An important issue in the analysis of stability is therefore whether there is a risk of house prices falling sharply and thereby eroding the security value underlying loans to households. Security value is of no consequence as long as borrowers can service and repay their loans but if a household becomes unable to pay, it is important that the value of the pledge covers the loan. While one cannot be absolutely sure about the appropriate long-term price level for houses and tenant-owned apartments, the estimates the Riksbank has made in various contexts do suggest that fundamentals such as incomes, interest rates and residential construction provide a fairly good explanation of both house prices and loans in the past decade. This reduces the risk of house prices falling sharply. Moreover, the speculative elements in the housing market are probably small. One reason for this is that Swedish households, unlike households in a number of other countries, buy housing to live in rather than to make a profit. They do not buy a house merely to be able to sell it a little later and make a capital gain. This means that prices are not forced up in the same way as in a financial bubble like the one we saw on the stock market not so long ago. Neither is it remarkable that households have enlarged their debts so much since the mid 1990s. Debt ratios were low after the crisis in the early 1990s.
In the UK, where the annual increase in house prices amounted to approximately 4 per cent the second quarter this year, the ratio of debt to disposable income is around 150 per cent. In Sweden, house prices have more than doubled in the past decade, with a par-ticularly strong increase in metropolitan regions. Part of the explanation is that household incomes have also risen rapidly in this period. It is reasonable to assume that house prices follow income in the long run. What gives some cause for concern is that house prices and household debt have both been rising very much faster than income and have continued to do so this year. At the end of the second quarter this year, house prices had risen by more than 7 per cent and house-hold debt by over 10 per cent compared with a year ago. Since 1995, house prices and debt have both risen over 40 per cent more than income. The pertinent issues have mainly been whether there are “bubbles” in the housing market in the sense that house prices have deviated markedly from what can be motivated by underlying factors such as disposable income and interest rate costs, and whether households have taken on too much debt in relation to their future ability to pay. Another question that has come up in recent years in Sweden, as well as in England and elsewhere, is why the strong credit growth and rising house prices have not been accompanied by increased consumption.