Riksbank pushes for FSA to gain stronger tools amid delays

Sweden needs stronger macro-prudential tools as its housing market continues to heat, Sveriges Riksbank warned on February 4, but the government says passing the necessary legislation will take time.

House prices in Sweden have been rising since early 2012, increasing 18% last year, which the Riksbank said was considerably faster than household income growth. The increase is largely driven by supply bottlenecks, rapid inward migration and low interest rates, and the high prices are encouraging debt accumulation that leaves the economy vulnerable, the central bank warned.

A first step in cooling the market is to introduce amortisation requirements to force Swedish households to pay down the principal of their loans. However, a battle over the requirements has been going on since early 2015, when a Swedish court said the Financial Services Authority's (FSA) mandate was not clear enough for it to wield the powers.

That seems set to change, as the government has approved new amortisation plans by the FSA, and these are due to enter into force on June 1. Sweden's Council on Legislation has deemed the proposals compatible with the Swedish constitution and the government is taking forward legislation.

But both the Riksbank and the FSA say the proposals do not go far enough. The Riksbank expressed reservations that the amortisation requirement was "relatively mild from an international perspective", and that the FSA was not sufficiently independent from government.

Furthermore, both authorities see the need for new powers. A spokesman for the FSA said "several possibilities" were on the table, with loan-to-income limits one attractive option. The Riksbank backed similar macro-prudential tools, and also called on the government to abolish the tax advantages interest payments currently enjoy.

While the government has offered cautious support to the idea of some sort of curb on debt, any action in this regard looks unlikely in the near future. A spokesman for deputy finance minister Per Bolund said the minority coalition government was in talks with opposition parties to assemble the necessary majority. "This takes time but secures continuity and predictability," he said.

Furthermore, the government says it fears if it introduces too many measures at once, it may trigger the housing market correction it is seeking to avoid. "But we have not excluded any additional measures to rein in the household debt growth," the spokesman added.

Robert Bergqvist, chief economist at SEB, is not optimistic about the outcome of the talks. "The next election is not until 2018, and there is a big risk that nothing will happen until the next parliament," he says. "We have this deadlock in the Swedish parliament."

At the same time, by many measures the Swedish economy looks robust. Growth rose to 3.9% in the third quarter of 2015, government debt is around 35% of GDP and the current account is in surplus. The only areas where the economy appears to be out of kilter are in the low level of inflation – 0.1% in December – and high household debt.

Bergqvist notes that looking simply at the growth and debt figures, the Riksbank might be expected to raise rates. Instead, it has cut them ever further as inflation refuses to rise. The high debt level represents another threat to the inflation outlook, he says, since a sharp housing market correction could derail any recovery in prices.

There is little the Riksbank can do about the debt except continue to protest at the lack of action. "It is of considerable importance that the measures are introduced quickly to reduce the risks associated with household indebtedness," Riksbank governor Stefan Ingves said on February 4.