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The Riksbank’s survey of risks on the Swedish housing market
Björn Lagerwall
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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”
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Background to the survey Real house prices in various countries
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? Sources: BIS, Reuters EcoWin and the Riksbank Note. Index, 1996 Q1 = 100.
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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
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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
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Read more about the survey on www.riksbank.com!
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A macroeconomic analysis of house prices in Sweden Chapter II.1
Carl Andreas Claussen, Magnus Jonsson and Björn Lagerwall
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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
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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
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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
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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
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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
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The macroeconomy and house prices
Household incomes/GDP Interest rates Inflation Etc. house prices
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House prices and the macroeconomy
Household incomes/GDP Interest rates Inflation Etc. house prices
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1. How can the development of house prices be explained?
Real house prices Index, Q1 1986=100 Increased incomes Households’ real incomes. Index Q1 1986=100 Increased financial wealth Households’ real financial wealth. Index Q1 1986=100 Lower interest rates Real mortgage rate, per cent Sources: Statistics Sweden and the Riksbank
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”Increased preferences for housing” another conceivable explanation
Larger proportion of consumption devoted to housing
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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
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What about lowering the growth rate of house prices?
Real house prices. Index, 2000=100 Sources: Statistics Sweden and the Riksbank
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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 Real house prices, percentage deviation from trend (Actual deviation from trend) 0 5.6 11.2 17.2 22.9 0 15.9 17.6 19.9 Repo rate, per cent (Actual repo rate) 4.4 (2.2) 5.1 (1.7) 7.2 8.5 (3.5) 4.9 (4.1) 0.1 (0.7) 1.7 (0.5) CPIF (Actual CPIF) -0.3 (1.1) -1.8 -3.5 (1.4) -4.3 (1.5) -1.1 (2.7) 0.3 (1.7) 0.2 (2.0) GDP (Actual GDP) 2.3 (4.2) 0.16 (3.2) (4.3) -0.6 (3.3) 0.0 (-0.6) -4.0 (-5.3) 4.6 (5.5) Interpretation of the table To keep house prices at the trend level, the repo rate would have had to be 8.5 per cent in 2007 instead of 3.5 per cent, which would have led to… inflation in 2007 of -4 per cent instead of 1.5 per cent a fall in GDP in 2007 of 0.6 per cent instead of growth of 3.3 per cent High macroeconomic costs of using monetary policy to restrain rising house prices
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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 1 – 2 per cent lower GDP 0 – ½ per cent lower inflation ½ - 1 percentage point lower repo rate The reason for the fall matters for the effects 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
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4. Are houses overvalued? Houses are overvalued if
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
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Sources: Statistics Sweden and the Riksbank
Above the trend Real house prices 1952 – 2010 Index 1952=100 Sources: Statistics Sweden and the Riksbank
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Fundamentally explained
Real house prices Index, Q1 1986=100 Increased incomes Households’ real incomes. Index Q1 1986=100 Increased financial wealth Households’ real financial wealth. Index Q1 1986=100 Lower interest rates Real mortgage rate, per cent Sources: Statistics Sweden and the Riksbank
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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
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Summary Why higher house prices? The role of monetary policy 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
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Summary If house prices fall? Is housing overvalued?
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
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House prices have ”levelled off” during the year
The development of house prices since the report was published Real house prices Index 1952 =100 House prices have ”levelled off” during the year Uncertainty about economic activity Mortgage ceiling Higher (variable) mortgage rates Sources: Statistics Sweden and the Riksbank
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