In addition to the low level of housing construction, demand for housing has risen mainly in metropolitan areas due to the greater numbers moving to these regions during the latter part of the 1990s. It is not surprising that a relatively constant, low supply, as well as high demand, should have contributed to the substantial price rises. Thus, low interest rates, an increase in disposable income and a low supply of new housing, together with high demand, are the fundamental factors that I believe have driven the rate of price increases from the mid 1990s. They also suffice to show that current price rises should not be described as an expectations-driven “bubble”. The same analysis can be performed for several other countries experiencing similar developments in their housing market, in particular the US. So did we have a housing market bubble during the crisis years at the beginning of the 1990s? I don't really believe that we did, at least not in the sense that homes were being bought for the purpose of speculation with a view to being sold once prices had risen further. Yes, prices rose sharply, especially in metropolitan regions, but these were due to reasons of a fundamental nature. Households' willingness to pay increased in line with their income during the economic upswing, the deregulation of the credit market led to the removal of some financing obstacles, and the supply of housing was, in the short term, highly inflexible. This is enough to fuel a steep rise in prices.
At that time, the credit expansion which was caused partly by the deregulation of the credit market resulted in a debt ratio of around 130 per cent, while the interest ratio increased rapidly over a couple of years from around 6 per cent to almost 10 per cent. However, there is no doubt that the recent rise in indebtedness has made households increasingly sensitive to changes in interest rates. Households tend to focus on their cash flow and are unperturbed as long as their debt-servicing costs can be accommodated in their monthly budget. But an interest rate rise of just a few percentage points would have a much bigger impact on cash flow today than when levels were around 15 per cent. An interest rate rise of four to six per cent would cause monthly costs to increase by 50 per cent. Higher mortgage rates could therefore prompt households to increase their saving and reduce their consumption more than expected or intended. Hopefully we will be able to avoid sharp, quick interest rate rises in our conduct of monetary policy, although mortgage rates are also influenced by events outside Sweden. To some extent though, the effect of any increases in rates could be alleviated by the fact that an increasing number of households have recently been switching over to fixed-rate loans. Developments in the commercial property market Prices in the commercial property market have been driven by somewhat different forces than in the housing market.