With regard to apartment buildings in Stockholm, the direct yield is lower than the risk-free interest, but at the same time prices are affected by the fact that most property deals are made in connection with converting apartment buildings to tenant-owned apartments. For these types of transactions, direct yield cannot be used as a measure since the tenant-owners association does not have a required return comparable to that for an owner of a rental property. The financial statements presented by property companies are also considerably stronger today than what they were ten years ago. The risks associated with lending to this sector by the banks appear to be considerably lower than then. Among listed property companies, it seems as though many consider that the level of indebtedness has become too low, considering the extensive interest in buying back shares within the sector. At the same time as buying back shares can lead to a higher return on equity, there is reason for companies and their credit granters to observe the risks associated with higher indebtedness. Above all, the companies can become extremely sensitive to changes in interest rates. An overall assessment of the credit situation in Sweden thus suggests that there is greater cause to be pleased that lending is growing as an integral part of the current economic upturn than to worry about the risks which may accumulate. However, an integral part of the Riksbank’s role is to remind about changes that can occur both rapidly and unexpectedly. What is the situation in other countries?
Another example is the Netherlands which, like Sweden, is normally characterised as a small, open economy. Even there, worrying signals similar to those in the Swedish and American economies can be perceived. The improved economic activity has led to falling unemployment and rising asset prices. During the last two years, total lending has risen at an annual rate of around 15%. In the Netherlands too, a large part of this rise in lending can be explained by rising prices, especially house prices. Dutch house prices rose on average 15.8% during 1999. As a comparison, it can be mentioned that Swedish house prices rose by approximately 8% during the same period (prices for tenant-owned apartments rose to a considerably higher extent, however). In the Netherlands, household indebtedness in relation to GDP has traditionally been low, but has risen dramatically in recent years and today amounts to almost 45% of GDP. If we compare the developments in Sweden, the USA and the Netherlands, we see Dutch property prices have risen considerably faster than Swedish and American prices both in real and nominal terms. In this context, the development in Sweden appears to be less sensational. What can the Riksbank do if the build-up of risk increases? An increasing level of indebtedness in the economy, combined with rising asset prices, involves greater vulnerability to changes in the macroeconomic environment, i.e. growing risks. The obvious question then, is what the authorities can do to prevent such a build-up of risk.