Sweden’s housing market appears to be in a bubble, and the central bank, the IMF, and the main Swedish financial regulator are begging the government to intervene.
But so far it has not.
Mortgages are so cheap, and prices are increasing so fast, that the Finansinspektionen, Sweden’s financial regulatory agency, has warned that Swedes are essentially borrowing money in the form of mortgages and then placing that money in stocks and mutual funds rather than paying off their mortgage debt.
The problem is that “their behaviour could amplify an economic downturn” if stocks or mortgages go down, the Finansinspektionen has said. Falling stocks would crush Swedish consumption spending, further hurting the economy. And falling house prices could cause Swedes to liquidate their stock positions, which would in turn exacerbate the cycle.
That’s the fear, anyway.
Right now, Sweden is enjoying a glorious housing boom!
A mystery buyer just paid 104.5 million kronor (£8.2 million / $12.4 million) for the most expensive apartment ever sold in the country, a rooftop terrace in Stockholm with a view of the sea. While £8 million for a flat is small potatoes for London or New York, consider that over the past year flat prices have gone up by 20% and houses have risen by 14%, according to Finansinspektionen.
The bubble is weird and difficult to deal with because outside property, Sweden’s economy doesn’t have inflation.
Prices have been stagnant for years, and the Riksbank has set a negative interest rate of -0.35% in an attempt to flush money out of banks into the economy. The Riksbank again held rates at -0.35% in a decision last week. The Swedes seem have dumped that easy money straight into their houses.
“Financial stability remains a concern. The housing market is looking very frothy with prices up
18% yoy (and more in some regions),” HSBC analyst James Pomeroy wrote in a note to investors this week.
So the Riksbank wants the government to give the Finansinspektionen new powers to require Swedes to pay down their mortgages. “Without this, there are substantial risks for future growth and inflation,” Pomeroy said.
Here is the timeline. Bear in mind how unusual it is to hear a central bank and its colleagues repeatedly begging its government to intervene in the economy:
September 29: The IMF urges property tax reform in Sweden to moderate house prices:
High house prices and household debt increase the sensitivity of domestic demand and employment to shocks. International experience indicates that household deleveraging and wealth effects can give rise to prolonged recessions.
November 19: The Finansinspektionen says it wants the government to give it the power to force Swedes to pay their mortgages:
What concerns us is linked to our new macroprudential policy assignment. The fact that more households are taking on loans with loan-to-value ratios above 50 per cent. Naturally, these households do not stop interest and amortisation payments on their mortgages in the case of an unforeseen event, but they reduce other forms of consumption. In this way, their behaviour could amplify an economic downturn. We therefore wish to introduce an amortisation requirement [which would force Swedes to pay down their mortgage debt].
… If anything occurs to make housing prices fall, there is a substantial risk that the value of the remaining assets also declines. The idea of the amortisation requirement is not to increase the total saving, but to get households to reduce their mortgages in the long run …
November 25: The Riksbank holds a press conference, warning of the increased risk of a housing crash:
Valuations on both the asset markets and the housing market in particular are unusually high at present. This means that the probability of a fall in prices is elevated. Together with increasing indebtedness in the household sector, this has made households, the financial institutions and the financial system as a whole more vulnerable. In the event of a serious economic shock, the consequences for the Swedish economy could be great.
December 1: Finansinspektionen again urges that it be given new powers:
FI also observes that household indebtedness does not at present offer any direct threat to financial stability. However, debt is growing rapidly and many households are highly indebted, which makes the economy vulnerable to shocks. It is therefore good that the amortisation requirement can be in place in summer 2016.
December 15, Riksbank again demands that Finansinspektionen’s remit be changed to allow it to moderate the mortgage market, according to Katie Martin of the Financial Times:
It is also of the utmost importance that Finansinspektionen’s mandate for macroprudential policy is clarified. If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy.
No doubt it will all turn out just fine.
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