New issue of the journal Sveriges Riksbank Economic Review
Dear readers, This issue contains articles about the development of prices on the Swedish housing market, the effects of various measures to reduce household indebtedness and challenges faced and considerations made by central banks when they lend money to the financial system.
Is a bubble forming in Swedish housing prices?
Emilio Dermani, Jesper Lindé and Karl Walentin analyse the development of prices for single-family dwellings in Sweden 1990–2015 from an international perspective. They find that several fundamental factors acting together may explain the rise in prices experienced across the country as a whole. Compared with other countries in the study, Sweden has had a greater increase in disposable incomes and financial net wealth but also, at the same time, a lower level of residential investment. Together with the rapid rate of population growth and the exceptionally low nominal and real interest rates of recent years, this has contributed towards the strong increase of housing prices in Sweden.
They also study the development of prices on the municipal level, focusing on municipalities in which households have unusually high housing expenditure in relation to income. They find that this phenomenon is primarily found in metropolitan areas and that the inhabitants of these municipalities have, for a long time, spent a larger proportion of their incomes on housing than have inhabitants in the average municipality.
Even though their analysis does not support the hypothesis that the market for single-family dwellings is necessarily overvalued, the authors consider that the rising prices may be unsustainable in the long term. For example, a powerful and sustained rise in the real interest rate would lead to the risk of a rapid fall in housing prices. There are thus good reasons to halt the rise in household indebtedness using various types of policies.
What are the macroeconomic effects of reducing household debt?
Daria Finocchiaro, Magnus Jonsson, Christian Nilsson and Ingvar Strid study, using a macroeconomic model, how different households would be affected by more stringent macroprudential policy measures or tighter mortgage interest deduction. They show that stricter requirements for loan-to-value limits, debt-to-income limits and amortisations will lead, in the longer term, to a reallocation of resources from lenders to borrowers.
They also show that tighter mortgage interest deduction affects households differently depending on how the government spends the budget funds made available. If the borrowers are compensated for the reduced tax relief on mortgages, such a measure can be positive for their consumption other than housing.
How monetary policy is affected depends on the type of measure implemented; in some cases monetary policy may need to become more expansionary, and in others tighter.
The article concludes with an analysis of how household indebtedness affects the impact of monetary policy on demand and inflation. The higher indebtedness is, the greater effect an interest rate rise will have on borrowers' interest expenditures and disposable incomes, which, in turn, will give households less scope for other consumption. The effects of an interest rate rise on demand – and thus on inflation – is therefore greater today than when inflation targeting was introduced in the mid-1990s.
The central bank's task of providing liquidity to the financial system – what are the challenges?
Christoph Bertsch and Johan Molin review the central bank's role as a provider of liquidity to the financial system.
The authors start by analysing the provision of liquidity by central banks using economic theory and historical examples. They go on to present the various tools that today's central banks can use to supply liquidity in various situations.
The authors then analyse, in depth, the special challenges and considerations facing central banks when they choose their tools and determine the conditions for their use.
They discuss, among other matters, how these challenges and considerations have been affected by the global financial crisis. Special attention is given to potential obstacles to the effectiveness of central bank liquidity provision and implications for market discipline and risk-taking in financial markets.
Finally, Bertsch and Molin discuss how structural changes in the financial system, new regulations and technological innovations in the area of finance may affect the conditions for the central banks' liquidity support in the future.