Sweden has long had one of Europe’s hottest housing markets, but prices have tumbled and are not set to recover for a long time, according to Danske Bank. Economists are also warning of a “false dawn,” as recent housing data suggests a slight uptick in prices.

Danske previously projected a 20% drop, peak to trough, in Swedish house prices. It has since revised that figure to a 25% dip, meaning prices are currently “still only half-way to the bottom,” according to Danske Bank’s Nordic Outlook report.

Prices are currently down by 12% from the peak recorded in February last year, according to the bank’s data.

Danske’s rival bank Nordea maintains its previous forecast of a 20% dip in house prices, peak to trough, but says that the risk is larger to the downside, rather than to the upside.

“We’re still very concerned about the housing market, and we think that there’s a lot of downward pressure still for house prices,” Gustav Helgesson, an analyst at Nordea, told CNBC.

House price data released by property statistics company Svensk Maklarstatistik Thursday showed house prices in Sweden increased for a second consecutive month in March, which was not in line with what many economists expected.

The data shows house prices rose by 1% compared with February. When adjusted for seasonality, the increase translates into a small decline of 0.3%, with house prices typically growing slightly at the start of each year.

The figure came as a “small surprise” to Jens Magnusson, chief economist of Swedish bank SEB.

“I was expecting a lower number [on Thursday],” Magnusson told CNBC, describing the positive momentum as “a little bit premature.” SEB is maintaining its forecast of a 20% drop in Swedish house prices, but with downside risk.

Nordea had also anticipated a decline in prices in the first few months of 2023.

“We’re quite surprised by the unchanged price development in the beginning of the year in non-adjusted figures … I would call this a false dawn,” Helgesson told CNBC before the latest house price data from Svensk Maklarstatistik was released. “We’re not out of the woods.”

The National Institute of Economic Research recently adjusted its forecasts to a more shallow dip in house prices, now seeing a drop of between 15% and 20% — compared with its previous projection near the higher 20% end of that decline range. Despite being more positive, its outlook is still “really pessimistic” according to Emil Brodin, economist at the NIER.

“Our forecast is the bank will increase rates again and that the house prices will continue to decline, but not as much as they did in 2000 and in the autumn,” Brodin told CNBC.

A lower volume of new listings and low transaction levels contributed to the higher-than-expected prices.

The Swedish housing market is particularly sensitive to interest rate movements, as around half of mortgages are financed with variable rates and many people have short-term fixed rates.

Sweden’s central bank unexpectedly started hiking its interest rate in April 2022, just three months after the bank signaled it would not be lifting rates.

Rates then continued to increase, jumping from 0.25% to 0.75% in July, then to 1.75% in September, 2.5% in November, and finally to 3% in the most recent policy statement. 

Nordea anticipates a stabilization of the housing market in the second half of 2023, projecting further rate hikes until June. It then expects a policy rate plateau for the rest of the year.

The bank sees a “calm price development” in 2024, when house prices will start to rally but won’t see a dramatic return to earlier heights.

The SEB anticipates house prices will start to recover in the summer or early fall this year and would be “surprised” if the housing market were to stabilize before then.

“We remain slightly pessimistic on the housing market for now,” Magnusson said.

Danske Bank also estimated Sweden’s central bank will reach the end of its hiking cycle by the summer, prompting house prices to start to stabilize. But it will be a long time before they fully recover.

“It will probably then be a couple of years before housing prices return to the previous trend seen in 2005-2019,” Danske Bank wrote in its report.

The bank doesn’t expect the central bank to lower its policy rate until inflation reaches its 2% target – a significant reduction from its current rate of 12%.

“The bank probably feels under immense pressure from inflation not showing any signs of peaking and actually accelerating,” Danske Bank wrote.

The Riksbank — Sweden’s central bank — declined to comment when contacted by CNBC.