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The Riksbank’s survey
of risks on the Swedish
housing market
Björn Lagerwall
Outline of the presentation
General description of the survey
More detailed description of one of the chapters of the
survey: ”A macroeconomic analysis of house prices in
Sweden”
Background to the survey
Real house prices in various countries
300
250
300
• From the mid 1990s: housing booms in many countries…
• …followed by housing busts and a financial crisis
• In Sweden, house prices continued to increase…
• What are the risks in the Swedish housing market?
250
200
200
150
150
100
100
Sweden
USA
50
50
Spain
Ireland
Germany
0
0
80
82
84
86
Note. Index, 1996 Q1 = 100.
88
90
92
94
96
98
00
02
04
06
08
10
Sources: BIS, Reuters EcoWin and the Riksbank
About the survey
Started in February 2010 – ordered by the Executive
Board (produced by the Riksbank’s staff)
Consists of 12 independent reports
Published on 4 April 2011
Some important questions in the
survey
What role can monetary policy play to prevent risks
on the housing market?
Is the Swedish housing market overvalued?
Is financial stability threatened by a fall in house prices?
Chapters II.5 and II.6
What needs to be done (within the near future)?
Chapters III.3 and IV
Read more about the survey on
www.riksbank.com!
A
macroeconomic analysis
of house prices in Sweden
Chapter II.1
Carl Andreas Claussen, Magnus Jonsson
and Björn Lagerwall
High house prices
Real house prices 1952-2010. Index 1952 =100
Note. Real house prices deflated by the CPI.
Sources: Statistics Sweden and the Riksbank
High house prices
Real house prices 1952-2010. Index 1952 =100
Why?
Note. Real house prices deflated by the CPI.
Sources: Statistics Sweden and the Riksbank
High house prices
Real house prices 1952-2010. Index 1952 =100
Monetary policy?
Note. Real house prices deflated by the CPI.
Sources: Statistics Sweden and the Riksbank
High house prices
Real house prices 1952-2010. Index 1952 =100
If prices fall?
Note. Real house prices are deflated by the CPI.
Sources: Statistics Sweden and the Riksbank
High house prices
Real house prices 1952-2010. Index 1952 =100
Overvalued?
Note. Real house prices are deflated by the CPI
Sources: Statistics Sweden and the Riksbank
The macroeconomy and house prices
Macroeconomy
•
•
•
•
Household incomes/GDP
Interest rates
Inflation
Etc.
house
prices
House prices and the macroeconomy
Macroeconomy
•
•
•
•
Household incomes/GDP
Interest rates
Inflation
Etc.
house
prices
1. How can the development of house
prices be explained?
Real house prices
Increased incomes
Index, Q1 1986=100
Households’ real incomes. Index Q1 1986=100
Increased financial wealth
Lower interest rates
Households’ real financial wealth. Index Q1 1986=100
Real mortgage rate, per cent
Sources: Statistics Sweden and the Riksbank
”Increased preferences for housing” another
conceivable explanation
Larger proportion of consumption devoted to
housing
2. The role of monetary policy
House prices
2-5 per cent
Repo rate
1 percentage point
GDP
½ - 1 per cent
Inflation
½ percentage
point
What about lowering the growth rate
of house prices?
Real house prices.
Index, 2000=100
Sources: Statistics Sweden and the Riksbank
Costs of keeping house prices at trend
House prices, trend from 2004 and onwards
Annual percentage change unless otherwise stated
2004
2005
2006
2007
2008
2009
2010
0
0
0
0
0
0
0
(Actual deviation from trend)
5.6
11.2
17.2
22.9
15.9
17.6
19.9
Repo rate, per cent
4.4
5.1
7.2
8.5
4.9
0.1
1.7
(Actual repo rate)
(2.2)
(1.7)
(2.2)
(3.5)
(4.1)
(0.7)
(0.5)
CPIF
-0.3
-1.8
-3.5
-4.3
-1.1
0.3
0.2
(Actual CPIF)
(1.1)
(1.1)
(1.4)
(1.5)
(2.7)
(1.7)
(2.0)
2.3
0.16
0.1
-0.6
0.0
-4.0
4.6
(4.2)
(3.2)
(4.3)
(3.3)
(-0.6)
(-5.3)
(5.5)
Real house prices, percentage deviation from trend
GDP
(Actual GDP)
High macroeconomic costs of using monetary policy to restrain rising
house prices
3. What will happen if there is a
dramatic fall in house prices?
Assume: house prices fall by 20 per cent during the course of
a year
The reason for the fall matters for the effects
1 – 2 per cent lower GDP
0 – ½ per cent lower inflation
½ - 1 percentage point lower repo rate
General downturn
Collapse of confidence in the housing market
Preconditions for results
Relations are stable over time
The repo rate can be cut to counteract the fall in house prices
4. Are houses overvalued?
Houses are overvalued if
1.
2.
3.
house prices are above their long-term trend
house prices cannot be explained in terms of fundamental
factors
forecasts from the models indicate falling house prices
Above the trend
Real house prices 1952 – 2010
Index 1952=100
250
250
Actual real house prices
Trend 2.9 per cent
200
200
150
150
100
100
50
50
0
0
52
56
60
64
68
72
76
80
84
88
92
96
00
04
08
12
Sources: Statistics Sweden and the Riksbank
Fundamentally explained
Real house prices
Increased incomes
Index, Q1 1986=100
Households’ real incomes. Index Q1 1986=100
Increased financial wealth
Lower interest rates
Households’ real financial wealth. Index Q1 1986=100
Real mortgage rate, per cent
Sources: Statistics Sweden and the Riksbank
Will house prices fall?
Forecasts from models do not indicate a fall in prices
but house prices are not independent of the general state of the
economy
Summary
Why higher house prices?
incomes
wealth
mortgage rates
preferences (?)
The role of monetary policy
Relatively limited effect of monetary policy on house prices
Costly to use monetary policy to dampen house prices
Summary
If house prices fall?
Relatively limited effects. Preconditions
Is housing overvalued?
Prices are above trend
but fundamentally explained
Models do not indicate price falls in the period ahead
but house prices not independent of the general state of the
economy
The development of house prices
since the report was published
Real house prices 1952-2011. Index 1952 =100
250
250
House prices have ”levelled off” during the year
•
•
•
200
Uncertainty about economic activity
Mortgage ceiling
Higher (variable) mortgage rates
200
150
150
100
100
Real house prices
50
50
Q3 2011
0
0
52
56
60
64
68
72
76
80
84
88
92
96
00
04
08
12
Sources: Statistics Sweden and the Riksbank