Kommentarer till ESO-rapporten 2022:3, “Samspel för stabilitet – en ESO-rapport om rollfördelningen mellanfinans- och penningpolitiken“. Bilder pdf, powerpoint.
“Are Swedish House Prices Too High?”, September 2022, paper.
Some international organizations state that Swedish house prices are too high relative to fundamental determinants. The European Systemic Risk Board, with estimates provided by the ECB, states that owner-occupied housing is overvalued by about 55% in 2021q2 (ESRB, 2022b), the largest overvaluation in the EU and EEA. The European Commission (2021c) states that the overvaluation is at least 30% in 2020q4. These assessments affect the warnings and recommendations that the organizations issue for Swedish economic policy and determine the negative house-price shocks in stress tests of Swedish banks by the European Banking Authority.
But the large overvaluation assessments are mainly due to the use of unreliable and misleading indicators, namely the deviation of price-to-income and price-to-rent ratios from their historical averages. They disregard the role of mortgage interest rates and lack scientific support. According to a large housing literature, the user cost of housing – not the purchase price – is the appropriate measure of the cost of living in owner-occupied housing, the cost of the housing services that the dwelling delivers.
New improved estimates of user costs for Swedish owner-occupied houses are constructed. The user-cost-to-income ratios have fallen over time and were at least 15% below their historical average in 2021. They have risen in 2022 after substantial mortgage-rate increases. With an appropriate correction for a preference-shift toward larger and better homes during the covid crisis, UCTI ratios were still at least 10% below their historical average in 2022q3. This is inconsistent with a significant overvaluation.
The problem of misleading indicators and overvaluation assessments is not restricted to Sweden but concerns several countries in the European Union. The relevant and informative indicators presented in the paper allow more reliable and appropriate valuation assessments.
“Monetary Mystique and the Fed’s Path Toward Increased Transparency,” May 2022, paper. Forthcoming in Essays in Honor of Marvin Goodfriend: Economist and Central Banker, Federal Reserve Bank of Richmond.
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.
Professor Erik Hjalmarsson skriver på Di debatt 23 juni att bolånetaket är rimligt och att han inte delar före detta statsminister Göran Perssons syn att taket bör höjas. Hjalmarsson utgår dock från ett alltför snävt perspektiv. Det skriver Robert Boije och Lars EO Svensson i en replik.
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“, 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.
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.
Jag uppskattar att Per Lindvall i Realtid ger Robert Boije, Harry Flam, John Hassler och mig rätt i vår kritik av amorteringskraven, men jag håller inte med om att jag eller vi skulle negligera några risker med hushållens skuldsättning eller bostadspriserna.
Replik i Realtid, 4 mars 2021.
“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?
“Ekonomiska tungviktare i tvist om amorteringskrav“, intervju, Dagens Nyheter, 1 februari 2021.
“Ska verkligen amorteringskraven komma tillbaka trots att de saknar påvisbar samhällsnytta?“, inlägg, Ekonomistas, 1 februari 2020.
Handelshögskolan i Stockholm har beretts tillfälle att lämna synpunkter på Riksbankskommitténs betänkande En ny riksbankslag (SOU 2019:46).
Handelshögskolans remissvar har skrivits av David Domeij, Tore Ellingsen och Lars E.O. Svensson.
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 202: 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.
Op-ed in Dagens Nyheter, November 9, 2019, English translation: The amortization requirements and other credit tightening by Finansinspektionen (FI, the Swedish Financial Supervisory Authority) have large individual and social costs, but according to research they have no demonstrable social benefits. It is irresponsible to push through a credit tightening that fails a cost-benefit analysis, write Robert Boije, Chief Economist, SBAB; Harry Flam, Professor Emeritus, Institute for International Economic Studies; John Hassler, Professor, Institute for International Economic Studies; and Lars E.O. Svensson, Affiliated Professor, Stockholm School of Economics.
Every economic-policy measure should pass a cost-benefit analysis. It should show that the benefits exceed the costs. The FI’s amortization requirements and the other credit tightening that it has achieved fails such an analysis. The credit tightening has obvious, large costs but no demonstrable benefits.
Finansinspektionens amorteringskrav och övriga kreditåtstramning har stora individuella och samhälleliga kostnader, men enligt forskningen ingen påvisbar samhällsnytta. Det är ansvarslöst att driva igenom en åtstramning som inte klarar en nyttokostnadsanalys, skriver Robert Boije, Harry Flam, John Hassler och Lars E.O. Svensson på DN Debatt.