Measures against risks from household indebtedness

Summary of the speech by Finansinspektionen's Director General Erik Thedéen at the Centre for Business and Policy Studies' seminar on the economic situation on 19 November 2015.

Developments on the housing market in Sweden are strong. Over the past year the price of tenant-owned apartments has risen by almost 20 per cent and house prices by almost 14 per cent. This is partly due to demographical factors, low interest rates and lower housing taxes. When housing prices rise, debts follow. So what role does Finansinspektionen play here?

Finansinspektionen has long had the task of promoting financial stability and good consumer protection. What is new is that we are now, as of 2014, responsible for macroprudential policy in Sweden. This means that we are to intervene if financial developments could lead to problems in the economy, even if neither the stability of the financial system nor consumer protection is threatened.

What concerns us is linked to our new macroprudential policy assignment. The fact that more households are taking on loans with loan-to-value ratios above 50 per cent. Naturally, these households do not stop interest and amortisation payments on their mortgages in the case of an unforeseen event, but they reduce other forms of consumption. In this way, their behaviour could amplify an economic downturn. We therefore wish to introduce an amortisation requirement.

An amortisation requirement means that the size of households' balance sheets can decline. So far, many households have chosen to save in shares or mutual funds, largely financed by mortgages, instead of amortising their loans. This has proved to be advantageous for many people. But it means that households can become very sensitive to various types of shock. If anything occurs to make housing prices fall, there is a substantial risk that the value of the remaining assets also declines. The idea of the amortisation requirement is not to increase the total saving, but to get households to reduce their mortgages in the long run, and as a consequences also reduce the assets in their balance sheets.

Even with an amortisation requirement, housing prices and debt may continue to rise. And we must therefore be ready to take further measures. One measure that appears appropriate is to introduce a debt ceiling, that is, a limit as to how much a bank may lend in relation to the borrower's income, of around 600 per cent of the household's disposable income.

If developments continue in the wrong direction, a measures package can create an insurance against the risks that ensue from housing prices rising too fast. This could be a combination of a mortgage cap, amortisation requirement, debt ratio ceiling, and regulation of how large a percentage of incomes goes to interest rates and amortisation payments. Together, these measures would dampen credit granting and thus reduce the macroeconomic risks. It is important to point out that it may also be necessary to take other measures that lie outside of Finansinspektionen's field of responsibility.

Finansinspektionen did not receive any new powers of authority when our assignment was extended. It is important that we receive these quickly so that we do not need to wait until financial stability is actually under threat or consumers need protection before we can take further measures.

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