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.
The forecast for 2004-2006 is that of the National Board of Housing, Building and Planning . Household indebtedness Per cent 160  16  120  12  80  8  40  4  0 1980  0 1982  1984  1986  1988  1990  1992  Debt to income ratio (LHS)  1994  1996  1998  2000  2002  Post-tax interest ratio (RHS)  Sources: Statistics Sweden and the Riksbank  Households’ real and financial assets 45  5000 Real assets (Billion SEK, LHS) Financial assets (Billion SEK, LHS)  4000  40  Debt as percentage of total assets (RHS)  3000  35  2000  30  1000  25  20  0 1988  1990  1992  1997  1999  2001  2003  2004 kv2  Sources: Statistics Sweden and the Riksbank. BIS Review 67/2004  5  The major banks’ profits SEK billion, prices in 2004  Profit before loan losses  dec-04  0 dec-02  0 dec-00  30  dec-98  30  dec-96  60  dec-94  60  dec-92  90  dec-90  90  Loan losses, net  Sources: The banks’ reports and the Riksbank. 6  BIS Review 67/2004