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Sweden facing possible property bubble warns IMF

Sweden News
25 Aug 2014, 13:41 GMT+10

COPENHAGEN, Sweden - The IMF has called for an urgent and comprehensive set of macroprudential measures to slow soaring mortgage debt and protect the country's wider financial system.

Nobel Prize laureate and economist Paul Krugman has made a similar call, saying Sweden probably has a significant housing bubble that needs to be addressed.

Property prices in Sweden have nearly tripled in just two decades. While in July, home prices rose at a double-digit pace from a year ago for the first time in more than four years.

The country's household debt-to-income ratio is now above 170% - among the highest in Europe and rising. The issue is worrying Riksbank policymakers, who, out of fear of spurring more borrowing, have kept interest rates higher than warranted by inflation.

The central bank's rates are still at historic lows, however, as there are fears that private consumption which drives the country's GDP would suffer if the rates were increased.

"To stem the increase in already high levels of household debt, moving beyond credit supply measures to directly contain mortgage demand is a priority," the IMF said in its most recent report. "This will help free the Riksbank to pursue its inflation target with less concern about financial stability risks. With the recovery firming up, there is scope for additional reforms to reduce unemployment, further increase housing supply, and shift towards fiscal consolidation to preserve Sweden's fiscal buffers."

"Alleviating housing market supply constraints would address an important underlying factor behind the rise in residential property prices especially in urban areas. The demand for housing is outstripping supply, reflecting ongoing rapid urbanization and immigration trends, and has resulted in higher house and apartment prices, driving up the size of mortgages," the IMF report finalised on 13 June 2014 said. "Containing these house price pressures will require a continued and strong effort to expand more significantly the stock of affordable housing, including additional reforms to zoning, permitting, and the rent-setting process. Public infrastructure investments coordinated with municipalities would increase the attractiveness of housing investments by the private sector."

Less than a month away from a general election, there are no votes to be had in campaigning for borrowing to be made more difficult for consumers, but there are concerns in government that the country may lose its coveted AAA score from credit rating agencies Fitch and SP if the situation isn't addressed.

Four in 10 mortgage borrowers in Sweden are not paying off their debt, according to data collected by Reuters, and those that are repaying the principal are doing so at a rate that would on average take nearly a century.

Sweden suffered a serious property bubble in 1992 after financial deregulation in the 1980s led to a boom in commercial property that eventually crashed. Two thirds of the value was wiped from commercial properties and two of Sweden's biggest banks had to be nationalized to keep them afloat.

It took three years for the country to pull itself out of recession.

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