Author Archives: admin

Are Swedish House Prices Too High? Why the Price-to-Income Ratio Is a Misleading Indicator

“Are Swedish House Prices Too High? Why the Price-to-Income Ratio Is a Misleading Indicator,” first version March 2022, revised April 2024. Paper (latest version). CEPR Discussion Paper. NBER Working Paper. VoxEU column.

Abstract

Appropriate indicators of housing valuation are important for macroprudential policy and assessments of risks to financial stability. Overvalued housing may result in a correction and a fall in house prices. This would weaken households’ balance sheets, reduce the collateral of mortgages and covered housing bonds, and threaten financial stability.

According to ECB (2023) and European Systemic Risk Board (2022), Swedish owner-occupied housing (OOH) was overvalued by about 55% in 2021q2, the largest overvaluation in the EU and EEA; according to European Commission (2023c), by about 30% in 2022. These assessments affect warnings and recommendations issued for Swedish economic policy and the shocks in EBA stress tests of Swedish banks.

But these large overvaluation assessments are due to the use of misleading indicators: the deviations of price-to-income (PTI) and price-to-rent ratios from their historical averages. It is shown that according to the appropriate indicator, the user- cost-to-income (UCTI) ratio, Swedish owner-occupied houses have since 2010 instead become increasingly undervalued (not overvalued), by about 30% in 2019q4. Due to rising mortgage rates, they are less undervalued in 2023q2, but still about 20%.

But these large overvaluation assessments are due to the use of misleading indicators: the deviations of price-to-income (PTI) and price-to-rent ratios from their historical averages. They disregard mortgage rates and other housing costs and lack scientific support. According to a large housing literature, it is not the purchase price but the user cost that is the appropriate measure of the cost of living in OOH, the cost of the housing services that the OOH delivers.

From this point of view, “Are house prices too high?” is the wrong question. The right question is, “Are user costs too high?”

New improved estimates of the user costs are constructed, including an adjustment for a preference shift during the coronavirus crisis in favor of larger and better housing. According to the user-cost-to-income (UCTI) ratio, Swedish owner-occupied houses have since 2010 instead become increasingly undervalued (not overvalued), by about 35% in 2019q4. Due to higher mortgage rates, they are less undervalued in 2023q4, but still about 25%.

For Sweden and the sample examined, the UCTI and PTI indicators are in fact strongly negatively correlated and have opposite signs (see figure 1.2). If the UCTI indicator is the right one, the PTI indicator is consistently wrong. Taking the average of the two indicators is not a good idea.

Figure 1.2: The preference-adjusted user-cost-to-income ratio and the negative of the preference-adjusted price-to-income ratio (percentage deviation from historical averages)

The valuation assessments of the ECB, the ESRB, the Commission, the OECD, and the IMF are scrutinized and compared. The problem of misleading indicators and overvaluation assessments—and resulting distorted warnings and recommendations—is not restricted to Sweden but concerns several other countries in the European Union.

Monetary Mystique and the Fed’s Path Toward Increased Transparency

“Monetary Mystique and the Fed’s Path Toward Increased Transparency,” chapter, in  King, Robert G., and Alexander L. Wolman (eds.), Essays in Honor of Marvin Goodfriend: Economist and Central Banker, Federal Reserve Bank of Richmond, 2022, 289-300.

Abstract

Marvin Goodfriend’s paper “Monetary Mystique: Secrecy and Central Banking” is a masterpiece: It is an extremely well-written, meticulous, and fair analysis and critique of the Federal Reserve’s defense of its practice of secrecy in monetary policy and central banking. His critique was devastating, and he completely demolished the Federal Open Market Committee’s (FOMC) arguments in the most precise and convincing way. Nevertheless, it took the Fed many years to reach the current standards of transparency and accountability in monetary policy.

Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in the UK

“Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in the UK,” April 2021, paper. CEPR Discussion Paper DP16059. NBER Working Paper 28806.

Abstract

The “debt-overhang hypothesis” – that households cut back more on their spending in a crisis when they have higher levels of outstanding mortgage debt (Dynan, 2012) – seems to be taken for granted by macroprudential authorities in several countries in their policy decisions, as well as by the international organizations that evaluate and comment on countries’ macroprudential policy. Results are presented for UK microdata that reject the debt-overhang hypothesis. The results instead support the “spending-normalization hypothesis” of Andersen, Duus, and Jensen (2016a), what can also be called the “debt-financed overspending” hypothesis – that the correlation between high pre-crisis household indebtedness and subsequent spending cuts  during the crisis reflects high debt-financed spending pre-crisis and a return to normal spending during the crisis. As discussed in Svensson (2019, 2020), this is consistent with the correlation reflecting debt-financed overspending through what Muellbauer (2012) calls the “housing-collateral household demand” and Mian and Sufi (2018) the “credit-driven household demand” channel. The correlation is thus spurious and an example of omitted-variable bias.

A simple model shows that consumption and debt changes are directly and strongly positively correlated, whereas consumption and debt levels are quite weakly negatively correlated. Importantly, and in contrast, examples show that there is no systematic relation between consumption cuts and levels of or changes in LTV ratios. The lack of a robust relation between consumption cuts and levels of or changes in LTV ratios implies that tests of these hypotheses should generally not be done by regressions of consumption cuts on levels of or changes in LTV ratios.

Amorteringskraven snedvrider och utestänger: Uppdatering

“Amorteringskraven snedvrider och utestänger: Uppdatering“, inlägg, Ekonomistas, 13 april 2021.

Trots att amorteringskraven saknar påvisbar samhällsnytta och medför stora individuella och sociala kostnader (se här, här och här) har Finansinspektions generaldirektör Erik Thedéen meddelat på DN-debatt att det tillfälliga undantaget från amorteringskraven löper ut i augusti. Amorteringskraven har stora och individuella kostnader, i och med att de snedvrider bostadsmarknaden och skapar höga trösklar för inträde för bostadssökande som saknar hög inkomst, förmögenhet och rika föräldrar, särskilt unga. De utestängs från bostäder som de mycket väl skulle ha råd med. Detta visas här med nya beräkningar – uppdaterade från 2017 till 2019 – av boendebetalningar och minsta inkomst för att få lån med olika amorteringsalternativ för en genomsnittlig etta i Stockholm kommun 2019 (”Stockholmsettan”). Den minsta inkomsten jämförs med inkomstfördelningen för 25–29-åringar i Stockholms kommun under 2019. Dessa beräkningar för 2017 har betecknats som ”överdrivna” av Thedéen.

Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in Australia

“Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in Australia,” April 2021, paper. CEPR Diskussion Paper DP16094. NBER Working Paper 28776

Abstract

The “debt-overhang hypothesis” – that households cut back more on their spending in a crisis when they have higher levels of outstanding mortgage debt (Dynan, 2012) – seems to be taken for granted by macroprudential authorities in several countries in their policy decisions, as well as by the international organizations that evaluate and comment on countries’ macroprudential policy. New results for Australian microdata are presented that reject the debt-overhang hypothesis. The results instead support the “spending-normalization hypothesis” of Andersen, Duus, and Jensen (2016), what can also be called the “debt-financed overspending” hypothesis – that the correlation between high pre-crisis household indebtedness and subsequent spending cuts during the crisis reflects high debt-financed spending pre-crisis and a return to normal spending during the crisis. As discussed in Svensson (2019, 2020), this is consistent with the above correlation reflecting debt-financed overspending through what Muellbauer (2012) calls the “housing-collateral household demand” channel and Mian and Sufi (2018) the “credit-driven household demand” channel.

Är verkligen hushållens skulder för höga?

“Är verkligen hushållens skulder för höga?“, inlägg, Ekonomistas, inlägg, 8 februari 2021.

Enligt en intervju i SvD den 6 februari vill nya finansmarknadsministern, Åsa Lindhagen, gärna se lägre skulder för hushållen. Men är verkligen hushållens skulder för höga? Vad ska de jämföras med? Hur kan man avgöra om de är för höga eller inte? Vad säger data?

Macroprudential Policy and Household Debt: What is Wrong with Swedish Macroprudential Policy?

“Macroprudential Policy and Household Debt: What is Wrong with Swedish Macroprudential policy?”, Nordic Economic Policy Review 2020, 111–167. Article incl. Online appendix. Online appendix. Slides.

Abstract

Much is right with Swedish macroprudential policy. But regarding risks associated with household debt, the policy does not pass a cost-benefit test. The substantial credit tightening that Finansinspektionen (FI, the Swedish FSA) has achieved – through amortization requirements and more indirect ways – has no demonstrable benefits but substantial costs. The FI, and international organizations, use a flawed theoretical framework for assessing macroeconomic risks from household debt. The tightening was undertaken for mistaken reasons. Several reforms are required for a better-functioning mortgage market. A reform of the governance of macroprudential policy – including a decision-making committee and improved accountability – may reduce risks of policy mistakes.

Update, June 2020: Problems of the amortization requirements confirmed

The paper was written before the onset of the coronavirus pandemic. It emphasizes that the FI’s mandatory amortization requirements substantially increase the mortgagors’ housing payments and reduce their cash-flow margins. Thereby the amortization requirements reduce households’ resilience to shocks – in contradiction to the FI’s objective to increase the resilience.

The paper also notes that the FI is aware of the problem that amortization requirements reduce households’ resilience. Its response to this problem and contradiction is to allow mortgage firms to make exemptions from amortization payments for mortgagors “for a limited period” on “special grounds.” However, the special grounds FI mentions refer to situations when individual mortgagors face individual problems in fulfilling their debt service for reasons such as “unemployment, long periods of absence from work due to illness and the death of a close relative.” There is no suggestion in the FI’s discussion that mortgage firms might consider mortgagors’ consumption or the macroeconomic risk from a reduction in mortgagors’ consumption—the FI’s official rationale for having introduced the amortization requirements. It difficult to believe that mortgage firms would exempt mortgagors from amortization on the ground that certainly they can fulfill their debt service, but they cannot maintain their normal consumption. The mortgage firms will most certainly be focused on any risk to their individual debt service rather than on any macroeconomic consequences. Thus, the FI has not provided any mechanism through which the exemptions to amortization payments would avoid the reduced resilience caused by the amortization requirements.

The problems of the mandatory amortization requirements were confirmed, when the corona pandemic forced the FI in March 2010 to adapt and to make a surprise special recommendation: “Loss of income due to the corona-virus [is] a cause for exemption from amortization.” But borrowers have no right to an exemption; it is still the mortgage firm that decides. And the recommendation did not apply to those that have not yet lost their income. In April, the FI corrected the latter and stated that banks may grant all mortgagors amortization exemption. But the exemption is only in force until the end of June 2021. As Bäckman has argued – and is argued in the paper – it is better to simply abolish the amortization requirements.