So when it comes to making assessments of what risks becoming a bubble, I believe that we must continue to make use of our experience combined with a dose of the sort of conclusion referred to in English-speaking circles as a “duck test”; if it looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck. Of course what we are talking about here is much more difficult to identify than a duck. But if there are sufficiently strong indications that developments are untenable, then there is a good probability that this is the case. And if this is expected to affect inflation and developments in the real economy, I consider the interest rate to be a possible weapon if others are not available or not sufficient – if not to prevent a bubble, then at least to tone down the bubble and its consequences. House prices today and in the coming period So what does this reasoning entail for my views on developments in house prices and lending today? Firstly, the crisis has meant that the repo rate has long been adjusted to try to alleviate the effects of the financial crisis on inflation, production and employment and to give support to the economic recovery.
Fluctuations in house prices and lending can in this way reinforce fluctuations in production and employment. In short, rising property prices often go hand in hand with an increase in lending. This means that problems in the property market often have greater effects on the financial system and the economy as a whole than do problems in, for instance, the stock market. And it is therefore important to be particularly vigilant with regard to the property market when discussing monetary policy and asset prices. I should also add that it is mainly commercial property, and not residential property, that usually causes this type of problem. “Lean or clean” – act sooner rather than just later? Let us say that property prices and credit volumes are increasing at a rate that does not appear sustainable. How should a central bank react? This is an “old” debate that has been given new life by the recent crisis. And it mainly concerns how the central bank should act when asset prices rise. In these situations it is often difficult to assess whether the current developments are reasonable or whether they are the result of over-optimistic expectations and speculation. It is also difficult to estimate the effects on the real economy and inflation. Moreover, it is difficult to judge when a potential bubble might burst. When property prices fall heavily, the real economy is often weaker and inflation lower. In this type of situation it is more obvious how the central bank should react.