Scandinavian asset bubbles

23 Nov, 2014 at 17:49 | Posted in Economics | 1 Comment

The Scandinavian economies top many polls on happiness and living standards. But they also have the worrying distinction of leading the developed world in household debt.

household-debtDenmark has the highest household debt-to-disposable income ratio among the world’s richest countries at 310 per cent. Norway and Sweden are not far behind with ratios of 200 and 170 per cent respectively, according to the Organisation for Economic Cooperation and Development.

Policy makers have taken different approaches in each country. In Denmark, officials seem relaxed , arguing that Danes have lots of assets and are able to withstand rising interest rates “The threat to financial stability from [household debt] is therefore not serious in the current situation,” Lars Rohde, governor of the central bank, told Bloomberg this year.

But the Riksbank in Sweden has long worried about rising house prices and household debt levels. The central bank sought (and failed) to gain control over macroprudential policy – measures designed to ensure financial stability, such as capping the amount home buyers can borrow for a mortgage. Instead, macroprudential policy was given to Sweden’s Financial Supervisory Authority, which is already tightening mortgage rules. Today, Swedes only have to repay the interest on mortgages, meaning some loans take as many as 140 years to repay.

The FSA this month proposed that new mortgage holders would have to pay down half of their loans.

The impact of such measures is hotly disputed. Distortions persist in the Swedish and Norwegian housing markets, where there is far greater demand than supply in the biggest cities. Borrowers in both countries are also able to claim tax relief on mortgage interest.

Some argue that reforming these distortions would be the most important change authorities could make. Christian Clausen, chief executive of Nordea, says politicians need to take responsibility for helping create asset bubbles.

On Sweden’s tax incentives to own a house, he adds: “You have a screwed system that wants to over-leverage in principle in an asset that you don’t want to over-leverage on.”

Richard Milne/FT

1 Comment

  1. This looks more like a form of rent-seeking than a purchase process. Also, there is the huge gap between those who own outright and those who are still on their mortgage (which looks like lease). In the cases where a house is owned outright, and the property is to be transferred to a relative or friend, the deed can simply be amended and ownership altered without affecting the credit scheme and the “”new”” owner takes over the mortgage payments or outright ownership. Or, the house can be sold for $1.00 which takes the real estate companies and the banks out of the picture. These kinds of transactions keep swaths of property within certain kinship structures, and the debt crisis refers then merely to those who are too poor and/or alienated to get a bargain.

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