Erik Thedéen visited the Committee on Finance today for a Q&A session. He discussed the unprecedented economic conditions that Sweden is currently experiencing.
The Swedish economy is thriving, but a strong economy combined with low interestrates has resulted in high asset prices and rapidly rising household debt.
Households with high loan-to-income ratios, i.e. large loans in relation to income, are vulnerable. They are sensitive to rising interest rates since their monthly expenses are affected more than households with lower loan-to-income ratios. They are also somewhat more sensitive to a loss of income, for example if they become unemployed.
Finansinspektionen’s report, Stability in the Financial System, shows that the high level of household debt and rising house prices are causing vulnerabilities to build up in the Swedish economy. FI therefore would like to introduce a stricter amortisation requirement for new mortgage holders who take large loans in relation to their income.
Household debt is a crucial matter which FI monitors closely, and the mortgage survey is an important part of this work. Household debt has increased sharply in recent years. During the same period, mortgage rates have fallen and are now at historically low levels, and house prices have also risen rapidly. Finansinspektionen (FI) judges there to be an elevated risk that house prices will fall compared to a normal state, and it is more likely that interest rates will rise than that they will fall.
The amortisation requirement that was introduced last year has had a slow-down effect thus far. Households with new mortgages are borrowing less and buying less expensive homes, but the risks associated with high household debt remain.
SUMMARY: In Sweden, both the percentage of mortgages that have a variable interest rate and household debts have risen sharply. This combination has made house-holds sensitive to rising interest rates.
Loans make it possible to smooth out consumption over a lifetime. Household indebtedness is high and in recent years household debt has risen faster than both income and GDP. Household debt consists primarily of mortgages.
House prices have been rising and, as a result, so has the debt of households in relation to their income – i.e. their debt-to-income (DTI) ratios. A DTI limit could slow this trend, but limiting households' opportunities to borrow would also slow consumption and economic activity.
Household debts are continuing to develop in an unfavourable direction. This is one of the conclusions in FI's Stability Report, which is being published today.