Affordable housing and household indebtedness is increasingly the focus of the public debate in many countries. Erik Thedéen participated in a plenary panel together with representatives from Australia, Canada and Ireland to discuss what can be done to manage systemic risks and maintain healthy housing markets.
Speaker: Erik Thedéen, Director General
Meeting: Canada's National Housing Conference
Erik Thedéen participated in a plenary panel session at Canada's National Housing Conference in Ottawa, organized by Canada Mortgage and Housing Corporation. The topic was "Balancing Act: How Governments can manage systemic risks and maintain healthy housing markets", and Thedéen shared his view on the Swedish experience. Thedéen summarised the historical development in Sweden, what FI has done to handle vulnerabilities related to high household indebtedness, and what can be done to tackle the dual problem of the affordability of housing and excessive household debt.
The Swedish mortgage market went through a structural change during the 1990s and early 2000s, which resulted in households borrowing more at a high LTV ratio with little or no amortisation. A dysfunctional rental market, increased home ownership and heavily reformed real estate taxes contributed to an increase in mortgage borrowing. Following this development, Sweden has experienced a prolonged period of low interest rates and strong economic growth, which has pushed real estate prices and debt even higher. FI has dealt with the systemic risk connected with highly indebted households by implementing several borrower-based measures: an LTV cap and two amortisation requirements, one linked to the LTV ratio and the other to the LTI ratio.
"Our measures focus on systemic risks arising from household indebtedness. However, there is a limit to what borrower-based measures can and should accomplish when it comes to affordability. The price level is the main hurdle for young households and other first-time buyers. And affordability is closely linked to the supply of housing. Sweden needs a more functional rental market as well as cheaper construction and tax policies that enhance mobility," Thedéen said.
FI does not consider house prices to be the best measure for determining the success or failure of its policies. What matters is how the policies affect the systemic risks and vulnerabilities that FI has identified. For example, FI has identified households with high LTI ratios to be a vulnerability. Success or failure is therefore determined by how well FI manages to decrease this vulnerability without creating situations in the housing market that lead to the materialisation of risks.
"We do, however, consider the recent slow-down in the growth of house prices to be a sound development on the housing market. This will incentivise participants in the housing market to better account for the inherent price risk in residential properties and the reality that real estate prices do not always go up," Thedéen concluded.