Scandinavians open macro-pru toolbox to cool overheated housing markets

Rising property prices, increasing household debt and towering banking sectors are pushing Norway, Sweden, and Denmark to consider unconventional measures to pre-empt a crash
nordics

Norges Bank today said it will issue specific requirements to domestic banks to build countercyclical capital buffers later this year, as governments across Scandinavia look to shield their banking sectors and their economies from damaging housing bubbles.

Norges Bank deputy Jan Qvigstad today said that the central bank expects that "regulation relating to the countercyclical capital buffer will be finalised in the course of autumn, so that the bank can give concrete advice in December".

Meanwhile, regulators in Sweden and Denmark are pushing for stricter rules for borrowers and lenders to curb the increase in household indebtedness.

According to its quarterly monetary policy report, out today, Norges Bank will offer "concrete advice on the level of the buffer and the timing of its introduction, probably in connection with the next report", to be published in December.

The report, which estimates that banks can raise their Common Equity Tier 1 (CET1) ratios by up to one percentage point per year and still maintain lending growth, warns that several years of rising house prices and lending have increased the risk that financial imbalances may trigger or amplify an economic downturn.

"Household debt continues to rise faster than income and hence the ratio of debt to disposable income is still rising," it notes, adding that it will take a long time before decreasing house price inflation translates into lower household debt ratios.

Erik Bruce, chief economist at Nordea's research department in Norway, says a fall in house prices of 20-30% is possible if interest rates or unemployment increased markedly – a potential upshot of oil prices dropping to $40-50 per barrel.

"That would be a catastrophe," Bruce says, adding it is questionable whether banks could withstand such a blow. He notes, however, that "we have a rich state" and that countercyclical fiscal measures would kick to in to cushion it.

The International Monetary Fund (IMF) earlier this month expressed concerns over Norwegian housing prices, estimating them to be overvalued by about 40%. Only the Canadian property market is more overheated, according to the IMF, which estimates Danish, Swedish, and Finnish prices to be overvalued by between 10% and 20%.

The fund said "overheating in the property market should be addressed by tightening macro-prudential policies" and stressed the importance of further strengthening supervision and the regulatory framework in the financial sector.

Swedes may have to pay down mortgage principal
In Stockholm, the head of the Swedish Financial Supervision Authority (FSA) – recently given the responsibility of supervising and regulating the country's financial system – yesterday revived a controversial proposal, previously floated by Riksbank governor Stefan Ingves, to outlaw interest-only mortgage repayments.

Speaking to local media after addressing parliament, Martin Andersson said the FSA was "prepared to introduce new measures" if mortgage lending continues to rise over the coming months, adding: "It's more about a repayment requirement than lowering the mortgage cap. We're working on the issue now."

Earlier this month, the IMF said risks in the Swedish banking and household sectors "remained sizeable", despite efforts to strengthen the financial system by introducing a loan-to-value (LTV) cap and increasing banks' capital and liquidity buffers.

"Credit to households continues to expand faster than disposable income, with mortgage amortisation low by international standards," the IMF noted, adding that the share of interest-only loans in Sweden is about 71% for mortgages with LTV ratios less than three to one in 2012 – well above that in other Nordic countries.

Stefan Ingves, who has long pushed for requiring borrowers to pay down the principal on their mortgages, also spoke before parliament yesterday, under the slogan "Urgent decisions – we're late".

Sweden's centre-right finance minister Anders Borg has repeatedly rejected the idea of an amortisation requirement, however, as has former Riksbank board member Lars Svensson, who this week deemed it "unnecessary patronisation" of mortgage borrowers.

Historically high capital requirements too low for Denmark
In Denmark, central bank governor Lars Rohde suggested yesterday that banks' capital requirements could be raised beyond already historically high levels.

Rohde – who is also the head of Denmark's Systemic Risk Council, the country's principal macro-prudential regulator – said the central bank wanted an investigation to clarify whether there was a need for further strengthening current recommendations, which state that systemically important lenders should be required to hold 12% of CET1 capital, compared with 7% required under Basel III.

A committee appointed to investigate the causes of Denmark's housing and banking crises yesterday said those recommendations may fall short.

In its Nordic Regional Report, published earlier this month, the IMF called for greater cross-border co-ordination among the Nordic governments on macro-prudential measures, which it said was "necessary to limit regulatory arbitrage and ensure that foreign-headquartered bank branches lend in line with [local] economic conditions".

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