However, the fact that the Riksbank clearly indicated that the development of household indebtedness and housing prices were not sustainable in the long term and that monetary policy considered this circumstance may have played an important role in curbing this development. In that case, this is exactly what is meant by leaning against the wind. The housing market today Housing prices have recently started to rise again, which has aroused some attention, not without reason. It is undeniably remarkable that housing prices are rising and that the rate of increase of the banks’ lending to households has started to grow again, at the same time as GDP is very weak and unemployment is rising. However, it seems reasonable to believe that this is because it is inexpensive to borrow money due to the low interest rates prevailing. Rising stock market rates and steadily-growing consumer confidence are certainly also significant. Household borrowing to invest in housing is also an effect we actually hoped to achieve by implementing a low interest rate. It is contributing to supporting demand and employment. Even so, household saving has risen rapidly since 2007, from approximately eight to around 13 per cent of disposable income. Over the short term, I do not consider the development of the housing market to be a problem. Housing prices in Sweden have certainly risen rather rapidly in real terms too, but there are good explanations for this.
This should help to deter future speculative attacks on the Hong Kong dollar. However, we have to acknowledge that the possibility of short term interest rates shocks does exist under the currency board mechanism and the banks therefore need to take this into account in the way in which they run their business and manage their balance sheets. 21. Bearing this in mind, I draw three main supervisory lessons from the regional crisis and its impact on Hong Kong: • First, it is important for banks to maintain a strong balance sheet that can withstand the interest rate fluctuations to which I have referred and maintain the confidence of the public. Banks in Hong Kong score well in this respect but it is not something that can be taken for granted. I think that it is true to say that some banks did expand their loan books too rapidly during the mortgage boom in 1997. As a result, loan to deposit ratios came under some strain. The banks were also exposed to growing interest rate risk because a substantial proportion of their assets are linked to best lending rate while their liabilities are linked to HIBOR. This has been a reminder of the need to maintain sound fundamentals: high capital adequacy and liquidity ratios; prudent loan classification and provisioning; and sound risk management. • A second and related lesson from the region is that banks need to beware of excessive lending to finance overheated asset markets.