1. The Riksbank’s survey of risks on the Swedish housing market
Björn Lagerwall

2. 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”

3. 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.

4. 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

5. 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

6. Read more about the survey on www.riksbank.com!

7. A macroeconomic analysis of house prices in Sweden Chapter II.1
Carl Andreas Claussen, Magnus Jonsson and Björn Lagerwall

8. 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

9. 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

10. 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

11. 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

12. 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

13. The macroeconomy and house prices
Household incomes/GDP
Interest rates
Inflation
Etc.
house prices

14. House prices and the macroeconomy
Household incomes/GDP
Interest rates
Inflation
Etc.
house prices

15. 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

16. ”Increased preferences for housing” another conceivable explanation
Larger proportion of consumption devoted to housing

17. 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

18. What about lowering the growth rate of house prices?
Real house prices.
Index, 2000=100
Sources: Statistics Sweden and the Riksbank

19. 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

20. 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

21. 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

22. Sources: Statistics Sweden and the Riksbank
Above the trend
Real house prices 1952 – 2010
Index 1952=100
Sources: Statistics Sweden and the Riksbank

23. 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

24. 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

25. 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

26. 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

27. 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