Sweden’s new center-left government and its financial authorities are under huge pressure when they meet tomorrow to tackle a mountain of household debt that is casting a long shadow over one of Europe’s few economic bright spots.
Having slashed rates to zero to fight the risk of deflation, top Swedish officials are now in a quandary over how to rein in borrowing and house price rises without sending the real-estate market into a downward spiral.
The nation’s “AAA”-rated economy is still one of Europe’s strongest, with low public debt, sound state finances and banks among the best capitalized and most profitable in Europe.
Yet consumers, barely touched by the financial crisis, have loaded up on cheap mortgages and caused Swedish property prices to triple over the past 20 years, prompting a warning from the IMF that the market is 20 percent overvalued.
In addition, Sweden has built too few houses over the past 20 years and its capital Stockholm is one of Europe’s fastest growing cities.
Critics say the former center-right government added fuel to the fire by slashing real-estate taxes and leaving 30 percent mortgage tax relief untouched.
Meanwhile, Sweden’s household debt-to-income ratio has risen to above 170 percent — among Europe’s highest.
The worry is that private consumption, nearly half of GDP, would suffer if rates rose or property prices fell.
In Stockholm’s frenzied housing market, buyers make multimillion crown offers to snap up flats they might only have seen in photographs. Cranes and scaffolding are common sights in suburbia as householders take advantage of generous tax breaks for home improvements.
Attempts by regulators so far to slow credit growth — squeezing banks by making them put aside more capital and draw up voluntary mortgage pay-down plans — have not worked because interest rates have continued to fall.
Last week the central bank, Sveriges Riksbank, cut rates to zero in an attempt to answer criticism that it is not doing enough to tackle another economic risk — deflation — even while it acknowledged the problem that would create in containing household debt.
“There is a fairly large consensus that household debt is a concern,” Sveriges Riksbank Governor Stefan Ingves said after the cut. “If households continue to borrow, we could end up with very big problems later on, and this is what we want to avoid.”
By last year, mortgages comprised 47 percent of the Swedish banks’ total lending from 30 percent in 2001. Another risk is that those banks are largely financed with international market funding rather than deposits.
Many economists say the obvious action to take — lowering mortgage tax relief or reimposing real-estate taxes — is politically difficult.
Ingves favors tightening rules on mortgage repayments because currently only four in 10 mortgage borrowers pay off their debt compared to nine in 10 in the mid-1990s.
Lowering the borrowing ceiling of 85 percent of the value of a property is another option, but that would hit first-time buyers.
The Swedish Bankers’ Association has suggested voluntary rules to make Swedes pay down the first 50 percent of loans in order that “households pay off debts when interest rates are extremely low in order to be better prepared when … we have higher interest rates,” said Annika Falkengren, who is chairman of the association and chief executive officer of Swedish bank SEB.
However, Sweden’s competition authority has said this could limit competition and is yet to give its approval.
Looking at other nations’ examples suggests that however Sweden’s government, central bank and regulators decide to act, engineering a soft landing would be hard.
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