Sweden was 2016’s poster child for economic growth, and 2017 is expected to be no exception. But below the surface, the issue of steeply rising house prices and high household debt is raising concerns – and not just for banks.
The country's population has risen from below 8.5 million in the late 1980s to 10 million as of 2017, with immigration a contributing factor, while the housing stock has only increased by about 780,000 dwellings in this time, according to Statistics Sweden. Demand for property has been growing, especially in Stockholm and other large cities, while construction has been slow, partly due to delays caused by Swedish planning laws.
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House price boom
This interplay has caused house prices to increase by 230% between 1996 and 2016, according to Organisation for Economic Co-operation and Development (OECD) data, as wells as household debt to rise. Data from Sveriges Riksbank, Sweden’s central bank, show the average debt‐to-income ratio for households with mortgages reached 343% in 2016, while the ratio exceeds 600% for 13% of these households, raising concerns of a housing bubble. In 2016 alone, house price inflation averaged at 9.4%.
“It has become [unstably high] but is there a bubble?” says Casper von Koskull, president and group chief executive at Nordea. “It depends on how you define a bubble. Household indebtedness has grown fast and there are signs of a bubble but I don't think the bubble will burst.”
The situation has been fuelled by negative interest rates, allowing larger shares of the population to borrow at historically low rates. Riksbank first moved the country’s repo rate from 0.25% to zero in October 2014 and introduced negative rates in February 2015 in efforts to reach its consumer price inflation target of 2%. Rates have since further fallen to -0.5% as of February 2016.
Taking measures
Steps have been taken over the past few years to alleviate Swedish households’ indebtedness and reform the housing market and planning laws. However, this also raised an issue over the country’s macro-prudential policy framework as the political process has delayed the Finansinspektionen, Sweden’s financial stability authority (FSA), from introducing measures to ensure financial stability by containing mortgage growth.
“The banks have taken quite a lot of responsibility themselves,” says Jan Erik Back, chief financial officer at SEB. “We proposed to the regulators to have loan-to-value [LTV] caps. We proposed compulsory amortisation and how that should work, and then there was a long discussion between the FSA and the politicians whether they had the authority to do that. In the meantime, the banks implemented it themselves.”
In April 2016, the FSA then introduced an amortisation requirement of at least 2% of the original loan amount per year for new mortgages with an LTV of more than 70% signed from June 2016 until an LTV of 50% has been reached. Since the amortisation requirement was introduced, the pace at which house prices have been rising has slowed.
“Today we see the housing market cooling off – at least in some cities,” says Mr Back. “The inner city of Stockholm is cooling off. It is not super-hot anymore, it is warm.”
Other previous measures capped the LTV ratio at a maximum of 85% in 2010, while the FSA also introduced 25% floors for mortgage risk-weights in 2014 and increased the countercyclical capital buffer for Swedish banks.
Still, Sweden’s Riksbank noted in its Financial Stability Report of November 2016 that the FSA’s mandate should be further clarified and that the measures the FSA has taken so far are “steps in the right direction, but are not deemed sufficient”. It added: “If no further measures are taken, the risks linked to household indebtedness are expected to continue to increase.”
According to Per Bolund, Sweden’s minister of financial markets, there is now a broad consensus in parliament to “increase the FSA’s mandate” for it to “propose new measures to manage risks to financial stability”. He adds that potential new measures could include a debt-to-income ceiling on mortgages and potential requirements regarding the percentage of interest rates being floating or fixed rate.
“There are no proposals on the table as we speak now regarding these issues but the mandate will give the FSA the opportunity to develop suggestions, which will then be put to the government and accepted,” he says.
Work for the politicians
Bankers are calling on politicians to implement more structural reforms to support the housing supply and alleviate the situation. Meanwhile, the Riksbank has also criticised the tax breaks enjoyed by mortgage holders, a policy that has also been scrutinised by the OECD.
“Today the people who pay mortgages can deduct the interest payments [from tax] – but that is a stimulus to get an apartment, to get a house that makes it cheaper,” said OECD secretary-general Ángel Gurría after the presentation of the organisation's economic survey of Sweden. He added that this stimulus should be revisited and the environment should return to normality. “Normal is good. You try to take the air out of the bubble before it bursts,” he said.
The removal of tax breaks, however, is a hugely political issue. “Currently we have no proposals regarding a phase-out of the deductibility of mortgage interest rate payments but we are monitoring the development on the housing market carefully,” says Magdalena Andersson, Swedish minister of finance and social democratic party member.
She adds that if changes were made, households would have to have certainty going forward. This would require “broad parliamentary support” and not just within the government, a statement Mr Bolund of the Green Party agrees with.
Assessing the problem
A further issue is that the scale of the problem is not fully known. Paolo Sodini, economics professor at the Stockholm School of Economics, focuses his research mainly on household finances based on wealth and consumption data collected by the Swedish state between 1999 and 2007. The data was gathered during a period when Swedes were taxed on their wealth, but when the tax was abolished, collection of the data also ceased.
“We went from being a country where we knew exactly who was borrowing, how much they were borrowing and whether they were earning enough money to service the debts, whether these loans were sustainable, whether they had enough real assets to back up these loans, to not knowing anything,” says Mr Sodini. “If the data was still collected, we would know much better whether we are living through a bubble [of household debt] and are sitting on an explosive situation or not.”
There is a strong need for more profound data and statistics to analyse the Swedish economy, financial markets minister Mr Bolund agrees, adding that there was a big discussion in Swedish politics after the wealth tax was abolished, which led to the data collection stop, as some members of the political spectrum saw this as a potential means to reintroducing taxation in the future.
“But I think that now everybody can see that there is a risk related to household indebtedness and that we need accurate data in order to manage that risk,” says Mr Bolund. “We know that too large a proportion of the Swedish population is over-indebted and can’t manage their finances any more. General data on indebtedness and on wealth would be very useful to enable us to make the right decisions.”
A risk too far?
According to an OECD paper analysing housing policies across its member countries from February 2016, Sweden had the highest percentage of overburdened homeowners at more than 25%. But until cross-political consensus is achieved, the Swedish economy and its banks need to deal with the issue without having full insight.
At Svenska Handelsbanken, the market share in mortgages fell in 2016, according to president and group chief executive Anders Bouvin. “I have no problems with that. Our branch managers know their local markets and they typically know when things are getting a bit stretched,” he says.
Banks are stress testing their mortgage portfolios on the basis of interest rates as high as 7%, which is a long way off today’s rates.
“We are monitoring the situation. But am I super concerned? Not in that sense,” says Nordea’s Mr von Koskull. “We have pretty tough tests when we give out mortgages in terms of loan-to-value – in Sweden we have never seen LTVs you see in some other markets – and there are no buy-to-let mortgages in Sweden.” Arguably, therefore it is the economy as a whole, not banks, that faces most risk.
“The Swedish population have historically been very good at paying their interests and debts, so the main concern is that households would cut down on other types of consumption to pay their debts and that would have a negative spiralling effect on the economy,” says Mr Bolund, who adds that for this reason the building of buffers within households and banks has been important.
“The amortisation requirement, for example, is a way to build the buffers in the households, and the capital requirements in the banks is a way, too, to make sure that they can manage disturbances,” he says.
Despite the debt downside risk, gross domestic product growth in Sweden, while expected to slow slightly, is still forecast for 2.6% in 2017 by the International Monetary Fund, compared with 3.6% in 2016 and 4.2% in 2015 – growth levels the eurozone can only dream of.
