Finance and economics: Property in Sweden Home is where the heartache is
House prices in Sweden continue to soar, to regulators' despair.
ASK a central banker what regulators should do when rock-bottom rates cause house prices to soar, and the reply will almost always be “macropru”.
Raising rates to burst house-price bubbles is a bad idea, the logic runs, since the needs of the broader economy may not square with those of the property market.
Instead, “macroprudential” measures, meaning restrictions on mortgage lending and borrowing, are seen as the answer.
But this medicine is hard to administer, as Sweden's housing market vividly illustrates.
Swedish house prices have doubled in the past decade, their rapid ascent only briefly interrupted by the financial crisis.
So far this year they have risen by about 14%. Apartment prices have been even giddier, rising by more than 150% in ten years.
In part, this is a simple function of supply and demand.
Stockholm is among Europe's fastest-growing cities, with the recent influx of Middle Eastern refugees only adding to the demand for housing.
Last month the country's migration agency said it expected as many as 190,000 new arrivals by the end of the year, double its previous estimate.
Sluggish and restrictive planning procedures limit supply: the current shortage of around 150,000 homes is expected to triple by 2025.
A counterproductive rent-control regime has crimped the supply of flats in particular, and led to long waiting lists.
Earlier this year an apartment in central Stockholm went to someone who had been in the queue since 1989.
Low interest rates have given Swedes the capacity to borrow more, pushing prices ever higher.
The debt of the average household has reached 172% of income after tax.
For people with mortgages in the big cities, the figure is nearly double that.
The most obvious way to calm things down is to raise rates.
But the Riksbank, Sweden's central bank, tried that in 2010-11, with disastrous results.
Unemployment stopped falling and inflation soon withered, stirring fears of deflation.
That prompted the Riksbank to reverse course in late 2011 and start cutting rates again.
The benchmark has ended up lower than it was to begin with, at -0.35%, increasing the sums flooding into housing.
“It's like mopping whilst the tap is running at full flow,” complains one official.
To try to stanch the flow, the Finansinspektionen (FI) , the country's financial watchdog, has adopted curbs on both lending and borrowing.
In 2013 it tightened capital requirements for mortgages, and since September it has required banks to hold an extra counter-cyclical capital buffer of 1% of all risk-weighted assets, to increase to 1.5% by next June.
This will help if the property bubble bursts, but clearly has not been enough to stop it inflating.