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 In some other countries, too, the earlier sharp rises in property prices have slowed down and been replaced by falling prices.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.
Indeed, it is worth noting that in 1994,  12  This lack of spare capacity in firms is hard to reconcile with the relatively sharp drop in GDP in the recession and the resilience of employment. However, it is possible that future data revisions may change the profile of GDP during the recession. It is also possible that underlying productivity growth trends were overestimated during the long expansion of the 1990s and 2000s, and that the economy was further above capacity in 2006/7 than was appreciated at the time. 10  BIS Review 158/2010  when the early 90s fiscal consolidation began, the UK economy grew by over 4%, which is still the strongest rate of GDP growth we have seen in any calendar year since the late 1980s. The strength of growth surprised forecasters, who had greatly underestimated the momentum of growth which would be generated by a rebound in private sector demand, a strong world economy and a competitive exchange rate. 13 There is a risk that we are making the same mistake again because of the preoccupation with downside risks following the financial crisis. The second key argument is that higher interest rates should help to exert a brake on abovetarget inflation and keep inflation expectations anchored around the 2% target. There are significant upside risks to the forecast recently published in the Bank’s Inflation Report which could sustain the period of above-target inflation into 2012 and 2013.