Barbro Wickman-Parak: The Riksbank and the property market Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at Fastighetsdagen 2008, Stockholm, 14 May 2008. *  *  *  Subprime loans in the United States were the origins of the deep-seated tensions in the international financial markets, which have not yet relinquished their grip after almost a year. The problems in the subprime market are an important reason behind the collapse in housing construction and the falling house prices, which have made a profound impression on the real economy in the United States. In some other countries, too, the earlier sharp rises in property prices have slowed down and been replaced by falling prices. Here in Sweden we have so far been spared these events. How does the Riksbank view future developments in the property market and what stance does the Bank's monetary policy take in relation to asset prices? Today I will address these questions. I will also briefly comment on the recent developments in the financial markets. Several countries have experienced rapidly rising house prices, for instance the United States and the United Kingdom, as well as Denmark, Ireland and Spain. Recently there has been a slowdown in the rate of increase and in some of these countries house prices are now falling. In the United States house prices have fallen by around 10 per cent since the peak in 2006 (see figure 1). In Sweden, too, house prices have risen rapidly, even more so than in the United States.
As I mentioned earlier, the problems in the US subprime market had widespread and profound effects on the international financial markets. These loans had been packaged together with other securities into structured products and sold to investors around the world. The uncertainty over where the potential losses were created a general distrust between the banks and a general increase in risk aversion. The former was expressed in a rise in the differences between interbank rates and risk-free government bonds, what are known as TED spreads. The latter was expressed in, for instance, rising credit spreads (see figures 7 and 8). For a few weeks now we have seen signs that the tensions in the credit market have eased. The credit spreads have declined and the cost of insuring against losses has fallen (see figure 9). Other signs are that the banks have been able to sell off loans from their balance sheets. They have also been able to strengthen their own capital, although a large part of this process still remains. The stock markets have also recovered. The uncertainty in the interbank market has prevailed longer; the TED spreads have remained high but have fallen over the past few days. In Sweden the TED spreads have also risen, but unlike other countries the markets have continued to function without any intervention from the Riksbank. Despite the fact that there are positive signs, it is still too early to assume the danger is past.