mäklarstatistik.