The headquarters of the Swedish central bank in Stockholm. If the Riksbank raises interest rates according to its own projections, mortgage rates would double in under three years.


Reuters/Stockholm



With the latest effort by Sweden to cool its housing market postponed by a court, concerns are escalating that political stagnation, a faulty institutional set-up and high household debt risks sending the triple A economy into a tailspin.
A move to force homeowners to pay down the principal of their mortgages – what many economists say is the very least needed to avoid a housing bubble – was postponed after a court in April said the Swedish Financial Supervisory Authority (FSA) lacked a legal mandate.
“The housing market in this country is dysfunctional and households are borrowing more and more and more,” Stefan Ingves, the Governor of Sweden’s central bank.
“This is one of those places in the world where the indecision bias has figured prominently and we are still seriously heading in the wrong direction.”
His remarks highlight the bank’s quandary – forced to cut rates and buy bonds to ward off deflation while a fast-growing economy and low rates are pushing home prices up at the same time. With a bubble already feared, GDP grew 2.7% in the fourth quarter, the fastest in more than three years.
The legal setback, which may only be resolved next year as lawmakers scramble to rewrite the FSA’s mandate, could have been a small problem if other policies were on the cards.
But with nothing else in the pipeline, it showed the extent of political stagnation under a minority centre-left government and institutional impasse after the central bank was stripped of regulatory powers, hindering regulatory reform.
“My firm opinion is that we should accelerate the pace,” said former Finance Minister Anders Borg. “But I have the impression that the opposite is true.”
The government fears any moves to cool the housing market – like cutting mortgage tax breaks – will anger voters or dampen economic growth.
Even before she was elected in September, Finance Minister Magdalena Andersson said that she would love to re-introduce a property tax – speaking as an economist. But voters would not stand for it, she added.
Sweden skirted the 2008-2009 crisis, avoiding the kind of housing market crash that hit countries like Ireland and Denmark. But record low rates have stoked fears Sweden could be next. The IMF said in 2013 that prices were more than 15% too high and property markets have surged further since then.
The FSA introduced a loan-to-value cap in 2010 to curb borrowing and has beefed up capital requirements for banks, but house prices soared 15.5% year-on-year in April.
The market is so frenzied that buyers in Stockholm often bid by text messages to brokers before they even inspect homes.
There are fears households have grown accustomed to ultra-low interest rates. In a recent survey more than half of the respondents said it would be a big or fairly big problem if housing costs in Sweden rose by 50%. Yet, if the Riksbank raises rates according to its own projections, mortgage rates would double in under three years.
Ingves has been calling for action for years. But in 2013 Sweden – unlike the UK and many other countries – handed regulator powers solely to the FSA, which initially rejected calls for tougher amortisation rules and cutting tax breaks.
Borg, who was finance minister at that time, says it might be time to give the job back to the central bank. “The next two or three years is the window of opportunity when the new tools has to be applied and if they are not applied, that would be a strong indication that the institutional set-up is wrong,” Borg said.
“We should apply a new instrument every six months.”
A tricky parliamentary situation has added to woes. The Social Democrat-Green minority government had its budget bill rejected by parliament and escaped snap elections after the main opposition bloc agreed a deal not to block future finance bills.
The deal freezes out the far-right Sweden Democrats, who hold the balance of power, but the tempo of reforms is slow as the government has to get opposition approval for most bills.
“Legislation takes time in Sweden”, Financial Markets Minister Per Bolund of The Green party told Reuters. “It will not be done over night.”




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