BIS Review 67/2004  1  As a representative of the Riksbank, I have reason to be positive about the increasing competition since it improves efficiency in the market. Perhaps there is cause to hope that the competition in the future will also give rise to new instruments with which households can manage their interest rate risk. Here I think that the developments have much to offer. The factors discussed above, which affect supply and demand in the housing market and mortgage market, go a long way towards explaining the developments in both housing prices and household borrowing. This is not the case in all countries. In the markets where prices have risen sharpest, for example in Australia, the UK, Spain and Ireland, it is also very common to see housing as a financial asset, as opposed to somewhere the buyer intends to live. These countries have so-called buy-to-let markets, which involves buying a second house or apartment with a view to letting it. Buyers hope that the property will rise in value in much the same way as a share, yielding a return in the process. In Dublin the situation has got to the stage where rents have dropped in recent years, which should have resulted in falling house prices. But prices have continued to climb.
It is likely that a number of markets contain elements of a speculative bubble, where price developments bear no relation to the fundamental factors that normally affect supply and demand and instead are driven by expectations of future price increases. Commercial property prices in Sweden at the beginning of the 1990s gave us a clear example of how such a market works. In Sweden we don’t see any indications that speculation is of any great significance for the formation of housing prices. I think there’s reason to wonder whether such imbalances really can arise in the Swedish market. Swedish people live in their houses or apartments. Perhaps the Swedish tax system, both as regards property tax and tax on rental income, has made it unprofitable for households to buy to let. Australia, for example, has considerably more favourable tax rules. So, to sum up, it seems that both housing prices and household borrowing in Sweden are fairly well explained by the fundamental factors that usually govern supply and demand. This doesn’t mean of course that prices cannot fall; far from it. Uncertainty about income developments and rising interest rates could, for example, curb demand at the same time as the supply increases when the construction of new homes picks up. In that case we should expect weaker price increases or even a drop in prices. But the prices shouldn’t fall as much or as fast as when demand contains obvious elements of speculation.