New Ekonomistas post (in Swedish). Here is an English translation.

From 1995 to now, Swedish households’ debt relative to their disposable income has almost doubled, from about 90 percent of disposable income to about 170 percent. The Riksbank maintains that the higher debt relative to income has made the households more vulnerable. “[A]s household indebtedness is now very high the households are more vulnerable” is a typical statement. But during the same period, the households’ assets and net worth has approximately doubled relative to disposable income, and is now about 580 and 410 percent, respectively, of disposable income. Households have thus become twice as wealthy relative to disposable income. Have the Swedish households, with now twice as much wealth relative to income, really become more vulnerable, as the Riksbank seems to imply?  Continue reading →

New Ekonomistas post (in Swedish). Here is an English translation:

The Riksbank is fighting an uphill battle to ex post justify the monetary policy that, with too high a policy rate, has led to an inflation far below the target and an unemployment far above a reasonable long-run sustainable rate. It is not going very well. The Riksbank has, for instance, stated that (1) households’ expectations about future mortgage rates are too low. It has also stated that (2) higher debt has led to a larger fall in consumption and rise in unemployment, in the countries that were hit by a fall in housing prices during the recent crisis. But it is difficult to find any foundation for these two statements, which can be seen in this and this post. Furthermore, even if the statements were true, it does not follow that tighter monetary policy is the best response or that it would even improve the situation. For instance, a lower inflation than expected has led till a higher debt burden (not lower). The Riksbank has also stated that (3) a fall in housing prices might make banks’ financing of the mortgages more difficult and this way threaten financial stability. Is there any foundation for this third statement?  Continue reading →

New Ekonomistas post (in Swedish). Here is an English translation.

The Riksbank maintains that household debt in Sweden is associated with risks and that this justifies a tight monetary policy resulting in low inflation and high unemployment. A representative statement about why household debt implies risks is given in a recent speech by the Executive Board member Kerstin af Jochnick (page 2):

We saw in the most recent financial crisis that high indebtedness in the household sector can create problems, with some countries suffering a severe fall in house prices. When the value of houses declines, households begin to save more. When savings increase, consumption decreases and thus demand in the economy falls. Ultimately, this can lead to lower production and higher unemployment. We do not want to see this kind of development in Sweden.

But is it really true that higher debt led to a larger fall in consumption and a larger rise in unemployment in the countries where housing prices fell during the financial crisis? Does this agree with the facts?  Continue reading →

New Ekonomistas post (in Swedish). Here is an English translation.

The Council for Cooperation on Macroprudential Policy set up a joint analysis group in February 2013 to examine a few issues concerning household debt. (The council’s tasks have now been taken over by the newly established Financial Stability Council.)

Finansinspektionen (the Swedish Financial Supervisory Authority) published three memos of very good quality from the group in October, 2013 (unfortunately in Swedish only, although they deserve to be translated into English). They are referred to in this post (Swedish only). Now, somewhat belatedly, the Riksbank has published three more memos, of mixed quality, from the group. One of these, Memo 6 ”Risks to the macroeconomy and financial stability arising from the development in the household’s debt and housing prices,” is unfortunately somewhat biased and possibly even misleading.  Continue reading →

Ekonomistas guest post by Harry Flam (in Swedish). Here is an English translation.

This is a guest post by Harry Flam, professor of international economics at the Institute for International Economic Studies, Stockholm University.

The U.S. and several European countries have experienced large falls in housing prices in the wake of the financial and euro crisis. Housing market indices fell 43 percent in the U.S., nearly 50 percent in Ireland, and – so far – 30 percent in Spain. This has contributed to very negative outcomes in these countries: banks have suffered enormous credit losses and have cut down their lending, tax payers were forced to rescue many of them, households became less wealthy, and households and firms decreased demand, resulting in high unemployment.

With hindsight, it has been argued that housing prices in these countries were driven by expectations of future capital gains. Considering the fact that real housing prices in Sweden have experienced a historically large increase since the mid-1990s – prices of single-family houses have increased by about 300 percent – after having increased at the rate of the consumer price index before that, one may ask if we have a pricing bubble waiting to burst, with serious consequences for households, banks and the economy?  Continue reading →

New Ekonomistas post (in Swedish). Here is an English translation.

Since last summer, the Riksbank has put forward a new reason for a higher repo rate (the Riksbank’s policy rate). The Riksbank suggests that households would have too low mortgage-rate expectations. But closer scrutiny shows that there is hardly any basis for the Riksbank’s suggestion. (This aside from the fact that, if households’ mortgage-rate expectations would be a problem, a higher repo rate is hardly the solution.) Continue reading →