IMF warns of Swedish housing bubble

17 Jun, 2014 at 09:19 | Posted in Economics | 3 Comments

A new IMF report warns of rising financial instability and unsustainabe household indebtedness in Sweden:

Financial instability is an increasing concern. House price increases have picked up again, exceeding 71⁄2 percent annual growth for single-family homes and 121⁄2 percent for tenant-owned apartments in April. Household credit growth also remained strong, pushing household indebtedness to almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant- owned housing associations is included. Recent data indicate that household debt ratios are high across all income groups, but particularly so for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks. The aggregate net asset position of households is solid, but a large share of assets is illiquid and has limited value as a buffer. As a consequence, a large and sudden drop in house prices would lower consumption, employment, and growth, and ultimately impact the banking system.

The increase in house loans – and house prices – in Sweden has for many years been among the steepest in the world.

Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices since 1986, there are reasons to be deeply worried:

Source: Statistics Sweden and own calculations

The indebtedness of the Swedish household sector has also risen to alarmingly high levels, as can be seen in the figure below (based on new data published earlier this month by Statistics Sweden, showing the development of household debts/disposable income 1990 – 2012):

Source: Statistics Sweden and own calculations

Yours truly has been trying to argue – for two years now – with “very serious people” that it’s really high time to “take away the punch bowl.” Mostly I have felt like the voice of one calling in the desert, and up until now neither the Swedish central bank, nor the government, has been willing to listen. Compairing the above figures with the one below (source) could perhaps give some refreshing perspective …

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Where do housing bubbles come from? There are of course many different explanations, but one of the fundamental mechanisms at work is  that people expect house prices to increase, which makes people willing to keep on buying  houses at steadily increasing prices. It’s this kind of self-generating cumulative process à la Wicksell-Myrdal that is the core of the housing bubble. Unlike the usual commodities markets where demand curves usually point downwards, on asset markets they often point upwards, and therefore give rise to this kind of instability. And, the greater leverage, the greater the increase in prices.