In the United States it is common that the bonds issued by institutions are tied to different parts of the credit portfolio, which have different risks. These types of instrument have been an attractive investment for many investors in recent years, as the return on more traditional investment instruments, such as government bonds, has been considered too low. The high demand for the higher risk parts of the portfolio, which includes subprime, have meant that the banks’ financing costs for the higher risk loans have declined in recent years. This may have encouraged the rapid growth in the subprime market in the United States. The US method of securitisation is very rare in the Swedish mortgage market. In Sweden, mortgages are traditionally financed through the institutions and banks  4  BIS Review 56/2007  issuing bonds with the total assets as collateral. If a Swedish bank were to have a larger percentage of loans with poorer credit ratings, it would mean that the total financing cost would rise. Although the market for subprime in Sweden is currently small, it is conceivable that it could grow with time. Essentially, this is a positive development as it enables more households to enter the housing market. More types of mortgage do not necessarily mean that credit management in mortgage institutions will deteriorate.
Lower real interest rates mean that it becomes cheaper for households to take out loans when buying housing. The low interest rates are therefore an important driving force behind the price increases. Secondly, developments in the real economy have been favourable after the crisis. Although unemployment has periodically been high measured by Swedish standards, households’ disposable incomes have increased substantially. Higher incomes have meant that households can afford to pay more for their housing. Thirdly, prices have also been affected by the fact that construction declined considerably directly after the crisis. When the demand for housing accelerated, it took some time before this could be met by a growing number of new houses on the market. Quite simply, it takes time to build houses. It was not until around 2000, when house prices had become higher and made new production of housing more attractive, that construction really accelerated. Moreover, there have been some significant changes in the mortgage market, which have also contributed to house prices rising so sharply. I will return to these changes shortly. The development of these factors largely explains why house prices have risen as much as they have in recent years. It does not appear to be a question of general over-optimism among households and lenders. I therefore do not see any serious risks to financial stability from developments in house prices at present. Household indebtedness has also risen substantially Household indebtedness has kept pace with property prices and has thus risen substantially.