House price bubble ‘a myth’

House price inflation is not a problem for monetary policy and the market poses no current risks, the deputy-governor of Sweden's Riksbank, Lars E O Svensson said at a seminar on Thursday.

House price bubble 'a myth'

Svensson rejected several recent reports that the Swedish housing market is showing signs of a bubble.

“There are currently almost no risks at all, this is a myth,” he said.

The deputy-governor referred to a recent report by the Swedish Financial Supervisory Authority (Finansinspektionen – FI) on the situation for the housing market.

“Even if one makes extreme assumptions there will be very few households in financial dire straits, according to the report,” Svensson said in a seminar organised by the Centre for Business and Policy Studies (SNS) on Friday.

Irma Rosenberg, a former member of the Riksbank board, is however of another opinion. Rosenberg sees the rising mortgage burden and climbing house prices as a warning signal.

“If you look at the whole picture then one should be a little concerned, even if monetary policy is not the correct weapon to use,” she said at the SNS seminar.

Svensson has registered reservations at several meetings of the Riksbank board over decisions to leave base rates stationary, instead arguing that the repo rate should be slashed to zero (from a current 0.25 percent).

Had the rate been cut, 10,000 to 16,000 more jobs would have been created, Svensson argues.

“We would have had a smaller production gap in the economy,” he explained.

But Rosenberg disputes Svensson’s assertion.

“That a 0.25 percent lower rate would have created 16,000 more jobs does not add up to me. There must be something wrong with the model,” she said.

The Riksbank board has been roundly criticised for its interest rate forecasts and for raising the repo rate to 4.75 percent just weeks before the Lehman Brothers collapse in September 2008.

Svensson was one of those who voted for the rise.

“During the summer, inflationary pressure increased and the real economy weakened. I thought it reasonable that we continued along the interest rate path that we had projected,” Svensson said on Thursday.

“But not all have understood that in fact we eased monetary policy at that meeting by adjusting the repo rate path downwards,” he adds.

Svensson underlined that their decision would have been different had the board known that Lehman Brothers would collapse.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”