2014 In-Depth Review for Sweden March 28, 2014 DG ECFIN

2 Agenda Macroeconomic Imbalance Procedure In-depth review of Sweden Next steps

3 Macroeconomic Imbalance Procedure - Alert Mechanism Report – yearly … proposes on the basis of a scoreboard of indicators which countries are susceptible to imbalances and need to have an In-Depth Review AMRIDR 14 Feb May Member States 28 Nov March Member States 13 Nov March Member States

MIP: the Procedure Alert mechanism report Nov Programme countries their own enhanced surveillance No problem Procedure stops In-depth reviews Commission prepares in- depth country reviews (IDR), using a wide set of indicators and analytical tools. No problem Procedure stops Excessive imbalances Imbalances Recommendations under European Semester June 2014 Decision on triggering corrective action (it depends on quality of NRPs and SPs/CPs) June 2014 Monitoring and subsequent steps

Findings of the 2014 IDRs Excessive ImbalancesSI, HR, IT opening of corrective arm will be decided in June after examination of NRPs and SGPs Imbalances BE, BG, DE, IE, ES, FR, HU, NL, FI, SE, UK of which requiring decisive action: IE, ES, FR, HU No ImbalancesDK, MT, LU

IDRs Cover a Very Wide Range of Issues Main issues External sustainabilityES, IE, FR, HR, HU Persistent large surplusDE, (NL, SE, LU) Price/non-price competitivenessBE, FR, IT, HU, SI, FI, UK, ES, HR, DK, LU Housing and mortgage marketsES, NL, SE, UK, IE, HU Households indebtednessDK, IE, ES, FR, HR, HU, MT, NL, LU, SE, UK Firms indebtednessIE, ES, HR, HU, NL, SI, UK, LU Labour marketBG, IE, ES Financial sector stabilityIT, ES, IE, SI Other issues Public debt, potential growth, subdued demand/low investment Unemployment, energy dependence, innovation and R&D, state-owned enterprise, networks, FDI

7 Agenda Macroeconomic Imbalance Procedure In-depth review of Sweden Next steps

MIP scoreboard of indicators for Sweden (AMR 2013)

Issues at stake for Sweden Issues Current account Export market share Private debt Housing Potential concerns  Misallocation of resources?  Loss of competitiveness?  Vulnerability to interest rate, income or employment changes?  Impact on consumption and investment?  Impact on financial sector?  Impact on private indebtedness?  Hampering labour mobility?

Current account surplus - not indicating an imbalance - caused by prudent policies (high savings by households and govt) and strong competitiveness, not by artificially boosted exports or lower demand (except construction) - on a downward trend CLEARED Flashing indicators – Sweden

Flashing indicators - Sweden Losses in export market shares - Not due to weak competitiveness - Common feature for all "old" MS - Losses in goods compensated partly by gains in services CLEARED

Flashing indicators – Sweden High private debt CSR Households (83% of GDP) - Corporations, consolidated debt (128% of GDP, EU-average: 91% of GDP) WATCH OUT !

Corporate debt - Overstated by a large share of intra-group loans (lower risk) - Intra-group loans related to efficient tax planning by multinationals - Indicators of financial health OK - Excluding intra-group loans, debt at 90% of GDP… still high !

Household debt 83% of GDP or 158% of gross disposable income Factors: Low interest rates Debt-bias in taxation Limited amortisation House price growth Low supply of new housing

Low imminent deleveraging pressures but macroeconomic risks on consumption

Evolution of financial resilience since the late 1990s Major trends Increase of the loan-to-value ratio of new mortgages Lengthening of actual repayment periods Predominance of variable interest rate loans Risk of income loss related to unemployment or sickness has become more significant Loan-to-value ratio of new mortgages

Despite the measures taken so far, debt-to-GDP is still pointing upward 85% loan-to-value cap 15% risk weight floors on mortgage loans Amortisation culture: amortisation down to 70% and individual amortisation plan Regulation on fairer rules for mortgages repayment: interest rate compensation and repayment in case of a general downturn in housing market Measures taken

Policy avenues to curb household indebtedness Promote sound lending practices Increase amortisation pace and requirements Base lending on actual repayment ability rather than value of underlying asset Review taxation Reduce gradually tax deductibility of mortgage interest: rate, maximum deductible amount, scope Strengthen recurrent property taxation Address housing market imbalances…

 - Steady, sharp and almost uninterrupted house price growth since 1994  - Nominal house prices increased by more than 205% (EU: 80%), while real house prices increased by 128% (EU: 25%)  - Prices remained relatively stable even during the crisis Housing market developments But: House price increases are fuelling private indebtedness and can have an important impact on consumption, economic performance and financial stability -> more in-depth analysis is required

House price levels - Traditional indicators, such as affordability (price-to-income) and dividend (price-to- rent) ratios suggest that house price levels are above their long-term average; - Price-to-income ratio: increased dynamically and remained higher than EA/OECD average after the crisis. - Prices are not growing excessively since 2010, rather on a stabilising path (but at historically high levels) IDR: Can house price increases be explained by favourable fundamentals only? Is there a macroeconomic risk?

House prices have been largely driven by favourable fundamentals… - A steadily rising population, in particular in the major cities - Strong economic fundamentals of Sweden (high employment rate, steeply growing disposable incomes, …) - Highly favourable credit conditions (low interest rates, non- amortised mortgage loans, …) - Strong tax incentives for house purchase (generous income tax deductibility, limited recurrent property tax, …) - but: particularly sharp increase of house prices in the main urban areas (in particular Stockholm) cannot be explained by favourable fundamentals only; additional inefficiencies also fuel price increase Lack of sufficient housing supply (widespread housing shortage in Sweden) Non-efficient use of the existing housing stock (rental market inefficiencies, high transaction tax)

Supply-side constraints (1): New constructions Lack of new constructions due to: -Long and complex planning and zoning process; -Local municipalities have a key role (planning monopoly, procedures, land ownership,..), but have no real incentives to support housing; -Value of land increases more than housing; -Non-transparent land allotment; -Limited competition in the construction sector; -Additional support would be needed for housing segment typically not provided by the market (student, affordable, …)

Supply-side constraints (2): utilisation of existing stock Rental market: -Strong rigidities market: wide divergence between rental prices and market prices in Stockholm mainly -Wide price divergence creates excessive demand, lock-in effect, limited new constructions, price pressure on comparable housing segments,.. Existing housing stock High level of transaction tax disincentives transactions (lock-in)

Policy recommendations on housing Reduce generous tax incentives (possible reduction of tax rates, limitation of scope, time, deductible amounts, maximum amounts,...); Increase recurrent taxation/decrease transaction tax; Address factors holding back new construction (simplify planning and building process, revise municipalities’ incentives, increase competition, address specific segments, …); Tackle most pressing rental market inefficiencies (reform rent setting to close such wide divergence compared to market prices,...)

25 Agenda Macroeconomic Imbalance Procedure In-depth review of Sweden Next steps

European Semester: country specific recommendations based on the IDR; proposed by European Commission, agreed by Member States Monitoring of on-going developments in Sweden Careful implementation of the recommendation is needed: measure are interlinked and reinforce each other, have strong macroeconomic impact, political consensus needed ‘Stock’ type of imbalances require more time to unwind Will forthcoming stronger economic growth and the ongoing wide debate in Sweden pave the way for further sound policy actions?

Thank you!