ULF DANIELSSON is thinking of buying a holiday home—or even a new house, so that he, his wife and two children can have a garden and more space than in their flat in Uppsala. He can afford either, he says, and as a professor of astrophysics is surely able to work that out. But he is hesitating, lest the giddy rise in Swedish property prices end in an ugly crash. “You risk having a big loan that’s worth more than the house,” he says.
The property market has fallen a little closer to Earth: prices dropped by 9% between September and January, largely because of a surfeit of pricey new flats. They then steadied, and are around 5% below the peak—and 50% higher than at the start of 2013, calculates Valueguard, a data provider. As Swedes have borrowed to buy, their debts have risen. Finansinspektionen (FI), the financial-stability supervisor, estimates that borrowers’ debts rose by 36% between 2012 and 2017, while disposable incomes went up by 13%. Almost a fifth of households with new mortgages owe more than six times net income.
Low interest rates—the central bank’s benchmark is -0.5% and banks charge around 1.5% annually on home loans—have both helped fuel the boom and kept mortgages affordable. The share of incomes going on interest has tumbled even as the debt ratio has climbed (see chart). Swedes also save plenty: 9% of disposable income, and 16% including pensions, according to Swedbank, a leading lender. But Anna Breman, Swedbank’s chief economist, notes that although households in aggregate are in “fantastic” shape, it is hard to know how many would be vulnerable to higher rates. The abolition of a wealth tax in 2007 deprived economists of valuable data on individual households’ finances.
Indebtedness worries both FI and the central bank, the Riksbank, which fears that a sharp fall in house prices could lead debt-laden households to spend less, knocking back growth and employment. It worries that banks, of which just four account for 75% of mortgages, could find loans harder to fund. They do this by selling bonds, some in foreign currency, with the loans as collateral.
Prudential regulation, however, is the domain of FI—even though the Riksbank’s governor, Stefan Ingves, heads the Basel committee, which sets international prudential standards. As long ago as 2010 FI capped mortgages at 85% of property values (some Swedes top up with unsecured loans). Since 2016 it has obliged borrowers to repay 1% of new mortgages each year if they exceed 50% of the value of the home, and 2% if above 70%. Since March they have had to repay a further 1% if the mortgage is more than 4.5 times gross income. In addition, banks typically lend only to those who can bear interest rates of 7%.
Loan-to-value ratios have levelled off. Erik Thedéen, FI’s director-general, hopes the repayment obligations will make people “think once or twice” about taking on debt and foster an “amortisation culture” in a country where mortgages can take many decades to be repaid. He would have tightened them sooner, too, but had to await a change in the law. In a “severe crisis”, he says, the rules could be eased.
FI has also bolstered banks’ capital requirements for mortgages, despite low default rates on home loans. Even so, the Riksbank is urging FI to do more to insulate lenders from possible trouble. It thinks banks should face more stringent rules for both leverage and liquid assets in kronor. Mr Thedéen is resisting both calls.
Lars Svensson of the Stockholm School of Economics, a former deputy governor of the Riksbank, thinks FI has already done too much. There is no evidence that debt is excessive, he says in a recent paper; the repayment rules merely make it harder for some people to get credit, in particular young people with modest incomes and limited savings. They are in effect forced to save, or stopped from buying homes they could actually afford.
Just about all agree that underlying all this is a dysfunctional housing market. Mortgage payments are still tax-deductible, which encourages borrowing and supports prices. Tight controls choke private renting. For years, population growth and housing demand have outrun supply, despite the recent blip. (Migration, a hot topic in September’s election, also requires more public housing in the short run; refugees are not likely buyers.)
Such distortions need sorting out. But financial policymakers have one thing going for them. “We are having a slowdown in the housing market when the economy is still strong,” says Olle Holmgren of SEB, another of the big banks. “That’s the best scenario we can hope for.”