Riksbank: housing market is a ‘serious threat’ to stability

Sweden’s central bank has welcomed proposals for stricter amortisation requirements for highly indebted households put forward by the country’s financial supervisory authority, Finansinspektionen (FI). But the bank warns that the measures will need monitoring closely, and might not be enough to deal with risk from the Swedish housing market.

Sveriges Riksbank considers Swedish households’ high and rising indebtedness a “serious threat to financial and macroeconomic stability”, it says in a statement issued today (September 8).

The proposal would require new mortgage holders with a debt-to-income ratio higher than 4.5 to pay at least 3% a year of the mortgage’s total value. The current regulation imposes a minimum of 2%.

The central bank says it “welcomes this proposal”, but warns that it may not be sufficient in itself to deal with possible dangers in the Swedish housing market. If the proposed measures become law, the Riksbank says, the authorities should regularly evaluate the amortisation requirement and household resilience “to assess whether the desired effects have been achieved”.

The central bank “wishes to emphasise how important it is that households’ resilience increases and the risks inherent in household indebtedness are reduced”, and points out that “further macro-prudential measures may be needed if this does not happen”.

“Strong growth and extremely low interest rates have meant that house prices and household debt have increased rapidly,” says financial supervisor FI in its proposal, originally published on May 31.

Swedish GDP expanded by 4% year on year in the second quarter of 2017, and house prices have increased by more than 40% in three years. Sweden has recorded negative interest rates since February 2015, when the Riksbank decided to further loosen policy to battle inflation. The repurchase rate is currently –0.5%. Private debt is around 85% of GDP, standing at Skr3.8 trillion ($478.1 billion), according to Swedish finance group SEB.

The central bank considers the debt-to-income ratio should ideally be calculated on the basis of all of a borrower’s loans. However, this is not feasible, as FI still does not have the authority to announce amortisation requirements for some companies that supply mortgages, says the Riksbank – therefore, some mortgages would not be visible in credit reports, and would not be covered by the amortisation requirement.

The central bank also observes that some macro-prudential measures are harder, as Sweden lacks a national credit register: “This is an even stronger indication of the need for authorities to have access to anonymous data at [an] individual level to be able to analyse risks in the financial system.”

At the European level and in Sweden, there is a large project under way to collect data on credit at a corporate level. The Riksbank says it considers a corresponding project for credit at an individual level would be desirable.