Changes in the Swedish mortgage market Although no large-scale market for lending to the subprime sector has developed in Sweden, there have been a number of other changes in the Swedish housing market – changes that have affected and may continue to affect developments in household indebtedness and property prices. This year new rules were introduced regarding how much capital the banks must hold in relation to the assets linked to risks, which includes lending. These rules are called Basel II. The new capital adequacy rules will take into consideration the actual risk in lending to a better extent than the older version. As lending is considered to have a fairly low risk, it will enable the banks to hold less capital in relation to their lending. This entails a lower cost for the banks. Lower costs will enable the banks to cut their margins on lending rates and compete for loan volumes. The fact that the banks have been aware that this rule would be introduced has probably contributed to the institutions cutting their lending rates in advance. It is probably in turn the increased competition that has led to banks and mortgage institutions now allowing higher loan-to-value ratios. If one can borrow a larger amount with the same collateral, the need for a down payment declines. This makes it easier for households with good incomes but little wealth to enter the housing market. Typically, this often applies to younger households who do not already own their accommodation.
But in principle, the reasoning with regard to the market for single-family dwellings also applies to the market for collectively owned  1  According to estate agents statistics (maklarstatistik.se) the price per square metre for a tenant-owned apartment has risen by 300 per cent in ten years. 2  BIS Review 56/2007  dwellings. The substantial increase in house prices has gone hand in hand with the increase in household indebtedness. Of all the loans granted to households, 85 per cent have property as collateral. A sharp fall in property prices combined with households experiencing difficulty in paying their loans could therefore cause problems for the banks. A central issue here is whether house prices have been pushed up by exaggerated optimism or by speculation. Despite the rapid upturn in prices, I do not believe that we are currently seeing any general overvaluation of the property market. This is because there are a number of factors that can largely justify the rise in prices 2 . Firstly, interest rates have been historically low in recent years. Since the Riksbank introduced its inflation target, in the mid-1990s, the inflation rate has become lower and has stabilised. A more stable development in inflation also means that the real interest rates – interest rates excluding inflation – have fallen. At the end of 1996, after the crisis years, the real variable mortgage rate was around 7 per cent. Today it is around 2 per cent.