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The Riksbank’s survey of risks on the Swedish housing market

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

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  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 surveyReal 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? Note. Index, 1996 Q1 = 100. Sources: BIS, Reuters EcoWin and the Riksbank

  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 SwedenChapter II.1 Carl Andreas Claussen, Magnus Jonssonand Björn Lagerwall

  8. High house pricesReal house prices 1952-2010. Index 1952 =100 Note. Real house prices deflated by the CPI. Sources: Statistics Sweden and the Riksbank

  9. High house pricesReal 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 pricesReal 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 pricesReal 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 pricesReal 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 • Macroeconomy • Household incomes/GDP • Interest rates • Inflation • Etc. house prices

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

  15. 1. How can the development of house prices be explained? Increased incomes Households’ real incomes. Index Q1 1986=100 Real house prices Index, Q1 1986=100 Lower interest rates Real mortgage rate, per cent Increased financial wealth Households’ real financial wealth. Index Q1 1986=100 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 • 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. Above the trend Real house prices 1952 – 2010 Index 1952=100 Sources: Statistics Sweden and the Riksbank

  23. Fundamentally explained Increased incomes Households’ real incomes. Index Q1 1986=100 Real house prices Index, Q1 1986=100 Lower interest rates Real mortgage rate, per cent Increased financial wealth Households’ real financial wealth. Index Q1 1986=100 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? • 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? • 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. The development of house prices since the report was publishedReal house prices 1952-2011. 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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