Economic commentary: The relation between household saving and falls in house prices

Date 13/05/2011

In contrast to the situation in many other countries, there was no significant fall in housing prices in Sweden during the financial crisis and several analysts believe that Swedish housing is now overvalued. An important difference between Sweden and, for example, the United States, where house prices have fallen, is that the level of household saving is high in Sweden but was low in the United States before the crisis. A low savings ratio could thus in itself be a sign that an imbalance is developing in the economy. We have studied whether an unusually low savings ratio maybe a warning signal for an increased risk of substantial falls in house prices and have concluded that the probability of experiencing such price falls increases from 23 per cent to 43 per cent when the savings ratio is unusually low. We have also found that the real economic effects of substantial falls in house prices may be milder in those countries that have had a higher level of saving, in relation to their historical average, before the crisis.