Lars Nyberg: Developments in the property market Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at Fastighetsvärlden (Swedish newspaper), Stockholm, 30 May 2007. *  *  *  I would like to begin by thanking you for the invitation to come here to Fastighetsvärlden and talk about the Riksbank’s view on the property market. The property market is a subject that arouses considerable interest and is discussed frequently in many different forums, both in Sweden and abroad. I have on several occasions held speeches on the subject of the property market and I see good reasons for returning to this field to give the Riksbank’s views on current developments. In recent months the US mortgage market has come under focus, mainly because of developments in the subprime market. An increasing number of US households have experienced problems in paying their loan costs and some US mortgage institutions have gone bankrupt in recent months. This has given rise to some concern that we might see a similar development in Sweden. However, I believe there is very little likelihood of this. I will explain why a little later on. Today I intend to speak mainly about how we at the Riksbank view the recent developments in the property market. In many respects, I am basing my answer on the reasoning put forward by the Riksbank in the Financial Stability Report published last week.
At the same time, this change means that both borrowers and lenders become more sensitive to developments in house prices. All other things being equal, higher loan-to-value ratios should increase the risk of loan losses for the banks. However, while the banks are allowing a higher loan-to-value ratio, they appear to have compensated for this in recent years by tightening some of the requirements for granting loans. It has also become increasingly common that mortgage institutions offer interest-only loans. This also increases the borrowers’ and lenders’ sensitivity to developments in house prices. The fact that households are choosing not to amortize their loans to the same extent may be related to the rising house prices. House-owners have been able to see their loan-to-value ratio fall even without amortization payments. Amortization is also a form of saving, but it is not self-evident that it is the best thing for a household to have its entire savings in its own housing. If they choose not to amortize the loan, they may perhaps have some other form of saving that can be used if their incomes unexpectedly decline or costs increase. To summarise, I do not see any serious risks, from a stability perspective, in households’ growing indebtedness and in rising property prices – not at present. However, the current developments cannot continue indefinitely.