A slowdown in the Swedish housing market is good news for the country’s financial stability rather than a major cause for concern, the central bank has said, after investor worries helped push the krona to crisis-era lows earlier in the week.
A recent dip in house prices after decades of rapid price growth has raised concerns about Sweden’s vulnerability to a sharper correction, contributing to a rapid weakening in the krona.
However, in its quarterly financial stability report released on Wednesday, the Riksbank said it expects prices to continue to grow over the next few years, albeit at a slower rate than in the past. That is a “positive”, according to the central bank, as “it will contribute to a more stable development on the housing market and a slower rate of increase in household debt”.
That said, the central bank said it was still important to push through new measures to improve the market’s resilience to any potential negative shocks. The Riksbank said it is “important” that the government take a decision on proposals that would require mortgage-holders to pay down their principal balance instead of paying only interest, and called for tax reforms to “reduce the willingness and capacity of households to take on debt”.
This is far from the first time the Riksbank has pushed for the government to take more action to rein in household debt growth. Sweden’s historically low interest rates have encouraged households to build up some of the largest levels of debt in the EU, which the Riksbank warned could make many households vulnerable when rates do finally begin to climb. It added that “if indebtedness continues to increase more rapidly than incomes, households will become increasingly sensitive to economic downturns as well as disruptions in their private finances”.
It added that the local banking system’s large exposure to the property sector makes it vulnerable to larger falls in housing prices. Lending to households and companies with collateral in property now comprises around 80 per cent of the major banks’ total lending, with growth encouraged by the rising property prices and banks reducing the risk weighting given to such loans.
As a result, the Riksbank said falling confidence in the property market could make it more expensive and difficult for the banks to renew their financing. The interconnected nature of Sweden’s banking system exacerbates these risks: all the major banks own each others’ covered bonds, meaning “problems in one bank can quickly spread to other banks and markets, and damage confidence in the entire financial system”.