Fighting Nordic Bubbles
The debate about potential financial imbalances in rapidly growing Sweden—and about the measures that should be taken to prepare for the rising risks—is heated. Moreover, the situation in neighboring Norway and Finland has much in common with that of Sweden. None of these three countries—unlike the other Nordic economies of Iceland and Denmark—saw a housing bust around the time of the recent financial crisis and they are now growing at a robust rate that looks set to continue.
The authorities are concerned about the rising levels of household indebtedness and the associated rise in house prices. In line with this, the financial supervisory authorities in each of the three countries issued guidelines in 2010 for maximum loan-to-value (LTV) ratios—85% in Sweden and 90% in Norway and Finland. Moreover, various additional regulatory and fiscal measures are being discussed, including: limits on the total loans taken out by households; limits on the proportion of a mortgage that can be borrowed at variable interest rates; amortization requirements; a reduction of the mortgage interest tax deduction; reserve requirements for mortgage lending; and lower and more binding LTV ratios. Changes to regulatory and supervisory responsibilities are also being discussed—such as giving more power to the central bank to improve macro-prudential supervision.
Housing Sector Indicators (%)
Source: National statistical institutes, OECD, Bank of Finland, National Housing Credit Guarantee Board of Sweden
Central banks in all three countries have expressed their concerns about the situation: Sweden’s central bank used rising household borrowing as one of the motives for its recent rate hikes; Norway’s central bank said last week after its policy meeting that financial stability considerations suggest the “key policy rate should not be kept low for too long;” while Finland as the lone Nordic eurozone member does not have monetary policy at its disposal, implying greater reliance on other tools to guard financial stability. (See related Critical Issue on the topic.)
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: Irish Fiscal Plan in Doubt; Fighting Nordic Bubbles; Belgian Deadlock
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