(Bloomberg) -- The pace of new home construction in Sweden appears to be stabilizing, following the largest plunge in activity since the early 1990s.

Housing starts declined by less than 5% in the first quarter of this year, according to a release from Statistics Sweden published Friday. That’s the least severe year-on-year drop in the agency’s preliminary figures in two years, and adds to signs of relief for homebuilders as the central bank has started reducing borrowing costs and interest rates are expected to fall further in the second half of the year.

In recent months, residential property prices have increased, households have become more optimistic about the value of homes and cost increases that hampered construction have moderated. While Statistics Sweden’s initial estimates are set to be materially revised, a housing-start indicator from data provider Byggfakta also shows a cautious recovery in the last six months. 

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The development is welcome news for the Swedish economy, as construction activity has been a major drag on the economy, which has contracted for four consecutive quarters. Still, following a deep slump in home values adjusted for inflation, any hopes of a rapid recovery seem overly optimistic, according to SEB AB economist Marcus Widen. 

“Even though the latest data indicate that construction activity has reached a trough, it is hard to shake the view that homebuilding is in a severe slump that probably will last through the next few years,” Widen said in a note on Friday. “The industry is warning that many workers will leave the sector and it may be difficult to retain skilled labor unless the situation improves soon.” 

The country’s National Board of Housing earlier this month said it expects that 27,000 new homes will be started this year, up from a previous forecast of 19,500. That remains far below the 67,000 new homes that the agency estimates is needed to avoid exacerbating housing shortages, and a far cry from the 71,000 that were started in 2021.  

--With assistance from Joel Rinneby.

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